fasten your seat belts - an analysis of sas’...
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Fasten your seat belts -
An analysis of SAS’ competitiveness
MSc. in Economics and Business Administration - Finance and Strategic Management
Master’s thesis by:
Alexander Glud 121185-XXXX
Eivind Wedding 220684-XXXX
Supervisor
Dan Kärreman
Department of Intercultural Communication and Management
October 2010 - Copenhagen Business School
Length
Characters including spaces: 269.769 equivalent to 118,6 pages.
Illustration: Svein Eide
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
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Executive summary
Scandinavian Airlines System (SAS) have challenges competing with low cost carriers
(LCCs) and network carriers. Multiple airlines, declining prices on airfares, price sensitive
consumers and a moderate of degree of rivalry are keywords describing the Nordic airline-
industry in 2010. Thus, this thesis analyzes SAS‟ positioning and competitiveness since we
find it interesting to examine why SAS‟ performance tend to be weak.
Our analytical findings that SAS‟ revenue is declining and their cost structures are higher than
competitors‟. Moreover, their corporate strategy, Core SAS, appears to be rather weak,
unfocused and has a lack of clear and concise long-term objectives. It may be interpreted as a
static cost savings program, not a generic strategy for generating growth.
Their internal resources, capabilities and core competences are challenged as many of these
tend to be outdated, expensive and inflexible. Additionally, they are aiming at a declining
business segment and mature Nordic market, which historically have generated their main
revenue. Thus, SAS‟ appears to be resource started and have difficulties with creating
competitive advantages.
The industry is getting increasingly competitive especially from LCCs which attack SAS on
prices. SAS appear to have challenges when with dealing with suppliers, buyers and product
substitutes, due to poor bargaining positions as well as insufficient products.
SAS‟ performances on the operational levels have been analyzed and benchmarked with
notable competitors. Findings include that SAS perform roughly in-line with the industry, but
at significantly higher production factor costs.
We create four potential scenarios, which may, individually or combined, serve as ways out
of their situation. This provides a clear understanding of SAS‟ future strategic opportunities,
where an M&A is most likely.
Our study connects the internal potential of SAS with the market in order to assess their
competitiveness. In addition to this, our study discusses and reflects over theoretical
frameworks and connects these in empirical contexts. Furthermore, we put our thoughts into
perspective, where we present notions, which could make a significant difference for SAS.
Our main findings illustrates that SAS is struggling due to declining internal competitiveness.
Their resources and capabilities are not geared to operate effectively in today‟s more dynamic
Nordic aviation market and their market positioning as well as objective is diffuse. Thus, our
study indicates that SAS‟ competitiveness is ineffective and declining.
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Contents
Chapter 1 – Introduction & Methodology 5
1.1.1 Introduction 5
1.1.2. Research Question ................................................................................................................ 7 1.1.3 Delimitation ........................................................................................................................... 8 1.1.4. Target group.......................................................................................................................... 8 1.1.5. Thesis Structure .................................................................................................................... 9
1.2. Methodology 10
1.2.1. Theoretical Perspectives ..................................................................................................... 10 1.2.2. Critique of theoretical perspectives .................................................................................... 14 1.2.3. Empirical data collection and critique ................................................................................ 17 1.2.4. Framework and research design ......................................................................................... 18
Chapter 2 – Analysis of SAS 21
2.1. History 21
2.2. The cost & revenue structures of SAS 23
2.3. Corporate Governance 27
2.3.1. Ownership structure, concentration and identities .............................................................. 28 2.3.2. Investor profiles .................................................................................................................. 29 2.3.3. Management structure and remuneration ........................................................................... 30
2.4. Corporate strategy - Core SAS 32
2.4.1. Porter‟s Generic Strategies on SAS .................................................................................... 35 2.4.2. Products and complementarities ......................................................................................... 35 2.4.3. The business segment and its preferences .......................................................................... 38 2.4.4. Ansoff‟s Product/Market Grid on SAS ............................................................................... 39 2.4.5. Part summary on corporate and product strategy ............................................................... 39
2.5. Findings from Chapter 2 40
