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 Widerøe, 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]


34 Responses to SAS Tries for Yet Another Turnaround

  1. Patrick says:

    SAS has (unsurprisingly) been in the news a lot here in Norway over the past couple of weeks. There’s quite a bit of stuff going on:

    One of the papers (unfortunately I don’t have a link right now) looked at the differences of salaries of SAS’s top management to Norwegian Air’s management, and the CEO and VPs at SAS are paid at least twice that of their Norwegian counterparts. SAS is trying to get employees to accept pay cuts of up to 15%… Even with executives taking pay cuts of up to 20%, these are still very large salary differences in countries where people are used to management not making that much more than normal employees.

    There is already interest from multiple parties in purchasing Widerøe. I guess we’ll have to see what the final result is, but a sale does seem probable. http://www.newsinenglish.no/2012/11/12/offers-fly-for-sas-regional-airline/ so

    The Norwegian government has also made things more difficult for SAS (and other airlines) to earn customer loyalty. –No flights within Norway are eligible for inclusion in frequent flier programs. I’m not saying this is the reason they’ve not done well, but obviously it’s going to have an impact on customer retention.

  2. I guess FlyBe has been sniffing around on Widerøe. Norway seems to have an unusually robust aviation market, as there are a lot of small towns connected by Widerøe, and even mainline Norwegian and SAS. It would be consistent for FlyBe to expand their Nordic ops beyond Finland by acquiring Widerøe. I mean, I guess, I have no clue what Widerøe’s loads are like or their margins…

    • CF says:

      James – And here’s a little story about FlyBe’s interest. It’s not a surprise, I suppose. FlyBe did recently do a joint deal with Finnair to create FlyBe Nordic for regional flights. So this might fit nicely into that. FlyBe is a really interesting little airline, for sure.

      • David says:

        Flybe’s share price has not been particularly inspiring. Their market capitalisation (i.e. value of company, including owned aircraft, parts, cash in the bank and any other assets they own) is just £42m or about $65m
        Flybe made a very small profit over summer this year, down significantly from summer 2011. The winter is unlikely to be profitable.

        I’m sure Flybe are sniffing around Wideroe, if only because it’s a chance to look through the books of a rival company, but their CFO is going to have to pull a rabbit out of the hat to obtain the financing to buy Wideroe. If SAS are selling Wideroe to raise cash, then they will want cash up front – not something involving stock, bonds, IOUs or any deferred payment

  3. CP says:

    Quite a change from the Jan Carlzon “best airline for the business traveller” turn-around.

  4. Having three governments with their hands in the operation can help and hurt so that could be a toss up. Operating in the northern climate will not help during winter months with weather delays and everyone in the world is not flying to their host countries to ski, so tourist travel is low.

    Shows being part of a large alliance like Star isn’t filling up their bank account, and in their U.S. market, their small US market is to UA hubs with a few routes flown by both UA and SK. Like you said it’s been years since they fly to LAX which is the second largest city in America and they do not fly it. Between UA and SK they should be flying to more cities in the USA. Hello Norway, Sweden, Denmark anyone want to go to Florida for the winter?

    They could be taking advantage of the beyond connecting market via CPH but since they don’t fly nonstop to a number of US cities, there is no reason to travel SAS if you don’t live in a nonstop US city.

    They are very limited outside of Europe as to where they fly and their non US cities can all be flown from the USA nonstop or 1-stop using US carriers. So for those living in the USA, there is no real reason to fly SAS. With the biggest bulk of their flying done in Europe, there are just to many low cost carrier options available, so again no need for Europeans to fly SAS at least not for tourism or small business owners needing to save money.

    Wow a major European carrier that doesn’t fly to India or the Middle East???

    I won’t even mention their blah plane livery, guess I just did….lol

    • Bob says:

      Talk about livery…I used to work for SAS at Idlewild (before it became JFK) in Operations/Weight & Balance in 1952 and in 1954. Their aircraft paint of white with the Norse Dragon in blue & the the sheilds of Denmark, Norway & Sweden by the passenger entry doors was very striking. They were a great airline to work for.

      • holy smokes bob, i bet you have some stories! hopefully you were able to stay away from jimmy burke and his cronies at AF and LH (and probably a few dozen other airlines)!

        cranky, you should hit up bob for a guest post, i bet he’s got a few great stories from being inside the flagship airport during the golden age of commercial aviation!

