Q2 2012 SAS AB Earnings Conference Call
Aug 08, 2012 AM EDT
SAS.ST - SAS AB
Q2 2012 SAS AB Earnings Conference Call
Aug 08, 2012 / 11:30AM GMT
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Corporate Participants
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* Sture Stolen
SAS Group - Director IR
* Rickard Gustafson
SAS Group - CEO
* Goran Jansson
SAS Group - CFO
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Conference Call Participants
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* Dan Togo Jensen
Handelsbanken - Analyst
* Jacob Pedersen
Sydbank - Analyst
* Edmond Darmawan
GSO Capital - Analyst
* Patrick Yuill
ABG - Analyst
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Presentation
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Operator [1]
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Good day, and welcome to the SAS Group's Q2, 2012 results presentation. For your information, today's conference is being recorded.
At this time, I would like to turn the conference over to Sture Stolen, Head of Investor Relations. Please go ahead
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Sture Stolen, SAS Group - Director IR [2]
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Yes, thank you very much and welcome to this second quarter teleconference. We have material that is available for you on our website, sasgroup.net, under investor relations. There you'll find the information package. What we'll do here is have a presentation for around 30 minutes, starting with our CEO, Rickard Gustafson, and then our CFO, Goran Jansson. And after this, we'll have a quick question and answer session.
So I think with that we will kick off. We will try and indicate the slide numbers so that you can follow us through the presentation. So, Rickard, please go ahead.
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Rickard Gustafson, SAS Group - CEO [3]
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Thank you, Sture, and welcome everybody to this conference call. The agenda will be very similar as the one that we used for the press conference a few hours ago.
I will start with to provide a short results overview. Then I will take most of my time to go through status and results derived from our 4Excellence program. Then I will hand over to Goran, who will take you through some more details around our P&L and balance sheet. And then, finally, I'll do a wrap up and an outlook for 2012.
So if I may ask you to flip to page 2 named Q2 4Excellence delivers tangible results and unit cost down 4%. We are delivering a positive result before tax of SEK137 million. If we're looking into EBT, it's somewhat better at SEK371 million, derived from the property deal we did with the Swedish Swedavia earlier this year that we also announced at Q1 numbers.
The result is actually below the result that we had at the same period last year, which is explained by a significant variance in fuel costs. And Goran will take you through that in more detail soon, but just to give you a flavor, this quarter, compared to the same quarter last year, the cost for jet fuel is up SEK800 million in our numbers.
Even though I can't say that in any shape or form that the results level is satisfactory, or in line with what we're aiming for, I need to stress, though, that our 4Excellence program is now starting to deliver some significant results. This relates both to top line as well as our costs.
In terms of revenues, the FX adjusted passenger revenues are up 3% in the quarter, driven by that we had roughly 230,000 incremental passengers in the quarter versus last year. And we have a load factor that is enhanced by 1 percentage unit up to 77%.
Unit cost is down, adjusted for fuel, 4%, in line with our ambition to reduce unit cost by 3% to 5% annually. And this is the same time that we maintained our high operational quality in terms of punctuality and regularity throughout the quarter.
It's a specific and strong cost focus, and emphasis is, of course, necessary in a business such as ours that is very, very stressed and under severe pressure.
Jet fuel is maintained at a very high level. As you're probably aware of, when we started the quarter in April, the price for jet fuel was at around $1,110 per ton. It dropped in late May, early June down to $996 per ton, but is now back at the level north of $1,000 per ton again.
We have seen an increased capacity in our key markets throughout the quarter. And in terms of number of seats, the market has grown, within Scandinavia, with roughly 12%, and within our important domestic markets, Norway and Sweden, the number of seats are up roughly 10%.
The European debt crisis, and the uncertainty in the macroeconomic environment, creates an enhanced cost focus among our important corporate travelers.
That's the backdrop to our results. If I may then ask you to click to the next page into the overview of 4Excellence. Let me just quickly remind you that the aim and purpose of 4Excellence is for SAS to excel in four key areas; commercial, sales, operational and people excellence.
Altogether, we said that the program would generate values of roughly SEK5 billion as of 2013, divided by SEK1.5 billion in costs -- sorry, in revenue enhancing initiatives, and SEK3.5 billion in cost reducing activities.
As of Q2, 2012, roughly one-third of the program is implemented, and we now start to see some real effects now of financial KPIs.
