'There's this idea that SAS will always be there, but time has moved on and a number of competitors are now snapping at SAS' heels,' warns one airline executive.
Matthew Stainer, analyst at Morgan Stanley in London points out that the relatively small carrier is also burdened by its geographical location. 'Prospects for underlying traffic growth are slower than the European average in the relatively mature market of Scandinavia.'
After its substantial financial turnaround in 1994 and 1995, SAS' performance last year was disappointing, indicating that further restructuring is needed. SAS is responding through a range of organisational changes, and is relying on its alliance links with the Lufthansa/United group to help generate improved profitability.
Competition is hitting SAS in its core markets, as new competitors enter the Golden Triangle linking Oslo, Copenhagen and Stockholm, other lucrative European routes, and domestic sectors.
The attack on the Golden Triangle has come from traditional domestic carriers such as Denmark's Maersk Air and Norway's Braathens Safe. 'They utilise their unit cost advantage and SAS, of course, has to follow,' says SAS senior vice president business systems divisions Vagn Sörensen.
Maersk has set up a mini-hub at Billund and competes directly with SAS between Copenhagen and Stockholm and from London/Gatwick to Copenhagen and Billund. Maersk vice president services Ejvin Pedersen claims that the carrier's business class product is 'quite ahead of SAS' but fares are some 10 per cent cheaper'.
Braathens looks set to become a pan-Scandinavian challenger to SAS following its acquisition of a 50 per cent stake in Sweden's second largest carrier, Transwede. Braathens has been offered the other 50 per cent at a lower price if bought before December 1997, Transwede president Per »degaard reveals.
Braathens threw down the competitive gauntlet in October 1996 when it attacked SAS' de facto monopoly on Oslo-Stockholm. Braathens, however, 'will not attack all of the Golden Triangle', discloses Odegaard, 'as this otherwise consists largely of transfer passengers'.
Braathens' entry on the route has been the catalyst for the creation of what Sörensen sees as SAS' key competitive advantage: the lower fare Express product, which offers ticketless travel and replaces inflight meals with an airside buffet.
Sörensen says SAS Express 'will definitely be implemented on all three legs of the Golden Triangle', with the launch on Copenhagen-Stockholm due on 1 April. Mike Powell of NatWest Markets in London believes Express 'will fit many of SAS' shorthaul routes in its battle against Braathens and new competitors.' Sörensen says the product 'should be implemented on all routes where there is significant volume to justify a fixed gate'.
SAS' competitors, however, are nonplussed by the concept. 'SAS Express is everything but express - you have to feed yourself and be there at least 30 minutes beforehand,' claims Odegaard.
Potentially more damaging is the emergence of low-cost startups serving Scandinavia from elsewhere in Europe. Possibly the biggest threat is Virgin Express, which now operates two daily flights from its Brussels base to Copenhagen and has grander plans. 'We're very interested in the Scandinavian market for expansion,' confirms the carrier's chief executive, Jonathan Ornstein. The gloves are already off. Virgin made a predatory pricing complaint to the European Commission in October 1996 over SAS' alleged flight-specific fare reductions between Copenhagen and Brussels. SAS responded to the complaint by lowering all of its fares on the route. Ornstein says this action shows how SAS had previously offered inflated fares. Sörensen, meanwhile, accuses Virgin of hypocrisy. 'I find it peculiar that a carrier like Virgin, which has made a lot of noise about free competition, runs straight to the Commission when we compete on their terms. They can't expect us to ignore them when they enter on our core routes.'
The rivalry is set to be exacerbated by further fare reductions introduced by Virgin in December 1996. Under an offer lasting until March 1997, Virgin Express is offering fares at some 37 per cent lower than SAS' on the route.
But Sörensen appears less concerned about those smaller carriers and startups entering niche routes. 'Not only do niche operators keep a relatively high fare level, you don't want to operate into the same city airport as them nor do you have the right equipment to.'
One such niche carrier is Malmö Aviation, whose operation is centred on Stockholm/Bromma, and whose new managing director Hans Kallenius concedes: 'We do not compete with SAS on price - never . . . for SAS we are a budgetable competitor'. Yet Malmö now claims a market share of over 40 per cent on the key trunk routes from Stockholm to Gothenburg and Malmö, and has re-entered the Malmö-London City route.
SAS' beleaguered situation will deteriorate further when the Swedish government starts taxing loyalty points from January 1997, undermining SAS' traditional competitive safeguard, its frequent flyer programme.
SAS has lobbied the Swedish Ministry of Finance to no avail. But Sörensen suggest the carrier could appeal to the Commission as the tax 'would distort competition to our disfavour'.
