The thesis aims to conduct a strategic analysis with a historical non-financial and financial perspective of SAS, in order to access where SAS’ could and should go in the future. The purpose of this assessment is to give an overview of the airline industry, focusing on Scandinavia, to give support to potential investors and strategists in their decision making as well as to assess the future scenarios of SAS. In order to do so, the following research question was asked as a central part of the problem statement: How did SAS manage the restructuring process and did this prepare SAS for future competition?
SAS is what can be defined as a structural and systematic important on its home market, being Denmark, Norway, and Sweden, as SAS connects the people in the three countries with destinations
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all over the globe as well as acting as a gateway for the outside world. There is no doubt that the infrastructural importance of SAS is crucial to the three countries. Were SAS to go bankrupt, then it would have had a very negative affect on the inhabitants within the three countries.
Several factors significantly influence SAS’ behaviour and manoeuvre room at the macro and industry level, as was summarized in the SWOT analysis. The PESTEL and Porter’s Five Forces analysis revealed that SAS is particularly exposed to economic factors, as the entire industry is still to some extent affected by the financial crisis, with the industry being characterized by declining earnings and high fixed operating costs for especially the legacy carriers, as well as the consumer’s decreased lack of willingness to buy the premium products of which SAS historically has earned a lot of money from.
There were, however, some positives, such as the technological advancements with more fuel-efficient planes, which should lower the operating costs of a fleet, as SAS in the process of replacing the fleet. IATA’s forecast for passenger growth was another positive, as the industry organization is expecting to see double-digit growth numbers within the next decade.
The airline industry is characterized by an intense competition. There is a lack of loyalty amongst the consumers and they are not reluctant to change suppliers to meet their need of lower prices.
Consumers have a variety of substitute products to choose from, which are more prevalent over shorter distances. Business consumers have the added flexibility that technology provides, as they can attend meetings over i.e. teleconference facilities. Finally, the bargaining power of the suppliers can also be argued to very very high. All of these factors are characteristics of an industry with low profitability for most airlines. The LCC’s have played a significant part in the development of the industry, as their focus on lower prices and lower fixed costs has enabled them to capture great market shares from the traditional legacy carriers like SAS, which is also why they are better off financially.
Ultimately, they have forced legacy carriers to rethink their strategy.
A number of factors cause the financial woes SAS has experienced in the last more than a decade.
The financial crisis resulted in the consumers opting for cheaper seats, rather than the more comfortable but more expensive ones. Increased competition from the LCC’s such as Norwegian, EasyJet, and Ryanair has eaten into SAS’ market shares, and SAS has found it difficult to change the operating structure, and reduce the operating costs. In fact, SAS’ unit cost is among the highest in the industry, with the main driver behind being the payroll expenses. Related to the payroll, the
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recognized financial result is affected by the incorporation of their pension commitments as well as other employee benefits.
The profitability of SAS has been negative for many years and the financial and operational analysis only revealed small signs of improvement. The growth of revenue has been negative over a longer period, but then positive for a few years. And recent interim reports and traffic numbers illustrate that SAS is still having a hard time handling its finances and its operations, which yet again causes red numbers at the bottom line.
The internal analysis identified four resources and capabilities that provide SAS with a competitive advantage. The four resources and capabilities are: the brand, the grandfather rights, the route-map, and the potential of the data that EuroBonus holds. These four resources and capabilities are what SAS should build upon in order to turn SAS into a profitable business.
Based on the strategic analysis, the financial analysis, the operational analysis, and assumptions on the future, four likely scenarios were developed, analysed, and discussed upon, regarding the future of SAS. It was though argued that none of the four “extreme” scenarios were the most likely to happen, but that the most likely future scenario consisted on aspects from the four different scenarios.
It was found that using some form of liquidation is not an option anymore, and it was never a real option, meaning that the political and social interests in SAS are too big for a scenario like that. A M&A is argued not to happen within the coming years due to the troubles that SAS still have, as well as the conditions of the analysed potentials airline groups for a M&A.
The most likely scenario consisted of an expansion of the intercontinental route-map. A combination of a new focus and partnership is a realistic outcome here, since the expansion of the intercontinental route-map will involve significant capital requirements, e.g. fleet expansion, which SAS is in the process of doing. Arguments include that these are means of differentiation from the LCCs, and speculations were made upon which routes could result in SAS with a niche route-map. Along with further needed cost-savings for SAS to become more competitive and perhaps reach a surplus this is the most likely scenario. Years with cost-cuttings may have reduced employees’ motivation, company revenue and capacity levels. In short, it is argued that future investments along with cost-cuttings are needed to enable future growth. Furthermore, it is argued that the fact that many of SAS’ employees
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are retiring within the coming years, will mean that new and likely more motivated employees may be a helping hand for SAS to regain a more customer oriented service culture.