As I mentioned before, FX-adjusted passenger revenues are up 3%, driven by new destinations and more effective network optimization, and to some extent, additional revenue streams.
Jet fuel adjusted unit cost is down 4%, driven by our ability to close down our union agreements. Our effective LEAN activities improved sourcing and outsourcing activities, and generally enhanced productivity. And I'm going to take a few minutes to take you through all of these activities in a little more in depth.
So if we start on revenue side and clicking to the next page named revenue enhancing measures are effective, I'd like to start with saying that, in line with our strategy, we are increasing our capacity in line with the market. We have launched 38 new destinations. Please note that many of those are very seasonal, and they are designed to capture an increasing demand from in the leisure or private consumer market.
Our European traffic has developed very strongly in the quarter, in particular from Norway and Denmark, where price, or average price per booking class is slightly improving. And many of our European major destinations are showing a positive RASK development.
Our intercontinental traffic has been strong throughout the quarter. This is especially true for North America, where we see some pretty impressive numbers, where traffic is up 7.3%, and our capacity is up 5.4%.
Traffic within Scandinavia and our important domestic markets in Sweden and Norway, we have an improved load factor. But the yield has somewhat been affected negatively due to a trend that we see that more passengers are moving backwards in the cabin, i.e., the corporate travelers are seeking the most cost effective way of travelling at all times.
If I take you to the next page, I'll talk a little bit about yield, because even though the passenger revenue has increased by 3%, we have reported a somewhat declining yield. I know that someone might be surprised, I might say, that we have a declining yield when some of our competitors are showing an opposite development. But the fact that the yield is declining a bit is actually a direct result of the effectiveness of our strategy.
We have reported a yield of negative 2.7% in the quarter, but at the same time, we have opened a new intercontinental destination, i.e., Shanghai, that has a 1% impact on the total yield. And by the way, the market reception of the Shanghai route has so far been very satisfactory, and we are reporting load factors in the high 70%s at the moment.
In our traffic program for the summer, we have decided that we are going to fly more and longer, and as the effect of this, when we count that the revenue per passenger kilometer, the yield is actually declining and impacting the overall yield by 2 percentage points.
So the underlying yield, as you see on this page, is actually somewhat or slightly improving in the quarter, and I think that is an important message or important thing for you to understand.
Moving on to the next page, we have seen a maintained very high quality in our operations and our production. We maintained a world-class punctuality, with arrival punctuality within 15 minutes at the high 91%. At the same time, we have had a very strong regularity throughout the quarter, north of 99% throughout each single month in the quarter.
Customer satisfaction is high, and still improving, and reaching 73. Punctuality, time effective solutions on ground, and our interaction with our customers, so the way we deal with our customers, stand out as our relative strengths.
Altogether, the number of passengers in the quarter is up 3%, or 230,000 travelers in Q2 this year versus the same quarter last year. I take that as a proof point that our offering is standing strong in the market, and that we have a competitive product. If I express it in another way, I think our customers are choosing to fly with SAS because we provide value through time and money.
Moving on to the next page, focusing on shifting focus to costs and the impact of 4Excellence on our productivity and unit costs; the main drivers for us that we've been able to reduce unit costs with 4% in the quarter. So as I mentioned at the beginning, the union agreement that we closed, the LEAN activities that we have put in place and are driving forward; some within outsourcing and sourcing have been more effective. And then we've seen increased productivity, both in our fleet and among our workforce.
So let's dig into it in a little bit more in depth, starting with collective bargaining agreements, or union agreements. We now have signed deals with all our unions, securing the SEK1 billion impact in 2012 and 2013 that we announced in the beginning of the year.
We have now a salary freeze in all three countries. We have new terms regarding early pension and average pension age, especially in Norway. We have increased flexibility among our pilots, due to that we now can reduce the number of training sessions and number of passive movements between different bases.
LEAN; our LEAN activities, they continue to simplify our business, reduce our costs, and improve our productivity. This is especially true within operations. Within flight deck, productivity is up 2% in the quarter, due to enhanced planning processes. Within ground handling, we have finalized roughly 20-ish LEAN projects that have collectively generated savings of SEK150 million on an annual basis.
We have signed a new component and spare part deal with Lufthansa Technik that will generate substantial savings as of 2013, and onwards.
But if we take a little bit further deep down on some of the productivity measures, you see two of them on the next page, starting with our salary costs over produced ASK. It's dropped by 6% in the quarter.