The latest competitive developments come at a bad time for SAS, whose financial recovery has faltered; the carrier suffered a sharp decline in pre-tax income for the first nine months of 1996 to SKr1.26 billion (US$187 million) from SKr2.15 billion in the same period of 1995. SAS chief financial officer Gunnar Reitan estimates the carrier will report pre-tax income of SKr1.7 billion for the full year 1996, against SKr2.6 billion in 1995, and concedes that is 'not a satisfactory result.' The poor performance is in large part due to depressed yields, which fell by some 6 per cent, and overcapacity: passenger load factor fell by 4 per cent as capacity increased by 8 per cent against traffic growth of only 5 per cent. Reitan admits that 'to some extent we were paying the price for rapid expansion in 1996'. He sees this as necessary, however, in order to 'expand the market - it's been a bit flat in the last two years'.
SAS is responding to the disappointing results through a series of cost-cutting measures that aim to increase productivity by some 3 per cent in 1996 and 4.5 per cent each year thereafter to combat falling yields. As well as organisational streamlining, SAS is reviewing its routes, revamping most of its fleet, and considering outsourcing and franchising. At the same time, the carrier hopes to take significant financial benefit from its membership of the alliance group led by Lufthansa and United.
SAS has also pledged to reduce waste and duplication caused by the airline's cumbersome three-nation status. As part of the process, the carrier also harmonised its shareholding structure. Last year, the carrier's stock structure was standardised, which should help it access financial markets more easily, along with its three parent companies' accounts. The holding companies' property was also transferred to the airline.
The real key to further organisational efficiencies at SAS lies in attacking the airline's Achilles heel - high labour costs and the power of its 39 unions. The pilots are particularly strong. Not only do they enjoy guaranteed employment until retirement but their consent is required in many strategic decisions. Laurie Price of consultants SH&E points out that as 'every other European carrier has addressed union problems - SAS has got to do something to make them less unwieldy'.
Erik Aversten, chairman of Swedish pilots union SPF, disagrees, claiming that SAS pilots' wages are lower than in the rest of Europe: 'We have to stand with our hats in our hands and take what's given to us.'
Peter Forssman, SAS senior vice president government affairs, maintains that labour problems were exacerbated by 'a decrease in service quality . . . and internal motivation' in 1995; he claims this will be offset by new cost-efficiency measures.
Change is slow to materialise, though SAS' recent move to start recruiting new flight crews for the first time in five years will help combat the seniority of its flight crew and their related high wages.
SAS has also 'started a dialogue with our unions covering a broad range of issues among these new labour agreements . . . these could be both for new and existing employees', says Reitan.
Sörensen views a two-tier wage system as 'definitely an option' and considers that 'some kind of incentive scheme', such as employee ownership, would be 'a very good motivator'.
SAS confirms that it is considering outsourcing to focus on its core airline business, although it has no plans to divest its hotels, which it says do not divert management attention and are 'probably the fastest growing in Europe at the moment, contributing between 5-10 per cent of SAS group revenue', says Reitan.
One analyst predicts that SAS will contract out ground handling services and turn engineering and aircraft maintenance into profit centres, targeting third-party business.
Franchising is also under consideration, although Sörensen says 'SAS has no concrete plans at this stage'. Christian Dahl from Danish regional Sun-Air's marketing department reveals that his carrier made 'quite a few attempts' to franchise with SAS before sealing a franchising deal with British Airways. Sörensen explains that SAS turned down Sun-Air's franchising offer because it was a'direct competitor which entered routes with an aim to pick traffic out of our system'.
Dahl predicts that SAS will start franchising instead with Cimber Air on domestic routes. This small Danish carrier presently provides hourly connections with SAS services on Aarhus-Copenhagen and participates in SAS' frequent flyer programmes. Cimber managing director, Jorgen Nielsen, confirms that he 'could imagine that SAS would look to us to operate short-haul routes'. One source reveals that Skyways Aviation, which acts as a feeder to SAS at Stockholm, is also 'putting its hands up' as a potential SAS franchisee.
Price of SH&E advises SAS to turn British Midland into a franchisee, possibly branded as SAS Express, and increase its 40 per cent holding in the carrier. 'British Midland's unit costs are substantially lower than SAS' but it still offers a high quality, efficient product' that corresponds with SAS' emphasis on high service standards.'
Price points to SAS' 'significant interest' in British Midland's holding of 13 per cent of prized slots at London/Heathrow. These slots could become even more valuable in the advent of open skies and 'could be switched to longer-haul flights from their current regional European designation,' maintains Morgan Stanley's Stainer.
Further savings should come from SAS' plans to cut Scandinavian travel agents' commissions in April 1997. Levels will be reduced from 9 and 8 per cent on domestic and intra-Scandinavian routes, respectively, to 5 per cent, with a new bonus provision of 1 per cent.
