Scandinavian Legacy Airlines Hoping New Aircraft Will Revive Their Fortunes
Almost exactly two years ago, it looked like the final day for one of Europe’s most prominent carriers, SAS Scandinavian Airlines, had arrived. And it was only after last- minute round-the-clock negotiations that its demise was avoided.
Two years on, the good news is that SAS is still flying. The bad news is that it and its legacy companion in Scandinavia, Finnair, are still losing money and cannot claim their decline has ended. Burdened with high unit costs built up over decades as state-controlled airlines without much competition, they are faced with the transformational challenge of new entrants—Norwegian in particular, as well as currency and political risk, and the strategic weaknesses of their own business models.
That airlines in Scandinavia are in so much trouble is somewhat ironic. The vast region lends itself particularly well to air transport, more so than Central Europe where distances are shorter and high-speed trains are a sensible alternative. But now, low-cost carriers and new long-haul players like Emirates have entered the market, and the future of SAS and Finnair is at stake again.
SAS has rolled out multiple cost-cutting plans in the past decade, with catchy names such as Core SAS and 4XNG/4Excellence Next Generation, to increase productivity, lower unit costs and reform legacy practices. But its complex shareholder base as flag carrier of Denmark, Norway and Sweden (which still hold a combined stake of 50%) and the distribution of operations across hubs in Copenhagen, Oslo Gardermoen and Stockholm Arlanda airports have not made the task easy.
“All in all, the fierce competition in the airline industry is persisting,” says SAS CEO Rickard Gustafson. He has been vocal on the overcapacity situation in Scandinavia, which is behind the continued yield decline, and Norwegian arguably is the largest single provider of new seat-capacity. However, SAS also has added a lot of seats, and boasts that it launched 41 new routes this year.
To offset the falling yields, in June SAS announced a deepening of its restructuring measures, including cutting 300 full-time positions in support, administration and management, adding more self-service bag drop/boarding kiosks, introducing automation in airport ground services, and increasing crew productivity, mainly in Norway. The new measures come on top of the 3 billion Krona 4XNG cost-saving program spanning 2013-2015. Additional “significant measures” will be quantified when SAS presents full-year results, according to Gustafson.
Finnair’s CEO Pekka Vauramo has just pushed through cost saving measures that may not be unprecedented, but are pretty substantial by European standards and even more so for Scandinavia. Important labor groups—finally including the pilots—have agreed to various concessions that will reduce labor costs by up to 20%, comparable to what SAS has achieved.
But as with SAS, there is more risk in Finnair’s model than just high labor costs, although the risks differ. Where SAS is clearly too dependent on low-margin short-haul flying, Finnair’s huge dependence on Asia may turn into a disadvantage over time if several threats become a reality.
Finnair has so far survived on its unique positioning, both geographically and strategically, making routes from Europe to Asia its specialty. The location of Helsinki—essentially under-neath the great circle routes from Europe to Asia—has helped the airline offer connections with minimal circuity and attracted a significant customer base, mainly in Asia. Around 50% of its total capacity is currently used for Asian routes.
Being dependent on one segment of the market can create risks. And it shows: In the first nine months of 2014, Finnair’s unit revenues fell by 3.7%. The decline was not caused by low-cost carriers in Europe or overcapacity, but by the strengthening of the euro against important Asian currencies. And Finnair admits that “the growth in passenger volume and the progress of cost-reduction measures were not sufficient to compensate for the weak revenue development.”
How serious those currency fluctuations are can be seen in Finnair’s financial results for the first three quarters of the year: The airline posted a €27.1 million operating loss, against a €33 million profit a year earlier. So in spite of the €200 million restructuring program that is to be implemented fully by the end of the year, Finnair’s overall financial situation has not yet improved. “It is always difficult to say you are safe,” Vauramo says. Finnair, like SAS, is aiming for an operating profit margin of 8% in the long term.
However, there are more structural threats to its long-haul business. None of the three Gulf carriers serve Helsinki so far, but given their previous expansion into Scandinavia, Finnair’s base is among their next logical destinations. Such a move would likely impact Finnair’s routes to Asia most—Bangkok, Singapore and Delhi. Also, if Chinese airlines expand more aggressively into long-haul markets to Europe, Finnair would feel the pain.
But the bigger issue may be much closer to home, and it is called Norwegian. Once that airline has sorted out its troubles with the U.S. Transportation Department, it will be able to take advantage of the more open European Union air traffic service agreements to Asia and expand beyond Bangkok, currently its only Asian destination with direct service. For now, Vauramo merely sees “some competition” on the Bangkok service, “but they don’t fly to China and Japan,” arguably Finnair’s biggest markets in Asia.
So there is a lot of downside potential in Finnair’s situation, but there is also some upside. Next year the airline will become the first operator of the new Airbus A350-900 in Europe. How important the introduction of the aircraft will be is shown by the latest financial guidance. Finnair believes that for any significant improvement in profitability next year, “a substantial recovery in domestic market demand and a substantial decrease in the world market price of fuel” would have to occur. However, the airline says that “we expect our first A350 aircraft, which will join our fleet in late 2015, to show an impact on our profitability from 2016 onwards.”