As a direct consequence from the new agreements that I described before, that we're delivering our promise to simplify and reduce administration, 300 FTEs have now been either exited from our business, or in the process of being exited from our business.
Altogether, we have 280 less FTEs, this quarter, compared to same quarter last year, and at the same time, we produced 4.6% more ASK in the quarter.
Our efforts to harmonize and modernize our fleet is maintained throughout the quarter, and you can also start to see that in the utilization of our aircrafts.
In terms of block hours per aircraft, you can see that it has improved by 2.4% in the quarter. That may not be a very high number, but if you isolate that, and look into what happened in the month of June in isolation, we have an improvement of 8%, due to more optimized network program that we operate.
I think the number is not getting less impressive, given the fact that we also include our aircraft reserves in those numbers. And they have actually increased somewhat, temporarily, due to the out-phasing and in-phasing of our aircraft, in line with our fleet strategy.
With that, I'd like to stop for a moment and hand the word back to Goran Jansson, who will give you some more insights to our P&L and our balance sheet.
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Goran Jansson, SAS Group - CFO [4]
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Thank you, Rickard. Can we then flip to slide number 10, top line development. As you can see, we have had an increase of the top line by SEK453 million.
If you start off last year, with SEK10.9 billion of turnover, and then add a positive currency effect of SEK300 million. We have also seen, as Rickard pointed out, a really good passenger growth of more than 230,000 passengers, which have increased our passenger revenues with SEK431 million.
The cabin factor has been good for the quarter, and increased the top line, with SEK109 million, while the yield then, according to our plans, have declined because we have increased the amount of long haul, Shanghai and leisure travelling, whereby it has decreased with SEK217 million.
Other traffic revenues are up with SEK86 million, and our cargo business and other revenues is down with SEK189 million.
During the period, there was a strike amongst security police, in Norway, which has caused a decline in our top line with some SEK75 million. All in all, our currency adjusted top line is up 1.3%, compared to last year, and in amount that represents SEK145 million.
If we then flip over to next slide, for the P&L in itself. We can see that our payroll expenses are more or less on the same level as last year, or SEK30 million better than last year. Then we have to remember that this number if affected negatively with currency, whereby the underlying improvement is SEK60 million. If we look at the share of this cost to revenue, it's down from 30.4% to 29%, i.e., 1.4% unit improvement to the EBIT margin.
As pointed out already, in the beginning of the year, our fuel costs will increase substantially this year. And of course, this quarter has been affected negatively with some SEK800 million of increased fuel cost, which represents a 6% -- percentage units decline on the EBIT margin.
Government charges is also up; very hard to get them down. But other costs has come down with some SEK300 million, which represents an improvement of the margin of 3.7% units.
All in all, the EBITDAR margin is hereby down with 1.5%, where the fuel then represents more than 6% decline in this period. Our lease costs and depreciation are on the same level as last year. EBIT margin is on 3.5%.
Our financial cost is slightly up, driven by increased interest cost, and also some currency movements.
The non-recurring items, as we talked about before, is represent of more than SEK300 million gain from the property sale, but also some restructuring costs in connection with the ForEx out-phasing of both the MD80s, but also the restructuring of admin personnel. So all in all, our EBIT (sic - see slide 6 "EBT margin") margin is 3.3% in the quarter.
We now flip over and have a look at how the fuel costs have increased, with SEK800 million. If we start off with last year's level, SEK2 billion, you can see that last year we had the positive impact of our hedges of SEK350 million, while this year, there's a negative off SEK50 million.
Then, it's also important to understand that, since we shifted over to make use of some more options to be able to actually gain from any movements downwards, going forward, the accounting methods, using IAS 39, means that you have to make your market-to-market valuation of the premium and the option value on these options.
Whereby the time value at the end of this period represented a cost of SEK141 million, compared to last year, so this result has been worsened by the fact that you, from an accounting point of view, need to actually cost the whole premium at already at this time.
Currency movements have gone negatively, for the quarter, where the US dollar to Swedish krona were unfavorable, compared to last year, which represented cost increase of SEK227 million.
Though the net volume and pricing improvements, actually, are just representing SEK16 million, so it's almost a non figure here, in the overall number.
So all in all, our cost is up SEK784 million, compared to last year. As I said before, it represent a impact of 6 percent units on the margin.
If we flip to the next slide and look at cash flow. Cash flow for the first half year is very favorable, SEK1.9 billion, before investments, driven by the fact that our working capital has moved in a very favorable way.