In an overhaul of its route network for 1997, SAS will close down 'not sufficiently profitable' services from Copenhagen to Borlänge, Newcastle, Lyon and Minsk, and Osaka flights from both Stockholm and Copenhagen.
This move will free up one Boeing 767 and three Fokker F28s for leasing and enable SAS to concentrate on new destinations, including two daily departures from Stockholm to Oulu in Finland in April and increased frequencies to Tampere, Vaasa, Turku, Karlstad and Dublin.
Further ahead, SAS' order for 41 B737-600s (plus 35 options), will cut fleet costs by replacing DC-9s and some of the F28s, as well as boost capacity. Deliveries will start in August 1998. The carrier is also examining 'new, fast turboprops' to replace the F50s and the remaining F28s; the Saab 2000 is an obvious contender. The carrier is also understood to be assessing 50-seat regional jets.
On longhaul routes, SAS is looking at 'slightly bigger aircraft to lower seat/mile costs' to replace its 13 B767 when the leases expire at the end of the century. The carrier is also looking for suitable widebodies for denser European shorthaul routes but is 'a bit disappointed at other options in the 180-seater range', Sörensen says. The carrier currently operates two B767-300s to London/Heathrow, which Sörensen concedes are the wrong fit for the route.
Allying with Lufthansa has undoubtedly been SAS' key move in the partnership stakes. The two airlines started cooperating in February 1996 and now codeshare on more than 2,000 weekly flights to 50 destinations. Financial benefits from the alliance are expected to enhance SAS' operating profit margin by 5 percentage points, or some SKr 1.7 billion (US$250 million), each year by 2000, estimates Stainer. The alliance has earned SAS US$15 million in 1996, compared to US$54 million for Lufthansa.
The link with Lufthansa combats one of SAS' prime weaknesses, namely 'the lack of a credible intercontinental network', says Stainer. Another source praises SAS for linking with an airline that 'is likely to survive' and is unlikely to want to interfere in SAS management.
While the alliance with Lufthansa is definitely a good strategic move which generates some stability for SAS, Peter Nordström of Andersen Consulting in Stockholm warns that it may limit SAS to intra-Scandinavian routes and reduce it to a Lufthansa feeder as far as cross-border routes are concerned. The alliance will further dissuade SAS from flying over Germany to southern Europe to avoid aggravating its German partner.
Andreas Diederich, who represents foreign airlines in Germany, refutes general industry expectations that Lufthansa will take a financial stake in SAS or fully absorb the airline. 'German authorities would not want further financial burdens placed on Lufthansa's shoulders in view of the airline's [ongoing] privatisation.'
Further cooperation between the two airlines is, however, inevitable. The partners are now sharing station handling, reducing sales agents for the Scandinavia-Germany market and are 'looking into how to cooperate on the marketing side', says SAS vice president partnership development Curt Lundqvist.
November's award of US antitrust immunity should give a new impetus to the SAS/United alliance. The carriers have been codesharing since April 1996 on 60 weekly flights to the US via Europe and cooperating on their frequent flyer programmes. SAS also codeshares on 14 weekly flights between Scandinavia and Bangkok with Thai Airways.
Lundqvist reveals that SAS also intends to start codesharing with Air Canada in the first half of 1997 'via points in Europe and the US to the main points in Canada'. The two carriers concluded a broad cooperation deal in October 1996, including schedule coordination and cooperating on their frequent flyer programmes.
While SAS fortifies its links with the United/Lufthansa/Thai/Air Canada group, its dealings in the Baltics have yet to develop beyond a codesharing arrangement between Scandinavia and Riga with Latvian carrier Air Baltic, in which it owns a 29 per cent stake.
SAS views the Baltics as a 'key area for future expansion', but it received a knock-back to its regional expansion plans when its bid for a stake in Estonian Air was rebuffed in favour of Maersk Air's offer, despite suggestions by one source close to the deal that SAS' offer was three times higher. The source says SAS was rejected because it planned to reduce Estonian to a feeder for Lufthansa. SAS wanted to combine Estonian with Air Baltic, which clashed with the Estonian's stand-alone policy following the country's newly gained independence. 'The government was probably prompted to choose Maersk as it planned to develop Estonian as a national carrier and a regional operator in its own right', says Estonian Air president Borge Thorn Bech.
Elsewhere, Lundqvist says SAS will be looking for partners in South America and Africa.' The favourites are Varig and South African Airways, which are already allied with Lufthansa.
Though SAS undoubtedly faces an uphill struggle with its unions and a series of other mounting challenges in the form of increasing competition and costs, Stainer is adamant that the carrier is in the good hands. He believes SAS president Jan Stenberg is the right man at the helm. 'Stenberg is one of a new breed of commercial managers. Though his task is a challenging one, he has brought a strong focus on the commercial realities of the airline business.
Source: Airline Business
