ANALYSIS: SAS ready to fight

Copenhagen
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The fight between Scandinavia's two heavyweights, SAS Group and Norwegian, is about to enter round three. In one corner, network carrier SAS sits bruised but defiant, hit by a fourth consecutive full-year net loss in 2011. In the other, low-cost carrier Norwegian has its gloves on, raring to go, with plans to expand further into Europe and beyond.

You might expect Rickard Gustafson, chief executive of SAS, to be reeling from the latest punch, after Norwegian placed a firm order for 100 Boeing 737 Max and 22 737-800s in January and signed a memorandum of understanding with Airbus for 100 A320neos. But the head of SAS is not easily rattled. Relaxing into a chair in the SAS business class lounge at Copenhagen airport, he spreads his hands and, with a smile, suggests the order was largely a "media stunt".

"I was surprised by the size of the deal, but when you start to unpeel it, you realise half of it is not a firm order; it's an MoU. I'm not sure you will ever see that Airbus order come into reality," he says.

Norwegian's chief executive, Bjørn Kjos, on the other hand, insists that the order is central to the airline's low-cost approach.

In announcing the order he said as international air traffic keeps growing in the years ahead, "Norwegian is determined to be a strong, stable and attractive player in the airline industry".

Though the size of Norwegian's commitment raises questions about future capacity in the Scandinavian market, Gustafson points out that many of the new aircraft will be used to churn Norwegian's existing fleet; Norwegian's policy is to fly aircraft no older than seven years. So, Gustafson reasons, capacity in Scandinavia is not going to grow as much as some people think.

In this context, Gustafson argues, the market can sustain both SAS and an expanded Norwegian. But Jacob Pedersen, senior aviation analyst at Denmark's Sydbank, says: "I can see the size of SAS and the size of Norwegian, and the growth it is planning, and there's no way I can match that to demand in 15 years' time. Something's got to give; either Norwegian will have to fly elsewhere or SAS will shrink further."

Norwegian switched to a low-cost model in 2001 and has been nipping at SAS's heels ever since, already expanding beyond its home country in setting up bases elsewhere across Scandinavia. It plans to increase flight frequencies to and from Europe, and will open new bases, including one in Malaga, Spain, from March.

"We see that competition is not standing still," says Gustafson. "We are defending our position in Scandinavia, especially on routes to other European destinations." But he refers to Norwegian's plans to outgrow SAS with an air of studied ambivalence. "It might happen, it might not," he says. "But even if that is the case, if we at the same time have developed a strong business model that provides value to our customers, value to our employees and provides decent returns for our shareholders, I'm OK to be number two. I'd rather be a solid and profitable number two than a loss-making number one."

The battle plays out amid tough market conditions, with pressure on yields from weakening economic conditions and increased capacity, combined with higher fuel costs. Capacity was around a fifth higher on Nordic routes in the last quarter compared to the same period in 2010.

"The fourth quarter was particularly affected by tough competition, soaring fuel prices and costs related to the phasing-out of older aircraft," admits Kjos. Norwegian's fourth-quarter loss deepened to NKr133 million ($23 million), while operating costs rose to NKr9 billion from NKr 7.4 billion in 2010.

Despite this, Norwegian ended 2011 with a full-year net profit of NKr122 million. Kjos says the airline's fleet renewal programme - it took delivery of 16 Boeing 737-800s in 2011 - gave it a competitive advantage.

SAS Group recorded a full year net loss of SKr1.7 billion ($249.7 million) in 2011, due in part to fuel costs, as well as the collapse of Spanair, in which it held a 10.9% stake, and disappointing returns from its Finnish subsidiary, Blue1.

However, Gustafson is still confident that SAS can achieve its aim of sustainable growth by 2015, by accelerating its 4Excellence cost-saving programme in 2012 and 2013. As part of this drive, the carrier has trimmed 300 of its full-time administration staff and negotiated savings of SKr1 billion in 2012-13 with trade unions through reducing staff salaries and pensions.

Commenting on the strategy, Pederson says: "I think they are doing the right thing, but it's difficult because it's such a complex organisation. Norwegian has the upper hand at the moment."