The campaigns we have had, sales campaign, has been moving this number upwards in a positive way. The reaction from the passengers have been very positive to the leisure efforts we have put in place, and therefore, the working capital movement has been positive, to a much, much bigger extent than last year.
And of course, last year's number, which here represent SEK164 million, needs to be corrected with SEK660 million coming out of the fact that we paid a EU fine in the beginning of last year.
We have, during the period, been able to amortize our debts on gross with SEK2.2 billion.
If we then move to the next slide and look at the financial preparedness; end of the period, this quarter, we have SEK8.2 billion of financial preparedness, which include SEK5 billion of credit facilities, and SEK3.2 billion of cash. We consider this being in good financial preparedness, and of course, the property transaction in the end of the period, which cashed in some SEK440 million, helped the situation.
By that, I hand over to Rickard, to finalize and have the outlook for the rest of the year.
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Rickard Gustafson, SAS Group - CEO [5]
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Right, thank you, Goran. I'll take you then quickly to page 16, to wrap this up, this presentation, then hand over to questions.
But for the full year 2012, we expect the passenger growth in the market to be at around 5% to 7%, and we plan to increase our capacity in line with market, i.e., at around 5%.
The organization is determined to continue to deliver an operational quality of world class, and I'm thinking in particular regarding punctuality, regularity, and customer satisfaction.
Our efforts and work around 4Excellence will be continued at the highest pace, and the implementation on the remaining activities, to deliver the SEK5 billion by 2013, will be maintained at a very, very aggressive timetable.
We expect that the fuel price will be maintained at a high level, at around $1,000 per ton, or thereabouts. And we also foresee a maintained capacity, strong capacity improvement, and yield pressure in the market.
The uncertainty among the global economy, and the European economy in particular, makes it difficult to foresee what changes we might expect from demand and in the important corporate market.
Altogether, we are determined to deliver and secure that we will deliver on our commitments around 4Excellence, but uncertainties in some other factors, parameters, is the reason why we don't provide a result outlook for the full year in 2012.
So with that, I'd like to hand over the call back to Sture to facilitate any questions.
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Sture Stolen, SAS Group - Director IR [6]
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Yes, operator, you can open up the Q&A session.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Dan Togo, Handelsbanken.
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Dan Togo Jensen, Handelsbanken - Analyst [2]
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Just a couple of questions. You have cash inflow from property sales here in Q2. Could you maybe elaborate a bit on how much more we could see of funds coming this way hence, indicating here, future property sales. That is one thing.
Then another thing, you're phasing in or phasing out the old MD80 and Boeing 737s, and phasing in new vessels. What will be the effects of this on fuel costs and on other costs, please?
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Goran Jansson, SAS Group - CFO [3]
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If we start off with the property; yes, there is some more scope for more activities to come. We have initiated trying to be able to sell more of the property. It's a time question, and we don't have a very clear timeline on this one, but it's something we're working on.
The magnitude should be considered somewhere in the same region as we have seen so far, depending also a bit on how we can conclude this with different parties. There are both properties in Norway, and a bit in Denmark as well, that we will trying to make a similar deal as we have made here with Swedavia in Sweden.
When it comes to the phasing out of our old aircrafts, of course, that is something we are very occupied with. As I said, it has some negative effects on the restructuring on the P&L. We have said that, mostly, this will happen during next year and the beginning of the year after, and therefore, one can anticipate that our fuel costs will come down a bit when we come into full effect from 2014.
As every one of you know, there is, of course, more efficient with new equipment, but it's also more expensive to run a brand new aircraft in terms of lease costs or depreciation, depending on how you finance that.
So all in all, the fuel costs will probably come down per ASK, but that doesn't mean that the lease or the total costs will improve dramatically. So yes, an improvement going forward but it is important to take in all cost elements when you discuss this question, not just the fuel costs, even though the fuel has been very negatively developed in the last year.
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Dan Togo Jensen, Handelsbanken - Analyst [4]
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Do you have a figure for how much more efficient these new planes are in terms of fuel consumption?
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Goran Jansson, SAS Group - CFO [5]
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Yes. In the range of some 25% to 30%, one can say. And we talked about the new neo aircraft we have ordered from Airbus will add another 15% on top of that. So yes, there will be an improvement going forward, absolutely; we will see that. But remember, we already have -- a big share of our aircrafts are already on the newest type, NG type, when it comes to 737 or current Airbus level.
