After less than a year in the industry, SAS president and chief executive Jan Stenberg is well on course to meet the target set in the cost cutting programme initiated by his interim predecessor Jan Reinås. Including the proceeds from the disposal of non-core activities such as SAS Service Partner, Diners Club Nordic and SAS Leisure, SAS produced a 1994 nine month pretax profit of $156.2 million - a turn around of nearly $300 million. Mark Odell talks to Stenberg about the restructuring, fleet renewal, applications of the third package, implications of an expanded European Union, and the search for partners.


Airline Business: Since you took over in April 1994 you have concentrated on reducing the cost base and disposing of non-core assets. What has been achieved so far, what are the remaining goals of the restructuring programme, and what further action will be needed to ensure the future viability of SAS?

Jan Stenberg: With regard to the disposal of assets, all that we have intended to sell has been sold, all of it profitably. We have used the proceeds and other cash to reduce the long-term debt, and in turn we are substantially shrinking the total assets of the company. We still have a very strong cash position. Some debt is difficult to redeem prematurely because it is part of fiscal schemes in Japan where an early redemption would upset the benefit for the lender and we would have to pay quite some premium to redeem it. So there is a slow process now further to redeem the debt.


Airline Business: What about on the cost side?

Stenberg: The aim was for (annual savings of) SKr2.9billion ($390 million), which amounts to some 13-14 per cent of total costs in the company, and by year end we had made savings of SKr2 billion. The programme will run until mid-1995 and we have good expectations of taking the remainder in the first six months if this year. Still outstanding are some structural items in the whole organisation and the way we have organised and distributed activities. Another aspect is continuous improvement. We are of course aiming at being fully competitive costwise and we have based the cost cutting programme on good solid knowledge of cost levels among our competitors. But we also know we are shooting at a moving target. While we are pursuing this programme others are pursuing similar programmes. This really means we need to continue beyond June 1995 with continuous improvements in productivity.


AB: Are you looking for a specific average annual cost reduction over the next five years?

Stenberg: we have based our plans on the expectation that half of the inflationary effects will be absorbed in cost reduction. That is a challenge really: the labour market in Scandanavia has for quite a few years now been waiting for a (wage) hike. The low business activity has kept the development of salaries and wages very low, so I believe we will have tough collective bargaining this year with quite a number of unions, and then what happens there will have to be absorbed in cost reductions overall.


AB: Are you suggesting that you don't expect any more savings on the labour side and that you'll be looking elsewhere for further cost reductions?

Stenberg: Savings could actually come from some of the structural items and from outsourcing of some trivial activities in the company that could probably be better and more efficiently done by people specialising in this business, rather than being off the mainstream of SAS activities.


AB: What do you mean by structural items?

Stenberg: The very character of SAS is that we are operating in three Scandanavian countries, and I strongly believe that SAS can have a strong presence in all of the three countries, but we don't need to multiply the activities so that we do the same thing in more than one place - or at least not do the same thing in three different places.


AB: You have been refining the structural side of the operation by eliminating duplication in the three countries?

Stenberg: Yes, and concentrating the activities to just one place. This is where things come up to the surface and create some dust, or sometimes even convulsions, by moving work from one country to the other and sometimes moving some activities back in the other direction. So there is a set off between the different activities in SAS.


AB: That is a problem unique to SAS, where you have political considerations when streamlining the operation.

Stenberg: The unique thing is the political overture to this. I'm sure Air France is carrying on different activities in many parts of France, but it wouldn't reach the national political level if they moved activities from one place to another. Instead it would remain on the regional political level.


AB: The cooperation of the unions has played a major role in the restructuring so far, but there has been some labour unrest recently. What is the cause and how do you intend to appease the unions?

Stenberg: I think it is quite natural that when extraordinary measures are taken in the company which then severely affect the staff as a whole, there are these kinds of reactions. Some of this the company can take the blame for by not having communicated the need for doing things. Losing your job is actually losing your job, and would you be happy about that? So it was not possible to avoid this kind of unrest in the company. The other aspect lies in the reorganisation of SAS that took place on 15 April. The interface with the unions changed on the employer side, so that where normally the unions would find their counterpart in one area he was now in another area and was another person. In autumn last year we addressed this issue by readjusting interfaces and actually creating interfaces at group level for communication between the unions and management. It's about confidence building.


AB: SAS still has long term debt of some SKr18 billion. In light of the penalty clauses on some of that outstanding debt and SAS' liquid funds of SKr10 billion, can you say whether the Japanese lenders will continue to dictate your debt reduction programme?

Stenberg: I think they will restrict our ability to further reduce debt. But all of the debt is not with Japanese lenders anyway, so we are still capable of buying our own debt papers in the market. But certainly if there had been another setup on the Japanese leases we would have been happy to solve that situation. As a matter of fact, even buying debt in the market, or reducing bank debt, outside Japan, is connected with some difficulty. There is overliquidity in the bank system because of low general investment and restrictions on lending. So they would rather not cash in on good debt now.


