After brokering a last-minute deal with unions for vital concessions, SAS Scandinavian Airlines believes it has the cost base to reinvent itself as a profitable network carrier able to repel the low-cost carrier invasion
SAS Group management prepared two press releases on the eve of critical pilot and cabin crew union negotiations in late March - one red, one green. If the talks succeeded, the green one, depicting a restructured, lower-cost network carrier, would to be released. If they failed, the red one would be posted, showing a scaled-back Scandinavian airline with no long-haul services essentially feeding Star Alliance partner Lufthansa.
After a night of "harsh" negotiations, including a period where agreement looked so unlikely that SAS executives were briefed to expect the worse, a deal was hammered out in the early hours of 24 March. The agreements with the last of 39 unions at SAS were part of the group's Turnaround 2005 plan, designed to wrench its unit costs down. The aim is to take SKr14 billion ($1.85 billion) out of the SKr30 billion cost base between 2002 and 2005, says Sören Belin, SAS Group's executive vice-president airline strategy & co-ordination.
Prior to the pilot and cabin crew talks, although SAS had identified savings of SKr12.5 billion, it was still short of its SKr14 billion target. In the past the fear of strikes has prevented management taking these groups on, says Belin. But with the future of SAS at stake, such "weak management" was not an option.
On the union side, there was an acute understanding of the predicament of SAS, and of management's resolve to push through its demands. Board approval of the SAS downsizing plan "did put the pressure on us", says Mogens Holgaard, president of the Danish Pilots Association, and head of the team negotiating collectively for SAS pilots from Denmark, Norway and Sweden. Two days prior to the crunch talks, unions also realised that putting political pressure on the three state owners of SAS to help would be in vain as Denmark's finance minister made it clear that the governments would not interfere.
Pilots pay cut
Holgaard managed to convince SAS chief executive Jørgen Lindegaard that the pilots offer does reach, and in his view exceed, the pilots cost-saving target of SKr700 million annually. The headlines of the deal sees pilots taking a 6% pay cut in the year that started on 1 April, with no pay increase in 2005, while new work rules will mean SAS pilots become more productive, with their annual block hours rising from 470 hours in 2003 to 700-750 hours. Also being scrapped is a pay deal that took into account currency fluctuations between the three countries.
"The pilots have taken a giant step to modernise their working rules and terms," says Belin. According to Holgaard, the SKr3.3 billion cost level that SAS pilots represent today will be slashed by 30% overall. In return for these cuts, pilot demands centred on job security, he says. In the past, pilots were particularly unhappy about seeing new service going to lower-cost carriers in the group like Spanair or Braathens rather than mainline Scandinavian Airlines. The board has given the pilots an assurance that it will not transfer pilot jobs and that additional services will go to one of the three new national SAS companies. "Under the new terms, we are definitely competitive with Braathens. In fact we can match and even beat them so there is no need to transfer more jobs," says Holgaard.
A new contract with cabin crew produces another SKr400 million in annual savings, in addition to savings. This, together with the pilots deal and other labour contract renegotiations, means that SAS has achieved its target. Wage cuts averaging 6-10% have been taken across the company. Belin says: "Some people will never have a pay raise in their time with the company." Out of an SAS Group headcount of 35,500 in 2002, some 6,000 jobs will go.
Belin recognises that making these changes stick will be a challenge. "In the next upturn if we can withhold increases and new terms from unions, that will really be the test for us," he says. But there is a determination that SAS has changed forever. "We have redesigned our complete salary system with our unions," says Belin, who believes that labour has a good understanding of why these measures are needed. "I would like to see Air France do this," he quips.
SAS has been inspired by the transformation of former loss-making Irish flag carrier Aer Lingus, led by chief executive Willie Walsh, into a low-cost network carrier. "Willie Walsh was the light at the end of the tunnel for us," says Belin.
Premium market
Like Aer Lingus, SAS has seen its once strong premium market collapse. "We have a tradition of offering a premium product, but the premium is no longer 75%, it is 25%," says Belin. But he believes the SAS service and network does deserve a premium and that the airline's brand will continue to be positioned as such. "There is still a value in the network carrier, but it is one that is focused on efficiency rather than comfort. We will be the premium carrier in a market where you have a lower average yield."
Once the full effects of the restructuring are felt, the airline's unit costs will fall by 40-45% on short-haul services and by 25% on long-haul services, says Belin. "On our home turf we are facing wing-to-wing competition from low-cost carriers. We have to be at their level and with our lower units costs we can compete." With its new cost base, SAS wants to achieve a 10% operating margin on short-haul operations, while the target is nearer 20% for non-airline units. After three years of losses, SAS is targeting a return to profit this year, with the 10% plus margins being achieved by 2006/7.
A key component of the new SAS sees the carrier, which had operated as a consortium of airlines from the three Scandinavian countries since 1951, divided into three different companies to serve each of its home markets. At first glance this would seem to go against the trend of airline consolidation. But SAS believes it is vital to treat each national market, with widely varying traffic mixes and labour conditions, differently.
One of the arguments for operating as a consortium is to gain economies of scale, but SAS found that benefits have "not materialised in real money terms", says Belin. As the network moves more towards point-to-point operations the focus is on "taking complexity out of the system", and therefore reducing costs.
The three wholly owned airlines - SAS Denmark, SAS Sweden and SAS Braathens - will still be owned by the SAS consortium. Braathens and Scandin-avian Airlines in Norway were merged to create SAS Braathens. Generally, the intercontinental operations of Scandin-avian Airlines will still be conducted by the consortium, which holds the traffic rights for these services. Traffic rights on non-European Union international services, which will be served by one of the three national carriers, will require re-negotiation with the countries involved, but SAS does not believe this will cause a major problem.
Although the national carriers will have a large degree of autonomy and responsibility for their businesses, they will not be entirely free. Each will be able to develop routes where it sees fit, but there will be rules governing services where they will compete, with the consortium having the ultimate say over which one serves a market. When an airline wants to add service it will have to make the business case for the extra capacity to the consortium, says Belin.
From the labour side, Holgaard agrees that it is a good idea to make each national carrier commercially responsible, but draws the line at creating totally independent airlines. "This would affect our feeling of security as it would make it possible to sell and break down these companies," he says.
Whither Snowflake?
As it defines the future of its new lower-cost national carriers, SAS is still pondering what to do with its low-cost Snowflake brand, which it uses to fly to "sun and burn" destinations. It is unlikely to become a separate airline, says Belin, but is probably going to be retained as a brand. Snowflake appears the only significant question mark in the new SAS strategic picture of a carrier that is being totally redrawn. For Belin, the transformation that SAS brought about during a week in late March 2004 is the "ultimate proof that we can change".
| The four airlines within SAS | ||||
| Base | Weekly capacity ASK million | Destinations | Fleet size | |
| SAS Braathens | OSL | 93,160 | 41 | 50 |
| SAS Denmark | CPH | 93,370 | 47 | |
| SAS Sweden | ARN | 78,284 | 35 | |
| SAS Intercontinental | CPH/ARN | 130,620 | 9 | 11 |
| Source: SAS and OAG data March. Notes: SAS Denmark and SAS Sweden destination total excludes intercontinental. Includes SAS Commuter. ARN=Stockholm Arlanda, CPH=Copenhagen, OSL=Oslo. ASK (available seat kilometre) for week of 29 March, departures only. SAS and Braathens combined for OSL. SAS only at ARN and CPH. | ||||
REPORT BY MARK PILLING IN LONDON
Source: Airline Business
