Photographer Andy Prhat
First, there were the targets from the 2020 recapitalization plan, followed by an enhanced operating model late last year to give it more flexibility. Now, Scandinavian airline SAS has announced a full transformation of its business to secure its long-term position. The plan called SAS Forward was presented during the FY22 Q1-results presentation on February 22. Forward should transform SAS into a competitive airline again.
Anko van der Werff, who joined SAS as the new CEO last July, has repeatedly said that his carrier needs to adapt and change its business plan. Two years of the pandemic have exposed SAS to the effects of continued lockdowns, low traffic, ‘peaky’ customer behavior, and – as a result – continued losses. At the same time, competition in the Scandinavian market has increased from both low-cost airlines and full-service rivals like Finnair who have grown their presence on SAS’ home markets Sweden and Denmark.
Despite a SEK 3.0 billion capital injection last May from the Swedish and Danish governments, which it drew down only this month, the effects of the pandemic will quickly exhaust SAS’ cash resources, says Van der Werff. Its short-term liquidity position is good, but if it wants to survive, the airline needs to transform and improve its cost structure and the ratio between revenues and costs. Last November, he announced a new operating model that retains SAS Scandinavia as the current mainline parent but adds two new units SAS Connect and SAS Link to the model. They will operate under the same brand but at a lower cost structure.
Forward focusses on six pillars
The next step is the SAS Forward plan, which outlines six targets. First, the airline wants to reduce its annual costs by SEK 7.5 billion. Of this, SEK 3.5 billion are new. The remaining SEK 4.0 billion targets for 2022 were part of the 2020 recapitalization plan. Cost reductions will be made aggressively “with a far more comprehensive burden-sharing across all major stakeholder and creditor groups.”
The operational model and planning should produce SEK 2.3 billion in savings, fleet, and maintenance SEK 1.8 billion. Another saving of SEK 1.2 billion must come from administration and distribution (including new labor contracts), 1,1 billion from airport services, and another 1.1 billion from other costs.
Of the SEK 7.5 billion cost reductions in SAS Forward, 3.5 billion are new. (SAS)
By reducing its costs, SAS wants to strengthen the balance sheet, with a liquidity target of at least thirty percent of annual revenues in FY25, said CFO Magnus Ornberg. It then plans to convert more debt into equity through hybrid and unsecured debts, equity swaps, and the refinancing and optimization of its fleet.
Once costs have been reduced, SAS plans to raise fresh capital. Van der Werff said this fully relies on the success of implementing the SEK 7.5 billion in structural savings and getting the support of its shareholders, of which the two states are the biggest. Ornberg added that SAS and its financial advisors expect to undertake a broad and comprehensive capital markets process for investors.
The 2020 recapitalization plan included SEK 2.0 billion in a directed issue of common shares, SEK 4.0 billion in new common shares, and SEK 6.0 billion in new hybrid notes. Last July, the two governments provided the EK 3.0 billion credit line that has been drawn down in February.
SAS’ long-haul fleet currently is too big
On the fleet, Ornberg said that SAS will review its long-haul fleet, which is too big now. The airline is in discussion with Airbus on deferral of pre-delivery payments as well as with lessors, but it didn’t specify how it plans to reduce its fleet. SAS has two more A350-900s on order that have already been deferred before until FY24.
SAS will continue to phase in more Airbus A320neo-family and other smaller aircraft, having recently introduced six Embraer E195s with SAS Link instead of leasing in capacity from external partners. It has 35 A320neo’s on order until FY25 and one A321LR. These single-aisle aircraft will not only operate on short-haul routes but also on long-haul services, like the LRs that now are used on Transatlantic services. “Those smaller aircraft will enable us to profitably operate also on routes with lower demand but also to increase frequencies on larger routes”, said Chief Commercial Officer Karl Sandlund. Aircraft utilization has already improved by ten percent but further optimizing and ‘co-planning’ of aircraft and crew should lead to more efficiencies.
Part of Forward is a review of the network and products to improve its customer position and experience. It will add new routes to more leisure destinations, increase frequencies and stage lengths, and open new (regional) bases like the one recently Bergen (Norway) to improve connectivity to Scandinavia and attract new customers. This summer, the carrier will operate to 230 routes and 170 destinations, with more than 500 weekly flights to Southern Europe.
Slide from the SAS Forward transformation plan that outlines how the airline plans to improve on its fleet en operations. (SAS)
Customer experience will benefit from a major digital transformation program that should improve operations and help grow revenues from personalized ancillary products. To support the digitalization program, SAS has hired fifty IT specialists and will add another fifty over the coming months.
Another clear target of SAS Forward is to make the airline the leader in sustainable aviation by investing in new and efficient aircraft, sustainable aviation fuels, and emerging technologies. It will incentivize customers to change their behavior, for example by purchasing carbon offsetting products or earning EuroBonus points if they purchase SAF.
The airline also wants to improve its operational flexibility to respond more quickly to market demand and competition, which includes implementing market-based contracts for its staff. Business travel has been its stronghold and reason for its existence, but SAS will adapt to changing customer behavior by shifting 75-80 percent of its capacity to leisure compared to the pre-Covid 50/50 Business/Leisure split. The new SAS Connect and Link platforms will contribute.
SAS Forward is a plan for future success
Van der Werff didn’t say what the impact of the Forward plan is on its workforce. It has only just been presented to the unions and “they aren’t expected to approve it next week”, but the CEO stressed that “everyone will have to participate in order for SAS to be successful. That means all stakeholders, including unions. (…) Everyone understands that we are better off with a stronger SAS. If we want to be competitive, SAS needs to be profitable and stand on its own two feet.” He added that Forward isn’t a rescue plan, but a plan preparing the airline for future success.
SAS reported a Q1 net loss (November-January) of SEK 2.442 billion compared to SEK-2.033 billion in the same period of last year. The operating loss (EBIT) was SEK 1.329 billion versus SEK-2.150 billion. Revenues improved to SEK 5.545 billion from SEK 2.282 billion. Operating expenses were up to SEK 6.874 billion, of which fuel costs were up 174 percent when currency-adjusted to SEK 1.136 billion. It said it hasn’t hedges fuel costs for this year. SAS remains cautious about the rest of its FY22, although Van der Werff is optimistic about the recovery thanks to pent-up demand.
Active as a journalist since 1987, with a background in newspapers, magazines, and a regional news station, Richard has been covering commercial aviation on a freelance basis since late 2016.
Richard is contributing to AirInsight since December 2018. He also writes for Airliner World, Aviation News, Piloot & Vliegtuig, and Luchtvaartnieuws Magazine. Twitter: @rschuur_aero.