AB: Will you then use the SKr10 billion to finance your upcoming fleet replacement programme?

Stenberg: The decision on new aircraft will bring with an early downpayment, but not substantial in the overall context of the investment or even the liquidity we sit on. I don't think the liquidity is a necessity or a precondition for the order to be placed. Deliveries will only start in the second half of 1998, so we need to make productive use of the cash in the meantime.


AB: Will you just continue to use it to reduce debt in the meantime?

Stenberg: Yes, but I would like to see SAS pay dividends to its stockholders again.


AB: You postponed the fleet replacement order from last December. Why?

Stenberg: The first deadline set for the order was even earlier that that, but was postponed for various reasons, some commercial and contractual. The critical part starts with some of the aircraft we are looking at which are still in the development phase. If we really want delivery by the second half of 1998 we should actually release the order now to start the whole process of development, manufacture and delivery.


AB: can you be more specific about what aircraft you are looking at?

Stenberg: The MD-95 in particular, but also one Boeing aircraft not in existence today where our decision could trigger off development. I am talking here of a 100-seater.


AB: The order is aimed at replacing the ageing DC-9s and the F-28s. Is 40 aircraft a reasonable figure?

Stenberg: I would say that. There are three reasons for getting rid of them. Age - namely reaching the age of 25 - plus noise restrictions and the termination of some commercial leases.


AB: Are you looking at any replacements for your longer haul fleet?

Stenberg: No, we intend to go on operating the B767 we have now. One aspect of introducing a new medium range aircraft is to strive to satisfy the concept of commonality. This could include cockpit commonality, so that pilots are interchangeable between aircraft. Airbus is a typical example of that.


AB: There are no orders yet for the MD-95. Would you consider becoming a launch customer or are you perhaps concerned about the lack of orders and would you consider a switch to another manufacturer?

Stenberg: we would be very proud to be a launch customer of the MD-95, for the reason that our own people have been deeply involved in specifying this aircraft.


AB: So are you tending towards commonality of type and McDonnell Douglas aircraft?

Stenberg: The whole scheme must involve an overall view of how the total fleet of SAS develops, because you can't really go down an alley and end up with something that longterm will not satisfy your interests of streamlining the whole fleet. There are a number of aircraft you could buy with a very short delivery time and others in existence on which the delivery time would be longer. And the third consideration really is whether our decision, coupled with the decision of a few other carriers, would be the trigger to start the development of these aircraft.


AB: With Sweden joining Denmark as a member of the European Union, do you foresee any problems arising from the Norwegian decision to remain outside the common market, despite the fact that Norway is already signed up to the third package?

Stenberg: On the political side we see no detriment from the decision. Honestly, I do believe that the economic situation in Norway is such that it can more easily live outside the Union than the other countries in Scandanavia, and even central Europe. And in three to five years from now you will hardly notice the fact that Norway is even outside the Union. They won't go back to the stone age as a consequence of the 'No' vote.


AB: The process of developing European fifth freedoms granted by the third package has been slow generally, but you have been experimenting with a number of routes. Will SAS be making greater use of these rights this year?

Stenberg: I can't envisage any example of that in 1995. It is as difficult for a newcomer to come into our markets as it is for us to enter new markets. There are so many corners in our traditional markets to defend and to exploit that that would have a higher priority. We were discussing Copenhagen-Brussels-Nice this morning and we have decided to add a direct flight to Nice instead. Our own evaluation of the benefits of (fifth freedoms) is that there is an early uphill battle really to achieve market acceptance.


AB: Are you ignoring political realities when you suggest there is a better than 50% chance that your joint appeal with British Airways, KLM and Lufthansa against the Air France state aid approval can succeed?

Stenberg: Did I say more than 50%? No, I'm not ignoring political reality. What we are actually pointing at is the ill-founded decision by the Commission, and I think you can shoot that down on a number of grounds. I think I am on record as having said I do not believe that the French government will allow Air France to go down the drain, so it would be saved in some form or another. But we are deeply critical of the evaluation made by the Commission and of the decision as such, when it comes to the conditions imposed on Air France and the very weak follow up rules involved. And there was clearly no good support for the specific amount of state aid.


AB Would you consider a similar appeal against Iberia if it is granted its $900 million second dose of state aid before its first state aid-backed restructuring programme is completed?

Stenberg: I see at Iberia today more powerful restructuring measures than I have ever seen at Air France, in the renegotiating of contracts with unions and reducing staff.


AB: But there is no escaping the fact that under Iberia's initial state aid approval they had until 1998 to restructure. You could shoot that down immediately - would you be looking to do that?

