SAS Tries for Yet Another Turnaround

I have to admit that I have soft spot for Scandinavian Airlines (SAS). My very first trip to Europe in 1985 was aboard an SAS DC-10 from Los Angeles to Copenhagen. And though SAS hasn’t flown to LA in years, there is still a connection in history. SAS ran the first polar nonstop from Europe to LAX back in the 1950s. There is even a plaque that used to sit outside the lower level of the Bradley Terminal celebrating the feat. (Today it’s outside the Flight Path Museum.) Oh, and I used to love looking up and seeing SAS fly over my house, because I could always recognize those distinctive (now long gone) belly stripes. But despite having fond memories of the airline, there is very little to say today that’s positive. SAS is having a really rough go of it, and it’s now trying for yet another turnaround.

SAS DC-10 (1987)

I think this is the third effort in the last decade to create a turnaround plan. The most recent came just last year when SAS launched its awkwardly-titled 4 Excellence plan. Apparently it failed 2 become Excellent because it’s already going back to the well. This time, it’s the 4 Excellence Next Generation (or, as the kids call it, 4XNG) plan. The goal is to improve earnings by about half a billion dollars a year, take in a half billion dollars by selling assets, and extend a line of credit for a half billion dollars from banks and shareholders to keep the airline running.

How will the management team achieve these gains? Well, you can probably guess. Part of this will require “new union agreements for personnel.” This means wage cuts and most people will go from a defined benefit to a defined contribution plan. There will also be a “centralization of administration functions,” whatever that really means, and there will be more outsourcing with call centers and ground handling.

Then they’ll sell of the ground handling and aircraft engine-related assets. They’ll also sell airport real estate that’s currently owned by the airline. And yes, they’ll try to sell off Wider√łe, a regional airline, if anyone will buy it. So let’s see, cut labor costs + sell assets = profit! This isn’t a new formula – we’ve seen it all too often as troubled airlines try to stay afloat.

How Did We Get Here?
Why is SAS in such persistent trouble? Lots of reasons. In fact, it almost make you feel bad for the airline (if it were a person with feelings). There is just so much going against it, but these problems are the same headwinds that face a lot of small market-based airlines around the world.

  1. It’s half owned by the government. And not just any government, but THREE governments – Denmark, Sweden, and Norway. Just imagine how difficult it is getting business done when the government is in charge and multiply that by three. Or maybe it’s to the third power.
  2. It’s a true legacy airline that has had years and years of built-up, well, legacy everything. Just imagine what US legacy airlines have worked through and then keep in mind that Scandinavian nations are generally socialist. That means there are a lot of costs built-in. This isn’t a problem in a vacuum, but SAS doesn’t operated in a vacuum. It’s in a global market, so competitors may not face the same costs.
  3. Its home markets are small. The three home countries combined have only about 20 million people, about the same as the entire New York metro area. Copenhagen, where the long haul fleet primarily flies, has a metro area population similar in size to Kansas City.
  4. On top of that, SAS is seeing increasing competition from low cost carriers, who are coming in and making a big dent. Norwegian is the biggest threat with large and growing operations in all three of SAS’s main hubs of Copenhagen, Stockholm, and Oslo. Norwegian will be starting long haul flights next year as well, just to make things suck more for SAS.
  5. SAS makes Delta look like it has a uniform fleet. SAS still flies MD-80s, 737 Classics, Next Generation 737s, and Airbus narrowbodies. The former two will disappear in the near future, making things a little better, but there will still be a relatively small split Airbus/Boeing fleet with the narrowbodies.
  6. It has the wrong airplanes in its fleet. According to CH-Aviation, SAS has 28 737-600s. Those are the little ones that are not very cost efficient on a per seat basis. They might be good niche airplanes, but that’s a pretty big “niche” with 28 planes for an airline the size of SAS. It also has a long haul problem with only 4 A330-300s and 7 of the underpowered, gas guzzling A340-300s.

I could probably go on and on, picking at things like an inferior business class seat, but you get the point. What does this leave SAS management with? An airline that’s going to continue to struggle, most likely. On the short haul European routes, low cost carriers can often serve routes more efficiently and certainly with cheaper fares. Norwegian is betting it can do the same on long haul, though that has yet to be proven by any low cost carrier.

With any luck, SAS will find a way to keep itself viable, but it has a very tough road. I don’t envy the management team over there.

[SAS Belly Photo via Flickr user Hunter-Desportes/CC 2.0]

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