Banks demanding more cuts at SAS

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Scandinavian Airlines (SAS) is under new pressure from both its banks and the three national governments of Sweden, Denmark and Norway that are its major shareholders. Intense negotiations involving the Swedish finance ministry reportedly won SAS a bit more breathing room, but the airline still must sell assets and cut costs in order to get its loans extended. Ticket prices are likely to rise.

SAS needs to cut costs, sell assets and probably raise ticket prices in order to keep flying. PHOTO: SAS

SAS’ financial woes once again landed on the front pages of most Norwegian newspapers on Wednesday, following the airline’s own extraordinary update of its financial situation on Tuesday. SAS, for all its troubles since deregulation of the airline industry left it struggling to meet new competition, remains an important part of the lives of millions of Norwegians, Swedes and Danes. The prospect of flight disruption or even a bankruptcy is chilling.

Even though the Scandinavians’ governments are now weary of pumping more capital into the airline, and such assistance infuriates SAS’ commercial rivals like Norwegian Air who don’t get any such help, most agree that it’s in their best interests that SAS survives.

That’s why the three Scandinavian governments with major blocs of stock in SAS (Norway’s share is 14.3 percent) reportedly hired investment bank Goldman Sachs earlier this year to come up with a long-term solution for SAS’ financial situation or find a buyer for the airline. Swedish newspaper Dagens Industri (DI) reported that investment banks Morgan Stanley and SEB also were hired, by other shareholders, with the same assignments.

Little interest from prospective buyers
DI reported that several potential buyers were approached including Qatar Airways and even Aeroflot of Russia, but neither showed great interest in taking over SAS. The attempts followed years of speculation that Lufthansa of Germany, which already cooperates with SAS through the Star Alliance partnership of airlines, would ultimately take over SAS, but that hasn’t happened either.

With imminent prospects of a buyer slim, DI reported that the Swedish government’s finance ministry and the investment banks started negotiating with six large banks that hold loans coming due in June of next year. The banks had signaled that they weren’t keen on extending more credit to an airline that hadn’t managed to turn around its financial situation after years of crises. The banks want the Swedish, Norwegian and Danish states to pump even more capital into SAS. Norway’s government has repeatedly signaled in return that it doesn’t want to do that.

Negotiations intensified in recent days, leading to the extraordinary press release from SAS on Tuesday that it had managed to eke out an operating profit in the third quarter but would need to cut costs and sell assets to raise around NOK 2.6 billion (USD 440 million) to secure financing next year.

Sales speculation high
SAS wouldn’t reveal details about it plans to achieve that, but speculation immediately turned to a sale of SAS’ profitable, mostly domestic carrier based in Norway, Widererøe, which an employee group led by Widerøe’s own pilots wants to buy. They’ve already sent a letter to Norwegian Trade Minister Trond Giske expressing their interest in buying Widerøe, which serves small airports all over Norway and also has various routes abroad, some of them seasonal, to places like Gotland off the coast of Sweden. Widerøe has been performing well, with profits more than doubling last year.

Other assets on the sales list include SAS’ ground service unit (now called SAS Ground Handing), real estate SAS still owns around Scandinavian airports, landing rights at attractive airports like London Heathrow, and even SAS’ frequent flyer program called SAS EuroBonus. While it presents liabilities in terms of the free flights or upgrades its members can claim after flying SAS and other Star Alliance carriers, it’s seen as potentially valuable to banks, credit card companies or other so-called “loyalty programs” because of the access it can provide to a large group of consumers with lots of stored information about them. Newspaper Aftenposten reported Wednesday that EuroBonus has 750,000 members in Norway alone.

Some good news
The news coming out of SAS this week wasn’t all bad. Several airline analysts said SAS’ third-quarter operating profit was better than expected, with airline analyst Hans Erik Jacobsen of Swedbank telling newspaper Dagens Næringsliv (DN) that SAS’ operations were “going slowly but surely in the right direction.”

SAS’ shares also jumped on the news of a 9 percent increase in sales and a 6 percent decline in costs. Several think a solution to SAS’ latest “crisis” is within reach.

“There’s all reason to believe that SAS will put together a concept to get costs down and revenues up,” Jacobsen told DN. “The most important will be to get ticket prices up. They’ve been much too cheap for too long.”

Views and News from Norway/Nina Berglund

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