Stenberg: I wouldn't really express a view on that now, but I am led to believe that Iberia would go bankrupt in a very short time, so if the money intended for the time up to 1998 was not sufficient then they are in a crisis right now.


AB: Do you feel that the addition of Austria, Finland and Sweden to the European Union can tilt the balance of power in Brussels against state support for flag carriers?

Stenberg: I think there is a good chance. But you have to remember that this is not the only industry which is heavily subsidised. Sometimes we believe that we see a give and take between governments which affects more than one industry.


AB: But would you expect the Finnish, Austrian and Swedish governments to be opposed to state aid?

Stenberg: Very much so.


AB: What do you expect of the new European transport commissioner, Neil Kinnock?

Stenberg: I don't know really what expectations we have, but I feel positive about his appointment. He has always given me the impression of being a very reasonable person, and even a man with strong fists if needed.


AB: Now that the effects of cost-cutting have started working through, you are starting the search for alliance partners in Europe, Asia and North America. SAS is currently holding alliance talks with Lufthansa. What kind of agreement do you envisage and how would you rate your chances?

Stenberg: I have no comment on that really. But on the other hand I am convinced that in the near term future - this year or next year - we will probably build cooperation with a major operator in Europe, and I do not exclude reinforcing the alliance with Swissair. But cooperation is not a condition for survival or a necessity for SAS, at least not as we view the situation in the market now.


AB: At the moment, then, you are not saying whether it would be Lufthansa or the European Quality Alliance with Swissair and Austrian?

Stenberg: We have evaluated all possible alternatives and had dialogues with various operators. Some close links were established between a number of airlines in the context of Alcazar. But there has been a change in the European scene since the Alcazar era, because at that time all the airlines felt that the restructuring of the industry would come quickly and there was a need and a drive for cross-national mergers. Since then a lot of things have happened, and I think everyone now views the European scene as much more fragmented, which in our case has driven the issue from a survival question to a complementary question.


AB: There are talks between the EQA airlines and other potential partners. Do you feel the EQA will stay together or do you think it is time to look elsewhere?

Stenberg: I think it is too early to have a firm view on that one. You used the word cooperation. To me alliance sounds like something very closely linked. And of course it is important that it is not just a superficial cooperation but something that actually yields a good return to the partners. Codesharing is certainly not an alliance and one should be careful of using the word alliance, because that might even be misleading when it comes to the nature and character of the collaboration.


AB: So you would be looking at a collaboration along the lines of the EQA but deeper?

Stenberg: Yes.


AB: SAS has historical links with Thai International, but at the moment Thai is concentrating more on its cooperation with Lufthansa. Where are you looking for an Asian partner and are you looking for more that one?

Stenberg: We think that the collaboration with Thai can clearly coexist with its arrangement with Lufthansa; that is the position that Thai is conveying to us. But Asia is a large territory with different cultures and indeed different traffic partners. I wouldn't say collaborating with Thai is the answer to all our wishes in Asia. We are trying to collaborate with Air China - we currently have a block space agreement. The Chinese market is tremendous and the China-Europe traffic is very strong, and it is quite reasonable to share that with the Chinese authorities.


AB: What lessons have been learned from the failed equity involvement with Continental and what criteria must a future North American meet?

Stenberg: I think it is clearly a warning against taking equity stakes when you don't have control over the company you invest in. My first instinct is that a good cooperation should be able to stand up on its own and must not be manifested by equity in order to survive, because then there is something wrong. Then you are probably using your investment and power on the board to achieve something that is not in the best interests of that company but is in your best interests.


AB: Are you looking to replace Continental as your North American carrier?

Stenberg: While much could be said about Continental - its history and even the present situation - it is servicing us well. Continental out of Newark offers a variety of destinations, clearly interesting to Scandanavian passengers.


AB: So you are happy with the collaboration you have?

Stenberg: Yes.


AB: You have stated that an Alcazar-type crossborder merger will never happen, but you head of an airline which is exactly that. Why can't principles applied in 1946 be adapted to the more competitive environment of the 90s?

Stenberg: The three Scandanavian countries are after all reasonably similar. We speak a common working language together and three different languages can actually be spoken within SAS without a problem. The proximity of the three countries is obvious. The cultures are different but closer, say, than those between Denmark and Germany and Sweden and Estonia. It was a small sized operation that started off at that time so it was easily controllable. It was instituted by governments through a common interest in achieving good air links under a heavily regulated environment. Then by natural growth it has become what it is today: roughly SKr30 billion turnover and 23,000 employees. Merging two companies is different. It involves integrating two things that originally have the instinct of repelling each other. So it's the difference between a baby growing up into an adult and a heart transplant. And a merger would have to be effected quickly and be forced upon the two organisations in order to extract the benefits.

Source: Airline Business