Will the "core" of SAS be a meal for Lufthansa?

Many years ago when the once great PanAm was running into strong headwinds, it announced the sale of its chain of Inter-Continental Hotels in 1981. The airline was losing money badly and needed the cash.

At the shareholders' meeting to approve the sale, a disgruntled shareholder shouted out "why don't you sell the airline and keep the hotels?" After the laughter had died down, the Chairman said soberly, "we tried".

But there were no buyers.

There are parallels with the actions SAS is now undertaking. The Scandinavian multinational conglomerate was once also a great airline with truly global aspirations, at one stage entering the US industry by buying a large minority share in Continental Airlines.

No longer. The archaic employment regime it is obliged to observe (including mandated national representation from each of the three national owners and dealing with anything between 23-30 unions), a highly complex management structure and some injudicious acquisitions made over recent years, have left it hanging by a thread.

Selling off assets is a means of keeping the "core" airline afloat. The big challenge will be to make sure that the core has enough to chew on.

Hopefully an ever-hungry Lufthansa may find enough sustenance now to make a purchase worthwhile.

And there is much in the restructuring that would make SAS a more attractive buy. Apart from a less unwieldy vehicle overall, the focus on local services makes SAS a useful means of accessing behind gateway traffic into the Scandinavian countries.

The announcement comes only a fortnight after concluding an agreement with unions to reduce costs by SEK1.3 billion. That took two months to negotiate.

"A new strategic direction"

According to SAS, "the renewed strategy, Core SAS, is intended to provide the key elements necessary to support a new competitive SAS, including a new, streamlined and simplified organisation".

The operational focus of the new core will be on business travellers and on the intra-Scandinavian market, continuing the carrier's progressive withdrawal from long haul services.

Each of the three national shareholders and charitable investment trust, FAM, which between them hold 57.6% of the equity in the airline, have agreed to the restructuring and to participate in the proposed SEK6 billion pro rata rights issue.

Core points

Some key points of the "new direction" are:

• Divestiture of Spanair, and SAS' shares in airBaltic, (both of which are "already signed and closed"), Spirit, Air Greenland, BMI, Estonian Airways, Skyways, Cubic and Trust;
• Outsourcing or divestiture of SAS Ground Services, SAS Technical Services and SAS Cargo (the latter of which management was prevented by unions from selling on at least one occasion in the past decade);
• Cost reduction of approximately SEK 2.7 billion between 2009-2011 plus annual salary savings of SEK 1.3 billion;
• Capacity reduction of 10% on short haul services (from 144 to 130 aircraft) and 18% on an already abbreviated long haul operation (from 11 to 9 aircraft). The network changes should save SEK800 million;
• National subsidiaries in Norway, Sweden and Denmark will cease to exist as separate companies, as will SAS International, the long haul arm;
• Staff reductions of a total of 8,500-9,000 staff, from 23,000 to 14,000, 5,000 of which will be divested with Spanair (3,000) and other operations, outsourcing etc. Much of this personnel change has already been negotiated with unions;
• A revitalised capital structure, including raising SEK6 billion through a rights issue and extension of a revolving credit facility for another two years

Now for the future: a partner

SAS' long overdue shakeup, now it finally arrives, is one of the most far-reaching ever for a major flag carrier. Its problems are not yet over, but, assuming the massive undertaking does not run into any popular or political hurdles, the carrier will be much better equipped to deal with the outside world.

There is plenty of competition still for it within the Nordic markets and even a more efficient standalone SAS will find it hard to attract the sort of international long haul feed necessary to give it sufficient edge to prosper.

That's why a much-anticipated intervention by Lufthansa (or perhaps a SkyTeam or oneworld member) is most likely to follow, once the ink is dry on this transaction. Skål to that!