We explore the 2 key challenges facing Scandinavian Airlines (SAS) as it files for Chapter 11 bankruptcy protection in the US.
Image: briYYZ, Wikimedia Commons
The news comes just one day after SAS pilots began industrial action following disagreements over cost saving measures highlighted in the airline’s ‘SAS Forward’ restructuring plan. Chief executive Anko van der Werff indicated in July 2022 that whilst the pilot strike has not directly affected the filing, it has accelerated it.
SAS' Chapter 11 filing effectively allows the airline to continue operating whilst it restructures its debt and its operating model. The airline is no stranger to restructuring and has struggled to achieve sustainable profitability for many years (even in times when other airlines were making significant profits). Even as the filing is made, the flag carrier faces two key challenges that will determine its future.
SAS’ cost base cannot compete with low-cost airlines - SAS is significantly more exposed to competition from low-cost carriers than other legacy carriers due to their higher exposure to short and medium haul sectors. SAS had over 90% of its seat capacity deployed on short-haul routes within Europe in 2019. These sectors provide fertile competitive ground for LCCs such as Ryanair, EasyJet and Wizzair. In contrast, Air France, Lufthansa, and British Airways had around 60% of their total seat capacity deployed on short-haul routes in 2019. Many of these carriers’ short-haul routes also feed their long-haul operations. Because SAS’ cost base cannot compete with LCCs, it is forced to cede market share or charge unprofitable prices.
Inefficient hubs and labour relations - For historical reasons, SAS has been required to spread its hubs between Stockholm, Oslo and Copenhagen. Not only is this less efficient from a network perspective, but also means that management has to negotiate with multiple unions. This makes cost reduction more challenging, as evidenced by the current pilot strike. The new ‘SAS forward’ restructuring plan includes a target of SEK7.5bn ($750m) of savings to create a more competitive cost base, a strengthening of the balance sheet and a reconfiguration of the fleet.
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