SAS head Jørgen Lindegaard has a clear vision to steer the group away from the rocks towards calmer waters in a turnaround programme designed to put it back on a stable footing
"The promise I have made to myself and to everybody else is that never, ever again will we put SAS in the situation where we lose control," says Jørgen Lindegaard, chief executive of the SAS Group for the past 18 months. He concedes that the group had indeed lost control by the end of 2001, posting losses of SKr2 billion ($214 million) in the final quarter.
"If you run a business when you lose that much, you simply lose control of it." he says. The group, which had made an operating profit every year since 1992, saw that become a loss of SKr1.1 billion last year. It was still reeling from fallout over the SAS/Maersk Air price-fixing scandal which came to the surface in mid-2001 and also struggling to cut its capacity to match demand in the post-11 September business climate.
Then SAS had its own tragedy, when in early October last year a Boeing MD-80 leaving Milan's Linate airport for Copenhagen crashed on take-off after colliding with a business aircraft that had strayed onto the runway. All 118 people on board were killed. As the company coped with its worst ever accident, it also had the task of continuing a huge restructuring programme, establishing a new management team and eventually converting SAS into a true group structure rather than as a parent airline with fringe assets.
In the middle of these crucial actions, too-good-to-miss opportunities to buy Norwegian carrier Braathens and take majority control of Spanish airline Spanair presented themselves. Given the importance of these issues, several other significant management decisions - such as how to make the most of SAS's role within the Star Alliance - were put on the backburner.
For Lindegaard, the key to the SAS Group's long-term future is to find a proven solid basis for the size of Scandinavian Airlines. He hopes the winter 2002 programme, which includes a 2% year-on-year drop in capacity, will form that baseline.
"Once you have that, then you can experiment and open new lines and add frequencies, knowing you can always go back to solid rock," he says. And experimenting is not too strong a word for how the previous regime conducted its network expansion. "Experimenting with the fundamental economics within our group jeopardised our profitability," says Lindegaard. "Never, ever will we flood the market with seats - this is not a mistake we will make again."
The core SAS Scandinavian Airlines business still represents 80% of the group's SKr51 billion annual revenues, but is the only part of the business not currently making money. Hauling it back into the black is clearly critical to Lindegaard's mission. It is also the main reason why he is in no rush to relinquish his role as acting chief operating officer of the airline division.
Right-sizing the airline is only one part of the equation; equally vital is to make it more productive. Lindegaard is paying personal attention to the SKr6 billion turnaround programme now underway. This involves increasing staff and aircraft productivity by 25-30% so that the carrier regains profitability next year, and makes a SKr6 billion operating profit in 2004.
There has already been a little cheer from the second quarter results for this year, with the airline showing a swing back to profit and traffic returning to last year's levels. Lindegaard plays down the success, however. "The most important thing is our second quarter numbers were on plan," he adds. "But the first quarter was terrible and that was also on plan." Lindegaard likens the performance to a soccer game in which SAS has scored an early goal, but still has the rest of the game to defend or indeed improve on its slim lead. "I am pleased, but it is not good enough," he says.
Restructuring SAS
Of longer-term significance are Lindegaard's efforts to produce a coherent and modern structure for the SAS Group. When he first arrived in May 2001 he had quickly set about a reorganisation but this was swept up in a further reorganisation a year later, which now leaves the group with four clear business areas, of which the core airline is but one:
Scandinavian Airlines, with the core airline business; Subsidiary and Affiliated Airlines, including the regionals, Braathens and Spanair; Airline Related Businesses, including cargo, flight academy, ITand trading; Rezidor SASHospitality, covering the Radisson and Malmaison hotel chains."I realised SAS was much more than an airline. It was a group of companies, but the thinking was centred on Scandinavian Airlines,"says Lindegaard. "The company was very difficult to manage as one big airline and a couple of other activities." The new structure will give each unit more independence, the ability to manoeuvre in their own marketplaces and work in a decentralised way on their own productivity.
