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SAS restructuring clears path for growth
By Sebastian Steinke
John Dueholm, Executive Vice President and Deputy Chairman of the Scandinavian Airlines Group (SAS), does not gloss over the situation during a meeting with journalists in the SAS Group headquarters in Stockholm. “Since 2001, SAS has sustained €650 million of losses. Since then we have sold investments worth €4.3 billion to finance investment. In future everything will have to be financed out of cashflow. In the meantime we may be back in profit, but not yet at a level sufficient to sustain strategic development and ensure our independence.” Together with the SAS management team, Dueholm has therefore drawn up a new “Group Strategy 2011” for the airline, which is based on the following principles: SAS will concentrate on the air travel business, as an airline; geographically, its offerings will be primarily confined to the Group's own home markets in northern Europe; and finally, organisational structure, fleet and offerings will be modified in such a way that SAS can win 20 percent more passengers and grow profitably once more.
The multinational company's complicated structural tangle will in future be organised more closely on individual home market lines. The three national airlines founded in 2004, SAS Sverige, SAS Norge and SAS Danmark, are to become more independent and more efficient than hitherto and will be able to run their flying operations in future without constant referrals through the parent company.
The international long-distance routes will be operated by SAS International, which will remain interwoven with the medium-range routes of the national subsidiaries at the two hubs of Copenhagen and Stockholm. However, under the new two-hub strategy, Stockholm will get more stand-alone long-distance routes so that Swedish travellers are not tempted to go to Helsinki and take a Finnair flight in order to get to their desired destination. Today, operating out of “CPH” (Copenhagen) and “ARN” (Stockholm-Arlanda), SAS's Asian routes are flown by seven A340's and its American routes by four A330's. Having run up a loss of €110 million in 2003, the long-haul network was restored to profitability in 2006.
The two subsidiaries Wideroe and Blue 1 will continue to belong to the future core business. SAS also has external international partners in the form of Air Baltic and Estonian, and, according to John Dueholm, SAS is hoping to acquire majority shareholding in these two airlines at some time in the future, as they are needed as a “gateway to Russia”.
On the other hand, the scope of further involvement in ground handling, engineering and cargo handling at the SAS subsidiaries is under review. Around 40 percent of the workforce, that is, 13,000 people, work here. The company is already planning to sell Spanair and its ground handling service provider Newco in 2009. Again, SAS's 20 percent share of bmi is to be disposed of by the end of 2008. A 37 percent stake in Air Greenland is also to be relinquished due to inadequate yield. Even the sumptuous SAS Group headquarters near Stockholm, complete with indoor swimming pool, restaurants and squash courts, are to be disposed of and replaced by a modest leased building at Arlanda airport, where SAS Sverige is already located. The number of staff employed at headquarters has already been trimmed back from its former 1,600 to below 1,000.
After this kill-or-cure remedy, SAS hopes to be permanently profitable again by 2011 and to win new market shares. In 2006 it made a profit of €140 million. The plan is that in the medium-term this will rise to €430 million. “If we don't achieve that by 2011, we will have to consolidate,” Executive Vice President Dueholm believes. But, he reassures us, “So far 2007 is looking good.” Business travellers play a critical role here, contributing 70 percent of turnover while constituting only 45 percent of passengers.
Robin Kamark, the Senior Vice President Airline Commercial and a Norwegian, conducted a survey of 8,000 SAS customers' travel needs last winter. He identified five distinct groups of customer amongst the passengers, the middle three of which SAS wanted to target.
At the bottom end of the scale is the bargain hunter who does not mind travelling two hours to a remote departure airport and waiting there another two hours, as long as the price paid is low. Although this group is growing in size and becoming more important, SAS is not interested in putting a lot of effort into wooing these typical customers of the no-frills airlines.
It takes a different line with the next group, the price-conscious business travellers. The most important factors for these people are value for money, speed and simplicity, and in return they are prepared to forego extra comforts.
The “productive business travellers” are people who want to be able to keep working above all else, possibly by having ready Internet access. For this they are prepared to pay a higher fare, but they are still price-sensitive.
Then there is the classic group of Business Class travellers, who expect and are prepared to pay for the traditional comforts with lounge use and in-flight entertainment.
Finally, right at the top end and over the other side of the SAS target groups, is the “the best of all” group, that is, typical First Class customers, the market for which is too small in Scandinavia.
“In the past our customers found the variety of products offered by the various group companies confusing,” Robin Kamark admits. “Our product was not clearly positioned, people did not understand what paying more would give them. Should I try and change the customers and force my concept on them, or do I let the customers decide? In the long term, coercion doesn't work.” Of that, Kamark is sure.
SAS's new approach is for the Group to project itself clearly right across all the Group airlines by offering the same range of choices on all of them. The Economy Class with seats in groups of three will offer a combination of attractive fares and onboard catering based around the sale of snacks. The Economy Extra class will offer additional in-flight entertainment and more in the way of catering, and on long-haul flights, the seats will be wider and seat pitch will be improved from 81 centimetres to almost one metre. On short-haul flights, the Business Class, with its groups of three seats, will always have a free centre seat plus even better catering with Scandinavian flair, while on long-haul flights it will have reclining seats with massage function.
According to a new tariff system, three kinds of tickets, which can be freely combined for outward and return flights, are now offered. The classic “fully flexible” full-price ticket, under which flights can be rescheduled and are refundable, is offered in all three classes. The “flexible” economy ticket offers savings to passengers whose trip includes at least one Saturday night, and rescheduling is allowed, but for a fee. Finally, there is a “fixed” ticket, once again available in all three classes. These are the cheapest tickets, under which passengers are required to book well in advance and to spend at least one Saturday night away, and there is no possibility of a refund. This option is primarily targeted at comfort-conscious private travellers who like to plan far in advance.
At the same time, SAS is well aware that business travellers these days are also price-conscious. “Business travellers often sit at the back,” says Robin Kamark. “And these days hardly anyone still pays IATA rates in Business Class. We also want to keep the customers whose companies no longer allow them to fly in the classic Business Class. This means that the Economy Extra class must offer real quality.”
The survey results also indicated that fast ground handling is a critical element of perceived comfort. Even if the actual flying time is only one to two hours, when one includes the journey to the departure airport and from the destination airport, the travelling time for a European connection can easily add up to six or seven hours. In the future, more checking-in will be conducted over mobile phone and Internet, as opposed to at the check-in counter and using check-in machines, and Business Class and Economy Extra customers will be filtered through accelerated control queues.
This year SAS is drawing up a new fleet plan which will run through to 2018. Whereas in the long-haul segment the latest thinking is that the company should stick with the present fleet size of eleven aircraft, it is considering the possibility of adding a further 15 to 20 new aircraft to the medium-range fleet. The Scandinavians' existing MD-80's have an average age of 16 and will have to start being withdrawn from service in 2012.
If the “Strategy 2011” comes off, SAS might later on increase the long-haul fleet by around 20 percent, as Roberto Mairana, sales director long-haul operations, explains. The Indian cities of Delhi and Mumbai are right at the top of his wish list. In his view both the Boeing 787 and the Airbus A350 would be “well suited” for SAS.
The Scandinavians, whose total population amounts to only 17 million, view Germany as an “extension of the home market”, given its physical proximity. Thus, Düsseldorf alone contributes 50 percent of SAS's passengers to China. Here the airline is helped by its membership of the Star Alliance and Miles & More.
From FLUG REVUE 11/2007
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