So yes, some of the MDs will be phased out and that will have an effect but it is not, all in all, that big. I think some people exaggerate this number, that we have such an old type of fleet. That's not true.
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Dan Togo Jensen, Handelsbanken - Analyst [6]
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Okay, thank you.
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Operator [7]
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Jacob Pedersen, Sydbank.
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Jacob Pedersen, Sydbank - Analyst [8]
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I have a couple of questions; I'll take them one by one.
First of all, a clarification on the 4Excellence program. These SEK5 billion that you expect in 2012 and '13, will they be implemented in '13, or will they have the effect of SEK5 billion in 2012 and 2013?
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Rickard Gustafson, SAS Group - CEO [9]
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All right. The implementation will take place throughout 2012 and 2013, and there won't be a SEK5 billion effect in 2012. The SEK5 billion effect will be there by the back end of 2013.
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Jacob Pedersen, Sydbank - Analyst [10]
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Okay. So we'll have an earnings effect, looking over the two years, of SEK5 billion.
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Rickard Gustafson, SAS Group - CEO [11]
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Correct.
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Jacob Pedersen, Sydbank - Analyst [12]
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Okay, great. I would also like to hear your thoughts on the fact that now you seem to get some low cost competition on the long-haul flights from 2013. What thoughts are you taking on this, and how do you expect this will affect your business?
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Rickard Gustafson, SAS Group - CEO [13]
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We take that seriously, and we are not ignoring that development. But with that said, though, we also know that we, at the moment, we have a very strong product. We have a good frequency and timetable to the main destinations. We also know that, in order to compete on long-haul, I think the value of being a network partner, we should not be underestimated. Just given such a simple example, such as roughly normally 50% of the cabin that we touch down in New York will not have New York as the final destination, but elsewhere in the US.
And, of course, we will continue to enhance our operations, and therefore, we're also happy with the fact that we now are reentering back into the US West Coast where we know has been a strong demand, both from a leisure point of view but, more importantly, also for a number of corporates that you see beginning to travel to the West Coast of the US.
So those are some of the measures that we take. On top of that, the JV we announced with Singapore could also potentially help us to strengthen our offering and our timetable to the important market in South East Asia.
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Goran Jansson, SAS Group - CFO [14]
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Remember, we already have low-cost competition from back and forth to Beijing, for instance. It's not just ourselves there; there are already parties playing this game in that. So there will be change, but we already see that.
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Jacob Pedersen, Sydbank - Analyst [15]
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Okay. When we talk about your financial preparedness, how comfortable are you with this measure at the moment? You've just reached the lower part of your hopes, or your expectations of 20%. How should we see this moving into some quarters that that might be not as good on the cash flow side than the first few quarters have been?
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Goran Jansson, SAS Group - CFO [16]
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I think it's important that -- I'll start off with the underlying performance, and the fact that we have really now started this program, 4Ex, to actually improve our profitability with SEK5 billion. That is the most important thing we can do to actually maintain a well and good financial preparedness.
The financial preparedness, and where we include facilities and where we include the cash, are more to seen as an insurance in case of something happen or something go wrong, rather than they just typically make use of that. It's also, you have to remember that part of our facilities are in another currency than the accounting currency, whereby it will swing a bit.
So we have this target of 20% just as a measure for ourselves so that we feel that we can show to the outside world that we have set aside resources to take care of any eventualities that will come up, and so on. So that is why we have this financial preparedness; not just to make use of it for investments and other things.
I think it's important when we talk about this number that it is financial preparedness in case of something happens. The most important thing for any company, as for us, is to make money, and we have now a program that will improve our profitability with SEK5 billion.
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Jacob Pedersen, Sydbank - Analyst [17]
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Okay. A question on the yield. I'm aware of the fact that you have some structural issues working against you in this quarter, but if we look across the board of European carriers, almost every single carrier has been able to increase their yield in the second quarter. And okay, underlying, you might have increased it just by a bit, a fraction, but could you maybe talk some more about the competitive pressures that you're seeing in your markets?
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Rickard Gustafson, SAS Group - CEO [18]
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Sure. I think that, first of all, I think it's important that we are not yield maximizing, but we're RASK maximizing. And some of these initiatives that we've taken that may have had a negative impact on yield have had a significant and positive contribution to the overall top line and our unit revenue.