  5. chinger says:

    Nice summary. What other options do you think the carrier might have? Should SAS still hope for Lufthansa to come save them, or perhaps someone else?

    • EricInChi says:

      I think one of the BIG problems at SAS is having to compete with a 900lb crane (LH) within the same alliance. Having an economic superpower with a world-class network as an ‘ally’ isn’t helping matters. Sad thing is that they do not have real options…Oneworld>LHR>BA present the same problems. Skyteam might be a better option but not by much given the established connectivity of AMS.

      It would be interesting to see if SAS could build momentum to forge a fourth alliance with the few global and regional carriers that remain unaligned. I personally think that, at a macro level, this is the only way out of their competitive disadvantage. Of course this requires allot of capital and carries a huge risk.

    • CF says:

      chinger – Good question. Lufthansa seems to be less and less interested in its pan-Europe strategy these days. I don’t think Lufthansa would want to take on such a big mess. Most struggling mid-size European airlines have been turning their focus toward the middle east, hoping someone will save them. Though Etihad has taken a stake in Air Berlin, these deals have been hard to come by. Malev tried before it shut down. LOT Polish has been trying to get Turkish interested, but nothing has worked. So there don’t really seem to be many options these days.

      SAS could try to go it alone and become a niche carrier that provides connectivity to a lot of airlines within Scandinavia, but I just don’t think there’s a ton of demand for that.

  6. Just not big enough to be a factor, I suppose. How has FinnAir been doing in relation to SAS? Seems like the best comparison (some service to US and a fairly strong connecting hub). I also think the proliferation of “other” airports outside the major metro areas along the lines of the ryanair model must also be hurting them.

    I have flown them once or twice and found it unremarkable but not much choice at the time in/out of ARN. At least 15-20 years ago, my cousin began travelling to Sweden regularly from Detroit. As an airline dork, I asked him about SAS. He replied he tried it once or twice over EWR and it was a lot easier to take KLM nonstop to AMS and connect to nearly any Swedish city/town that he could get to using SAS (which made him connect over CPH most of the time anyway). 20 years later, that’s still the case. Even though it’s part of AF now, KLM clearly succeeded where airlines like Swissair, Sabena and SAS failed.

    • CF says:

      Bill from DC – Finnair long ago decided that it couldn’t just rely on the short haul stuff. It really put a focus on Asia and has very little in the US. So it’s the opposite of SAS in that sense.

      Finnair flies only to JFK in the US. But in Asia, they do 11 cities including smaller ones you wouldn’t expect. They do Chongqing in China, for example. With the great circle route, it makes it a simple and not time-consuming connection from much of Europe to Asia.

      I like how they found this niche and have worked to build up something sustainable. It has had mixed results but they’re in a lot better shape than SAS.

      • Brett, didn’t realize Finn was only at JFK in the US but their second (third?) tier city asian strategy seems smart. Hope they have some dreamliners on order, that will be THE plane to make those sorts of runs even more profitable.

  7. another nostalgia tidbit re SAS. Cranky noted they were the first to fly the LAX-Europe polar route. That accomplishment was “memorialized” in an original (late 50’s?) Mickeky Mouse Club TV show episode. (all you YouTube geeks, see if you can find that one!). Yes, I’m showing my age…..

  8. MJ says:

    One hopes they can turn around. Scandinavian countries are generally socialist??? No. The Nordic countries are mixed economies. They have high, redistributive income tax and general welfare benefits but they are have capitalistic freedoms and are fully democratic.
    Three governments make things worse by power of three. Not all countries see governments as inefficient. In fact some countries see government as the most efficient way of delivering some services. I do not get the impression ant of those governments have interfered in the day to day running of SAS.The mistakes and fleet structure can be laid firmly at the feet of SAS management.

    • CF says:

      MJ – Ok, they aren’t completely socialist by the traditional definition. Maybe you would feel more comfortable calling them social democracies. The point I was trying to make, however, is that costs are higher due to the socialist tendencies in these countries.

  9. JayB says:

    Good summary, as usual.

    I see SAS 925 (343) is coming down New England for its landing at Dulles. Love to see that Great, great Circle flight path they take.

    [Just observing, it seems like a lot more than usual trans-atlantic flights to IAD these days are taking a much more southern track into the US…flying over BOS, not the mouth of the St. Lawrence, Newfoundland, Labrador track I’m used to seeing. Not sure why.]

