The evolving European legacy carrier

By Bjorn Fehrm

October 13, 2016, ©. Leeham Co, Nice: Scandinavian Airlines (SAS) has fought its way back from a near-death experience in 2012, readjusting to the growing low cost carrier environment in Europe.

After nearly being bought by Lufthansa in 2008 the airline has had to slug it out themselves, gradually fighting its way back to sustained profitability.


Figure 1. SAS will receive 6 Airbus A350 from 2019 to complement the A330. Source: Airbus.

Things are now looking up and the development and future of SAS is a good example of the problematic past and future of European legacy carriers.

The mainline problem, the cost level

At a presentation in Nice earlier in the week, SAS said it had the classical cost problem of former European national carriers. Most costs were non-competitive after the airline developing in a market of national carriers, each with its captive customer base.

One of the dominant costs which have been difficult to attack has been the labor costs. Air crews traditionally have especially strong negotiating power. In SAS’ case, the negotiations to get the labor costs in line were not helped by being partly owned by three governments, Sweden, Denmark and Norway.

This meant each employee group had three unions, one for each country, representing them in the discussions with the airline management. It was not until the airline was days before a liquidation that the discussions took a direction that enabled restructuring of the airline.

All other cost factors were also reworked. A lot of corporate functions were outsourced. New aircraft were acquired, with a large portion being on lease. The aircraft fleet was standardized on Airbus, with the A330 and A350 for long haul and A320ceo/neo for short haul. The feeder network was outsourced to specialized service providers.

About 40% of the route network is now serviced with wet-leased aircraft from carriers like FlyBe, CityJet, Cimber Air and Jet Time. The negotiations with the air crews in 2012 included scope clause-type agreements to regulate the extent and route types of such wet leases.

Travel patterns

SAS’ strategy has been to be the business travelers preferred choice. Lie-flat business class for long haul and other perks manifested the market position on the carrier’s home markets. The result was an aircraft fleet that had utilization that followed the business year. Summers were times with low utilization of SAS resources. At the same time, business travel is not where the market growth has been.

Over the last decade, the large passenger growth has been personal travel, often to leisure destinations. This resulted in a change of strategy for SAS. Go also after the leisure market, especially in the summer months when the business travel frees the resources. For the first time, the 2016 summer months have been profitable for SAS.

Premium economy

SAS introduced premium economy as “Economy plus” with about 20% higher prices than standard economy. Load factors have been high and the class contributes to the airline being profitable in recent years. The class has been necessary, as many companies in Scandinavia no longer allow business class travel for their employees.

SAS will introduce WiFi-based internet on all their flights going forward. As the aircraft gets high bandwidth connectivity, the passenger is not the only one to benefit. The crews will be equipped with iPads to better serve the passengers.

The improved communication allows the cabin crew to have passenger lists with not only the name but also personal preferences, any constraints like allergies/dislikes and booked trips with connections. The result is a further personalized service level.

The future for an ex-national carrier

With around 30m passengers transported over its own network of 120 destinations (1,300 as part of Star Alliance) with 160 aircraft, SAS can to be counted as a mid-sized carrier. It’s the eight largest carrier in Europe.

The state owners declared that they would like a buyer for their shares.  Lufthansa nearly bought SAS in 2008. The airline therefore knows that future is most likely as a part of a larger group.

But to get there on good terms, it’s necessary that the airline is profitable, based on a good market position and an efficient operation. While the question of ownership does not affect the airline in the short- or mid-term strategy, it must act as if the healthy SAS of the future is a healthy SAS of today.

7 Comments on “The evolving European legacy carrier

  1. My only question, Bjorn, is why hasn’t Norwegian “swept the boards” of them some time ago? Or does the strong, young Norwegian wolf keep the SAS buffalo around to tear occasional meat strips off, and to keep the governmental antitrust hunters at bay?

  2. I have been watching SAS since the Jan Carlzon era. As you point out Bjorn they were “the business man’s airline” for a long time. Their yields were very good, but their costs were enormous. I remember sitting at the back of a DC-9/MD80 and there were only two rows of economy behind the curtain. They have since gone through many iterations and philosophical changes as well protrayed in Richards Björnelid book: “SAS – the art of sinking an airline”. But SAS has had more lives than the average cat, there have been many projections of doom and death. When I attended a Fleet Planning course in the early 2000´s, SAS was used as the epitome of bad fleet planning with IIRC almost 20 types and subtypes. They seem to be getting out of that one. Finally.

  3. I guess SAS (other airlines too) is heading into a lot of trouble from Norwegian (Air Shuttle) competition. There was a good WSJ-article bout LCC across the pond. Bjorn Kjos said some ticket prices could be less than $100 one-way, when opening new routes. And Norwegian procuct is way more attractive than that of the legacy carriers. No wonder LH is building Eurowings to try to hedge this (with a bad pruduct).

    • As a Scandinavian family we fly both, for leisure and business. SAS used to be nowhere, worse pricing and product. Today we check both and book SAS many times. They have really recovered.

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  5. I can testify that SAS has changed a lot. In the 70s-80s, I hated them for their monopolistic position and I tried my best to avoid them.
    Of course when travelling on business’ expenses, the business class with warm food, the famous tulip glasses and the small pegs to hold a thick soft napkin were nice gimmicks.
    Nowadays I would say that the best of SAS, along with affordable prices, is the quality and dedication of their personnel.
    I have at least two examples:
    1- on a late flight CPH-SVG, we had to stop at KRS due to snow storm on destination. “Don’t worry” said the Captain ” I live in Stavanger and want to go home, but we won’t take any chances. Better late than never”. We landed safely two hours later at SVG.
    2- on a Xmas eve, I missed the early morning flight from SVG to TRD. It was the last one for the holidays (yes at times, SAS almost shuts down). All I talked to helped: the desk lady in re-booking me on a very short connection via OSL against company basic rules, the purser of the first leg in giving me a first row seat for easy exit, an off duty Captain in guiding me off grid to reach my next flight on time. Even the ground crew managed to have my suitcase full of Xmas gifts following me.

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