With that said, though, we are operating in a market where we face fierce competition, and we are still, and will be, dependent on a big chunk of corporate business. Our network is designed to capture the corporate business; our product is designed to be attractive to corporate traveler, and that's going to be maintained. But that also means that we're more exposed to the economic turbulence. Because we see a clear correlation when there is uncertainty in global economies, companies [stress] their corporate travelling policies harder, and they are very cost aware in their travelling. And I think that may impact us more than some of the other carriers that are less dependent on the business segment.
And then, of course, you should also bear in mind if you compare us with Lufthansa and so forth, they have, 70% of what they do is long haul, 30% short haul. And as I said in my presentation as well, our long haul business was actually doing well, and we see a strong development there with improving yields.
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Jacob Pedersen, Sydbank - Analyst [19]
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Okay. Last question, concerning your pension issues and the new accounting rules, how can you solve this pension problem besides making a rights issue? Have you any ideas -- can you give us any idea on the thoughts that you are having on this problem?
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Goran Jansson, SAS Group - CFO [20]
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I think first, it's important to just put some perspective on this question. Yes, there has been decided there is need for an accounting change on how one account for the future obligations we have. Remember that pension accounting is something that you're trying to project something that will be paid out in the next 20 years or more. Actually, in our case, it's even more than so. And then you're trying to get a number for what kind of -- how will these obligations look right now.
We have, compared to many other companies, during the last 20 years actually used an insured way of dealing with this. We have funded fully our future obligations outside our own balance sheet with insurance companies, so we don't have a deficit to live up to. Many other companies in Europe have done this in their own balance sheet and have a big deficit that they need to finance in the coming years. That's not the case for SAS.
We need though, from an accounting point of view in our Group accounting, to make a change next year, November 1, 2013. Yes, it will have a significant impact on the equity. What we focus on is, of course, as we've said before, to make good cash generation, to improve our profitability, and cash generation is the most important thing when it comes to actually get credibility with creditors and others. That is what we're so much focused on.
Of course, the pensions themselves, we have now an ongoing discussion with different organizations to actually move over from a DB, defined benefit, to a defined contribution situation. So that is something we have working a lot with and have an aim to trying to solve within this year. Thereby, a big part of the way of accounting for this will change, going forward. The whole obligation will not have these swings, as we have seen in the last years happening in our balance sheet. So that is an important thing for us to try and to limit the future possible swings in this element of the balance sheet. And we think that that is something we can achieve during this year.
When coming to the --.
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Jacob Pedersen, Sydbank - Analyst [21]
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So we should expect to hear more on this during this year?
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Goran Jansson, SAS Group - CFO [22]
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Absolutely.
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Jacob Pedersen, Sydbank - Analyst [23]
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Great, that's my questions. Thanks a lot.
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Operator [24]
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Edmond Darmawan, GSO Capital.
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Edmond Darmawan, GSO Capital - Analyst [25]
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My first question is in relation to the expiring credit facilities, a lot of which are expiring in 2013. I was wondering if you could share a little bit about your plans in relation to this? And I'll continue on with my next questions after.
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Goran Jansson, SAS Group - CFO [26]
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Yes. Of course, any company that has a long credit facilities needs to start to think about what will happen with them, somewhere a year before they mature, and the same with us. We have started a discussion with our banks to see how we can prolong these facilities, going forward. So that is an ongoing discussion we have the participating banks in these facilities. And we aim to come to a conclusion with that discussion also at the end of this year. That's what I can say so far, but it's, of course, something we have started to try and take care of.
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Edmond Darmawan, GSO Capital - Analyst [27]
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Okay. End of this year meaning end of this calendar year?
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Goran Jansson, SAS Group - CFO [28]
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End would be actually end of the calendar year more than the fiscal year, yes.
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Edmond Darmawan, GSO Capital - Analyst [29]
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Okay. And my next question is with regard to fleet replacements. It seems like the fleet replacement program is now a little bit faster than previously, as I understand, and I was wondering if there are any upfront costs related to this? It sounds like, from my understanding, that most of the 30 [modern] aircraft will be in operation by 2013, 2014 and so are there any upfront costs related to CapEx for this fleet replacement program?
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Goran Jansson, SAS Group - CFO [30]
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I would say yes. We have had some cost in phasing out the MDs -- there will be some more cost of phasing out the MD80s but that is very limited. The thing is, of course, that what we do right now is trying to engage more leased equipment in the next 1.5 years, that is what -- so we don't foresee any large CapEx when it comes to aircraft, but rather, of course, that the lease cost will come up a bit, going forward, while the depreciation would come down a bit.