But no sooner had Lindegaard set the initial restructuring plan in motion in mid-2001 than the SAS/Maersk scandal unfolded in what he now describes as a "nightmare" period. SAS endured a blaze of bad publicity across Scandinavia and was fined heavily by the European Union for its part in the pricing cartel with Denmark's Maersk. Deputy chief executive Vagn Sørensen, now at the helm of Austrian Airlines, resigned over the affair, which had been signed before Lindegaard's arrival. Later the entire SAS supervisory board stood down after coming under criticism.
"I have never had to deal with anything like that before," Lindegaard says of the frenzied media and political interest in the case. "It was very frustrating to lose a key player and also a friend, but I argue that with our [new] management compliance programmes it simply cannot happen again."
In parallel, Lindegaard realised in August 2001 that the growth ambitions SAS had long harboured were coming to fruition just as the market was slowing sharply. "We had to cut out capacity rather than increase it," he recalls. "All the fuss about the Maersk case, changes in the management team that I started and the couple of months getting the company under control again, meant that we were late in cutting capacity. Then came 11 September, which meant that not only were we late but we were also stuck in a situation where the market did not come back."
Although Lindegaard admits SAS was one of the last European majors to react, he says it responded with "powerful" measures to cut up to 3,600 jobs from its workforce of 25,200, a 15-17% reduction in capacity and the grounding of 21 aircraft.
Some surprising distractions then entered the frame. SAS had been offered the opportunity to buy financially troubled Braathens in neighbouring Norway. "We were virtually the only company that was both able to take it over, and that could justify the price, because we could see the synergies," says Lindegaard. "And we have proved that over the last half-year it was a very attractive acquisition for SAS."
He adds: "You could imagine that, with all the problems we had at Scandinavian Airlines, the last thing we want really is to acquire another company. But I was very interested in this because from my previous jobs with acquisitions and mergers I knew that this was a very good case." Then Spanair became available.
Up until then SAS had held a 49% stake in the Spanish carrier, but Lindegaard's experience with equal joint ventures or in partnerships, in which his company was not the majority shareholder, was not positive. "It is not a very interesting situation to sit in, so therefore I changed the strategy to going for majority stakes. It is very straightforward - either we have the majority or we go out." The only exceptions are for technical or future investment reasons. The Braathens purchase cost SAS $124 million, while it raised its holding in Spanair to 74% through a $112 million mix of loans and cash.
Structural change
It was these two acquisitions that spurred Lindegaard to rethink whether the group structure he had first put in place needed some modification. "We now have five airlines in the group - there might be more to come - and we have separated the businesses that support all the airlines in the group," he says. However, once the second reorganisation was announced he lost Marie Ehrling, a respected member of the management team who stepped down as head of the airline group. Lindegaard says he regrets her decision to resign, but notes: "It gave me an opportunity to really choose people that would fit exactly to the new structure rather than using the people that we already had internally."
Although there are some parallels with the Lufthansa Group, Lindegaard's vision is not influenced by his Star Alliance partner. "This was purely what I thought was best for SAS. Also I think it is very important to have these airlines in the group, but also to give them an independence so that they can look after their customers and use whatever they are best at."
For example, although the core Scandinavian Airlines operation has always been thought of as a high-cost, high-yield, business carrier, today Lindegaard argues that the SAS Group "is much more than this".
"With Braathens and Spanair, we have two companies that are performing as well as any low-cost carrier," he says, with Spanair having a cost base as good as Ryanair or easyJet. "Therefore we have business opportunities that are far more spread out now than just with Scandinavian Airlines. That is still the most important part of our business. It is still the jewel in our crown, no doubt about it, but we have now seen an opportunity to diversify, to be more proactive in capturing new business opportunities, creating packages with our hotels or creating services that the customers want."
The SAS board is discussing whether its hotel activities fit with the new group and whether an initial public offering for this business is possible. However, with the importance of the SAS brand to the hotel chains, and - provided synergies are found between the airline and hotels in market terms - Lindegaard feels there are many good reasons to keep them in the group.
