More precisely, it is the traditional Scandinavian Carrier SAS that will soon become a member of the French-Dutch Airline Group, should competition authorities okay the deal. There is
little doubt about this, however, as competition between airlines for passengers and air freight in Sweden, Denmark, and Norway, is fierce. This has driven SAS into the red and it had to file for
Chapter 11 to avoid going bust. Now, the carrier needs to fundamentally restructure its business model before Air France-KLM open their vaults to inject cash.
This news will likely hurt Jürgen Weber: SAS is to become part of the AF-KLM Group and thus a member of the SkyTeam Alliance. Hence, it will exit the Star Alliance. The decision was preceded by a
bidding process in which the Franco-Dutch airline acquired 19.9% in the loss-making Nordic carrier.
From alliances…
Retrospect: It was the former head of Lufthansa and his counterpart, Jan Stenberg at SAS, who founded the basis for the Star Alliance in 1994, during a bilateral meeting in the luxury Hotel Vier
Jahreszeiten in Hamburg. Their shared vision, which still holds some validity today, is that no single airline can achieve global presence by itself. It needs alliances to offer clients seamless
travel and fast air freight transits at gateways jointly used by partnering airlines.
Almost three decades later, this vision still has some relevance, as this statement from Benjamin Smith, CEO of Air France-KLM, evidences: “With its well-established position in Scandinavia
and strong brand, SAS offers tremendous potential to Air France-KLM. This cooperation will allow Air France-KLM to enhance its position in the Nordics and improve connectivity for Scandinavian
and European travelers. We look forward to being a part of this new chapter in SAS's history and thank the board of SAS for their trust.”
… to conglomerates
Today, consolidation, rather than alliances, is the buzzword. Shown by BA – Iberia, Lufthansa – Brussels Airlines or ANA – Nippon Cargo Airlines, and now followed by Air France-KLM – SAS.
“[We are] determined to play an active role in the consolidation of European aviation. The envisaged cooperation with SAS is one of the components of the Group's strategic roadmap,”
states Air France-KLM CEO, Ben Smith.
Provided the competition watchdogs approve the transaction, the consortium, together with the Danish State, would invest USD 1,175 billion in SAS, USD 475 million of which in common shares and
USD 700 million in the form of secured convertible bonds, is detailed in an Air France-KLM release. The investment attributable to Air France-KLM amounts to USD 144.5 million, of which USD 109.5
million would be invested in common shares and USD 35 million would be provided in the form of secured convertible bonds. Once the financial deal is done, Air France-KLM would own up to a maximum
19.9% non-controlling stake in the share capital of the restructured SAS AB.
Cut-throat competition
Will it turn out to be a win-win, benefitting both sides? Time will tell. The passenger and cargo market in the Nordic countries is highly competitive. Norwegian, Norse, Easyjet, Eurowings or
Ryanair all hold strong positions, and all of them have substantial cost advantages compared to SAS. Hence, they were able to penetrate the Nordic market, progressively pushing aside SAS, which
struggles with higher base costs caused by generous pension plans and other social benefits for its workforce or retirees.
Enormous cost pressure
This has led to a dramatic decline of the airline, especially since the time for high air fares is over, torpedoed by budget carriers. And SAS is only a marginal player in the most important and
lucrative air freight sector, the transport of seafood (particularly farmed salmon), because of its lack of freighters. This is aggravated by the closure of Russian airspace due to Western
sanctions imposed on the Putin Regime following the Russian attack on Ukraine. Consequently, Nordic carriers have to circumvent the huge Siberian land mass when serving routes linking Europe with
the Far East. This is a significant cost driver compared to airlines based in Central or Southern Europe.
So, what comes next? SAS will probably retain its Scandinavian brand but turn into a Danish company in terms of ownership, with headquarters in Copenhagen. This is because both Norway and Sweden
have exited the carrier, with only the Danish State remaining as main stakeholder. Therefore, it doesn’t take much fantasy to imagine that the Stockholm-based HQ will be shut down and transferred
to Copenhagen rather sooner than later. This applies all the more since the contract between Air France-KLM and SAS includes the clause that the Franco-Dutch airline can become a majority
shareholder in the Scandinavian carrier after two years.
TAP might be next
Market experts predict that Air France-KLM will tie up a lot of resources with the integration of SAS into its own scheme. This is likely to make the entry into TAP Portugal, which has been under
consideration for some time, more difficult. The Lufthansa Group also has its eye on the Portuguese carrier, because its strong Latin American passenger and cargo traffic would well complement
its services across the South Atlantic as well as into Africa (Angola). However, the Lufthansa Group is currently busy integrating Italian ITA, which seems to be more complicated than
anticipated. Prior to Air France-KLM’s Nordic move, Lufthansa circles had unofficially hinted that an investment in TAP would make more sense than bidding for SAS.
Heiner Siegmund
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