Phasing in a fleet of long-haul aircraft with operating costs at least 20% lower than the current models could indeed be critical for the airline’s cost structure, given its reliance on widebody operations. Finnair plans to take four A350s in 2015, another four in 2016 and three in 2017. It is replacing all seven of its A340-300s, with the oldest leaving first. Finnair’s A340s are split in two batches in terms of age. The oldest is an ex-Virgin Atlanticaircraft that has just turned 20, followed by two 17-year-old ex-Air France aircraft. Four A340s are much younger, and were only delivered in 2007 and 2008. The eight A330-300s were delivered in 2009 and 2010, when Finnair phased out its last MD-11s.
The current orderbook provides the airline with the potential for significant capacity expansion in the long-haul market, as Finnair could add a net four aircraft for a total of 19 A330s and A350s. If all eight options for more A350s are converted, Finnair could end up with as many as 27 long-haul aircraft. But Vauramo says the decision whether A330s will leave the fleet when the final A350s on firm order arrive will not be made before 2016 at the earliest.
The A350 will first be used on the flights to Bangkok, Beijing and Shanghai, and on the routes to Hong Kong and Singapore in 2016.
Another fleet deal is looming in the short- to medium-term, but it will have to be preceded by the more fundamental decision about the structure of Finnair’s Helsinki hub. Vauramo plans to decide in the coming months whether to stay with two daily arrival and departure banks at Helsinki-Vantaa, or take the number up to four. Staying at two is “inefficient” from a cost perspective, Vauramo admits, but it does maximize connection options, particularly for the Asian services. If passenger volumes continue to grow, that hub structure will sooner or later make an expansion of the airport terminal necessary. Alternatively, Finnair could go to four smaller banks that would spread out the loads more evenly across the day.
“It is a major decision,” Vauramo says, especially on the fleet side. Finnair’s narrowbody fleet currently consists of 9 Airbus A319s, 10 A320s and 11 A321s. In addition, Finnair has leased 12 ATR-72s, two Embraer 170s and 8 Embraer 190s to FlyBe Finland, its joint venture with FlyBe. If the size of the banks decreases, so will average aircraft size. Four banks will not sustain the same number of larger narrowbodies. Instead, Finnair could opt to use more smaller aircraft such as the Embraer 190 or the Bombardier CSeries.
Finnair is also seeking a new majority investor—or owner—for FlyBe Finland after it and FlyBe decided to terminate their cooperation by the end of the year. “The financial performance of our joint venture has not developed according to the expectations of its shareholders. We haven’t been able to arrive at a common view to resolve the profitability issues,” says Vauramo.
SAS, too, is investing in cabin and fleet renewal to enhance the customer experience and reduce operating costs. The airline has firm orders with Airbus for eight Airbus 350-900s, four A330-300s and 30 A320neo aircraft with an option on an additional six A350s and 11 neos. The new narrowbodies are due for delivery from 2016, while delivery of the new A330-300s will take place during the latter part of 2015 and the beginning of 2016. The A350-900s are scheduled to join SAS’s fleet from 2018.
The widebodies that enter service from fall 2015 will be fitted with the airline’s new interiors. SAS will also refurbish interiors of seven A330/A340s, upgrading them with new seats, a new entertainment system and inflight Internet access. The first aircraft with the new cabin is expected to go into service in early 2015, and most of the SAS long-haul fleet will have the new interior within 12 months. SAS currently operates 12 A330/A340s, of which five are owned, with an average age of 13 years.
SAS’s network focus this year has been short-haul routes, specifically on European and Intra-Scandinavia routes as it tries to fend off competition from low-cost carriers. The airline thus far has resisted the idea of setting up its own budget carrier, though it briefly and unsuccessfully operated a no-frills business unit, Snowflake, from March 2003 to October 2004. Capacity in available seat-kilometers (ASK) on international services to Europe and within Scandinavia increased 5.4% in the first nine months of its financial year that ended Oct. 31. Traffic on these routes rose 9.6% year-over-year.
SAS will boost its intercontinental network in 2015. Its long-haul plans include the launch of new direct routes from Oslo and Stockholm to North America and Asia, starting in autumn.
SAS Fleet* | ||||||
| Aircraft in Service | Age | Owned | Leased | Total | Purchase | |
| Ordered | Lease | |||||
| Ordered | ||||||
| Airbus | ||||||
| A330/A340/A350 | 12.6 | 5 | 7 | 12 | 12 | 0 |
| A319/A320/A321 | 9.5 | 6 | 19 | 25 | 30 | 0 |
| Boeing | ||||||
| 717 | 13.9 | 4 | 8 | 9 | 0 | 0 |
| 737 NG | 11.8 | 17 | 67 | 84 | 0 | 2 |
| Bombardier CRJ900 | 5.2 | 12 | 0 | 12 | 0 | 0 |
| Total: | 44 | 101 | 142 | 42 | 2 | |
| Leased Out and Phased-out Aircraft | Owned | Leased | Total | In Service | Parked | |
| Boeing 737 Classic | 0 | 2 | 2 | 0 | 2 | |
| Bombardier Q400 | 0 | 1 | 1 | 1 | 0 | |
| McDonnell Douglas | ||||||
| MD-80 | 3 | 0 | 3 | 0 | 3 | |
| MD-90 | 8 | 0 | 8 | 8 | 0 | |
| Total: | 11 | 3 | 14 | 9 | 5 | |
| * As of July 1, 2014 | ||||||
Ingen kommentarer:
Legg inn en kommentar
Merk: Bare medlemmer av denne bloggen kan legge inn en kommentar.