    Whatever. So, here comes SAS. Anybody aware of it? Marketing locally is nonexistent. Nice airline, but would it hurt them to advertise their services/fares just a little bit?

  10. Hrm, perhaps should they go for the Alaska play and partner with anyone and everyone? I have no clue with the competitive dynamics but perhaps its better to let others handle the long haul and for SAS to pick the last mile.

    CF – You also probably saw a lot of the PSA smile too eh?

    • CF says:

      Nick – Well, not as much. It wasn’t until late 1987 that we moved into that house, so there weren’t smiles flying around for very long. With SAS, it was quite often a 767 over the years. I don’t remember when they switched.

  11. Charles Hagen says:

    It was a big disappointment when SAS discontinued its polar nonstop from Seattle to Copenhagen. Now those of us on the West Coast are faced with fairly unattractive connections from Midwest or East-Coast cities. Lufthansa from, e.g., San Francisco to Frankfurt is now a compellingly better deal.

    • Well at least next spring SFO-CPH starts on SAS so that will get a lot of west coast connections with UA.

    • Patrick says:

      I was also disappointed when SAS dropped the CPH-SEA route. It was quite convenient. From Seattle, though, Icelandair can be an attractive option if you don’t mind that they’re not part of any alliance.

  12. Bob Gordon says:

    A comment on the SAS polar route in the 1950s and on SAS business class service now. The LAX-CPH polar route started in 1954, flown by a DC-6B, and of course it could not be flown nonstop. The early flights stopped twice, once in Winnipeg and then in an airport in Greenland having a funny Danish name that starts with “S”. The introduction of the DC-7C around 1956 allowed the Winnipeg stop to be eliminated, but the Greenland stop remained even with the first generation of DC-8’s flown in the early 1960s.

    A minor detail for airline dorks is that in 1983 when UA got its first Asian route rights, three years before the acquisition of PA’s Pacific division (the 1983 routes were SEA-NRT and SEA-HKG), UA needed an international lounge and started to share SK’s SEA lounge in the N terminal satellite. From 1983 to about 1991, when it finally got nonstop ORD-NRT route rights, UA ran a noon-to-1pm omnidirectional bank at SEA with departures to NRT, HKG, YVR, PDX, SMF, RNO, SFO, LAX, SAN, DEN, ORD, JFK, and IAD.

    About the modern SAS business class, not only are the seats non-lie-flat, but I call it the “cellophane airline” because the business class food comes with plastic wrapping on everything which the passenger is expected to tear off rather than the crew doing it in the galley.

  13. Sanjeev M says:

    The part about fleet is especially true. They have way too many fleet types.
    How does Blue1 factor into this?

  14. Fred says:

    Cutting back to one hub might help, instead of keeping trying to keep three going (CPH, ARN, OSL). The politics might be tricky with three governments, but more hubs just means the network is spread thin, probably having flights to all three hubs from many destinations and not enough passengers to fill all the flights.
    This has been done with success – US Airways dropped its Vegas and La Guardia hubs to run more efficiently. And Alitalia (perhaps not the best example) has dropped most flights from Milan and even if you don’t want to call it a success, they are doing a lot better now then they had been before. Both of these airlines also had a very mixed fleet that they are simplifying, which is easier if you cut capacity. Other than Lufthansa with FRA and MUC (and possibly BA with LGW and LHR even though they are in the same city), no major hub/spoke airline in Europe has more than one real hub.

    • re: “US Airways dropped its Vegas and La Guardia hubs to run more efficiently,” I would argue that they dropped those hubs because they were getting their brains beat in by the competition and that increased operational efficiency was a benefit of that.

      • Fred says:

        But US seems to be doing fine with competition at DCA and PHX (Southwest). Also, SAS does have significant competition from Norwegian Air Shuttle, especially in Oslo.

  15. I flown on them during my last trip to Europe. (DUB-OSL-ARN-LHR). Overall a nice experience on short haul economy, pleasant crew. And the only time I’ve been offered a Reindeer meat sandwich :)

  16. Mark says:

    I just did two flights on SAS in the past five days, TXL/CPH and CPH/LHR, and noted the amazing diversity of their fleet, not to mention the horrible quality of their “business class” cabin. On both flights, loads were atrocious, and they were offering me rock-bottom fares, as short as 1.5 weeks out. I was wondering how they were staying afloat.

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