Also, there are parallels between the market dynamics of hotels and airlines, as both shift toward the low-fare or low-price model. For example, Rezidor SAS - mainly a four-star hotel chain - plans to expand into the three-star market, a move resulting from both Scandinavian Airlines and Rezidor wanting to address the rapidly growing market for private leisure customers and for businessmen who want to fly in economy or find cheaper accommodation.
"It is not that we don't want to be the businessman's airline anymore, but we have to change according to what the businessman wants," says Lindegaard. "I don't see Scandinavian Airlines as anything but a full service airline, with cheap products within that concept." In June, as the first element of this strategy, SAS launched Scandinavian Direct, a one-class product with a simplified fare structure and fares up to 30% lower on domestic and intra-Scandinavian flights.
Lindegaard's strategy definitely sees a place for a low-cost product at the right time. "We might have other companies in the group which are not full-service companies, but we don't see any reason today to only have companies that are low-cost, low-service. If we launch Scandinavian Lite, it will be a service that is light compared to the normal SAS businessman airline, but it will still have a number of components that we could call full service: interlining, lounges, etc," he says. "There are many ways of doing this. We can address that market with Spanair, with Braathens, or with other companies within the group." But Lindegaard will not make any hasty moves. "The SAS turnaround programme is meant to have increased productivity in full effect by 2004. We have said that we will use that step-change in profitability to invest in expansion."
Lindegaard's team is carefully studying where this measured expansion will come, with a couple of intercontinental operations, 20-odd regional jets and possibly a Scandinavian Lite product serving southern Europe as the favourites if the step-change is taken.
Lindegaard is keen to see regional jets introduced to the SAS product by 2005. "We are working with our unions to justify an investment in regional jets," he says. "The Scandinavian market is perfect for regional jet operations. It is ridiculous that the only market in Europe where you don't have a huge regional jet operation is Scandinavia, when they are what the business community wants."
With so much work needed to get SAS's own house in order, Lindegaard concedes that, although the need to maintain its Star Alliance relationship is unquestionable, in recent months SAS has not paid as much attention to the alliance as it normally would.
In today's tough market, he believes the emphasis of the alliance should shift from revenue enhancement and service expansion to "taking cost out". He adds: "We have to be much better at using the experience and products and services from one Star company to another. That has certainly not been done because Star has always been thought of as an organisation which is meant to increase revenue. We can do much more by implementing what has already been decided."
A consensus at the June meeting of Star chief executives in Shanghai was that, although it is important that all members should implement decisions or products, "maybe we should be more keen on the 80% [of carriers that want to implement a change] and not spend time on trying to make it perfect [for everyone]".
"So," adds Lindegaard, "make Star more open or make the internal life at Star more flexible so that a couple of Star companies can go in this direction, a couple of others in that direction. There should be a minimum level that every Star company accepts, but do not try to push everything down the throat of everybody.
External focus
"Of course, within Star we also have a special relationship with Lufthansa," he says, via a joint venture with the German carrier. In recent talks with Lufthansa chairman Jürgen Weber, Lindegaard says both expressed concerns that they "were not managing our relationship in the right way because we are so focused on our own problems". They agreed to increase the number of management meetings to be sure to grow that partnership. This will concentrate on using their Frankfurt, Munich and Copenhagen hubs more actively, and building up services from secondary cities in Germany to Scandinavia.
"Not only do we have a similar view in what should happen to Star, but we also have this bilateral relationship which is beneficial for Lufthansa and SAS," says Lindegaard. "This is a very important thing about our arrangement: it is of equal importance to both parties."
Lindegaard brushes aside suggestions that Lufthansa is the dominant party. "That's not the way I see it at all. We don't feel threatened at all by Lufthansa because we believe that SAS is equally important to Lufthansa, and that nobody could serve this market as well as we do."
Partnership activities are one of several work-in-progress items still on Lindegaard's must-do list as he steers SAS on its turnaround course. When it has achieved its goals, it will once more be time for SAS to expand. "Then we can grow, not based on bigger aircraft, new lines, or lots of fancy ideas of what we would like SAS to be, but we can grow based on profitability, route by route, line by line."
REPORT BY MARK PILLING
Source: Airline Business