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Edmond Darmawan, GSO Capital - Analyst [31]
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Okay. And in terms of -- what's the estimated once all these aircraft are now in operation for SAS, what's the approximate, assuming oil prices stay where they are today, what's a rough estimate as to what the cost benefit is of having to replace these aircraft? Or is --
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Goran Jansson, SAS Group - CFO [32]
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I thought we answered that, we don't have a -- as we've said before, there is of course -- changing the old MD80s for a new one could be something between 25% to 30% on the fuel cost. But remember, right now, the depreciation we have on the old MD80s are not that big. So you will increase the lease cost when a new aircraft comes in. All in all, that will be an improvement, but not enormous.
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Edmond Darmawan, GSO Capital - Analyst [33]
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Okay. And my last question is related to working capital. As I understand, working capital tends to be a cash use during the second half of the year, and a cash inflow during the first half of the year. There was a significant cash inflow in the first quarter, not so much in the second quarter. And I was wondering if you could share a little bit of color as to what that means in terms of forward bookings, and what that means in terms of working capital for the rest of the year?
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Goran Jansson, SAS Group - CFO [34]
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Of course, as you said, it's forward booking and we have been very successful in attracting more leisure customers. And, of course, the way you buy your leisure tickets are more in advance than typically a business customer do, whereby we have seen a very good pick up in the beginning of the year. We will continue to run campaigns at the end of the year. This summer has been very rainy in this part of the world; we hope that people will take the opportunity to go somewhere else, but we don't know.
The thing is that you will have seasonality in the working capital change, positive beginning of the year before the summer. People make use of the tickets during the summer period; they come back and start to book a bit later in the autumn, and some of them make use of these tickets for the holiday period around the Christmas time whereby the working capital go the other way again. So there are two parts of the year where you have a positive, while two parts where we make use of it. So as you said, it's typical seasonality in this, and maybe it will increase a bit with the increased focus we will have on leisure traffic, i.e., we will see more prepayments or more early bookings which will help our working capital.
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Edmond Darmawan, GSO Capital - Analyst [35]
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Okay. And net, net for the year the volume and traffic developments for the rest of the year is in line with the current outlook, would that mean that there should be a slight positive working capital development for [next] year for the Company?
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Goran Jansson, SAS Group - CFO [36]
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Typically, the third quarter we have a decline, coming back a bit in the fourth quarter, the calendar quarters. So that is typically how it is; it will look the same this year.
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Edmond Darmawan, GSO Capital - Analyst [37]
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Okay. Those were all the questions I had, thank you.
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Operator [38]
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(Operator Instructions). [Patrick Yuill], ABG.
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Patrick Yuill, ABG - Analyst [39]
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Just a question on the cost side; when looking at other operating expenses it's up by SEK500 million in the quarter, and we saw Q1 up by SEK300 million. Can you elaborate a bit on this? Thank you.
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Goran Jansson, SAS Group - CFO [40]
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Sorry, up on which line you said?
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Patrick Yuill, ABG - Analyst [41]
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Other operating expenses is up by SEK500 million in the quarter, up from --
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Goran Jansson, SAS Group - CFO [42]
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Yes, of course, it's depending on where you look in our -- which slide you look at, whether you see IAS accounting or our internal --
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Patrick Yuill, ABG - Analyst [43]
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The statement of income on page 13, below note two from your interim report. It's up from SEK315 million last year to SEK815 million.
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Goran Jansson, SAS Group - CFO [44]
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Can we come back on this? We need just to look on another separate slide, so if we can park that question and we will come back to that.
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Rickard Gustafson, SAS Group - CEO [45]
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Did you have more questions or --?
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Patrick Yuill, ABG - Analyst [46]
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No, that's it. Okay, thank you.
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Operator [47]
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Thank you. At this time, there is no further questions in the queue. (Operator Instructions). There is no further questions at this time, gentlemen.
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Sture Stolen, SAS Group - Director IR [48]
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Okay, I think, with that, we thank everyone. We will come back to you on the question; we needed a little bit more time to look into that. If someone else also is interested in the answer, we can also provide it to you.
Thank you very much, and we will be available, of course, from the IR side, to take any more questions after the call. Thank you.
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Operator [49]
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Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.
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