Chapter 3 - Resources, capabilities and competences 42
3.1. Resources 42
3.1.1. Employees .......................................................................................................................... 42 3.1.2. Fleet .................................................................................................................................... 44 3.1.3 EuroBonus ........................................................................................................................... 45 3.1.4 Star Alliance ........................................................................................................................ 46 3.1.5 Hubs and route map ............................................................................................................. 47 3.1.6 Political resources ................................................................................................................ 49 3.1.7 Brand Value as a resource ................................................................................................... 50
3.2 Core Competences 51
3.2.1. Punctuality .......................................................................................................................... 52 3.2.2. Frequency ........................................................................................................................... 52 3.2.3. Eurobonus and Star Alliance .............................................................................................. 53 3.2.4. Transparent Prices and Simplicity ...................................................................................... 54 3.2.5. IT ........................................................................................................................................ 54
3.3. Findings from Chapter 3 55
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Chapter 4 – PEST and Industry analysis 57
4.1. Macroeconomic Level 57
4.1.1. Political Conditions ............................................................................................................ 57 4.1.2 Economic Conditions ........................................................................................................... 60 4.1.2.1. Fluctuations in oil price and currency. ............................................................................. 61 4.1.3. Social and Technological Conditions ................................................................................. 61
4.2. Industry forecasting 62
4.3. Part summary of PEST and industry forecasting 63
4.4. Industry level – Porter’s 5 Forces 64
4.4.1. Threat of New Entrants ....................................................................................................... 65 4.4.2. Threat of Substitute Products or Services ........................................................................... 66 4.4.3. Substitutes & Complementarities ....................................................................................... 70 4.4.4. Bargaining Power of Suppliers ........................................................................................... 71 4.4.5. Rivalry ................................................................................................................................ 75 4.4.6. Part Summary of Porter‟s 5 Forces ..................................................................................... 77
4.5. Findings from Chapter 4 79
Chapter 5 – Operational performance & benchmarking 81
5.1 SAS operational performance 81
5.2. SAS’ performance compared to notable competitors on European services 85
5.3. Findings from Chapter 5 88
Chapter 6 – Analytical findings and discussion 90
6.1. Main analytical findings 90
6.2. Discussion 93
Chapter 7 – Potential future scenarios for SAS 100
7.1. SAS succeeds and remain independent 100
7.2. M&A with Lufthansa 103
7.3 Intercontinental expansion 105
7.4. Liquidation 108
Chapter 8 – Conclusion & Perspectives 109
8.1. Perspectives 113
Bibliography 116
Appendices 120
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Chapter 1 – Introduction & Methodology
1.1.1 Introduction
During the more monopolistic eras solid earnings were obtained due to the regulated industry.
During these times, licenses were needed in order to operate routes and SAS had beneficial
exclusive licenses to serve lucrative destinations. As a result of this, SAS were successful and
profitable. The Nordic airline-industry was deregulated in the mid-90s, which allowed airlines
to compete on equal terms, i.e. on route network and departure times. Competition increased
and new airlines were established rapidly, often with a low fare-objective. These airlines are
commonly known as low-cost carriers (LCCs) and have rapidly gained market shares. LCCs
tend to have more satisfactory cost-structures than mature companies, as well as innovations
and cost reductions have made it possible to offer lower airfares. In short, new and attractive
opportunities for travel became a reality.
Weak margins and strong rivalry resulted in numerous LCC-bankruptcies during the 90s1.
Today, there are fewer, but stronger and more competitive LCCs, which represents major
threats for SAS, e.g. Norwegian, Ryanair, easyJet, etc. We find this competitive situation to
be of particular interest, especially as research has indicated that SAS operate with less
beneficial cost-levels than LCCs. Among several reasons, this has been a motivation for us to
assess the competitive landscape, thus SAS‟ resources in accordance with the industry.
Several, perhaps vague, corporate strategies have been the roadmap for the airline, and they
have often been replaced with other programs, e.g. Strategy 2011 was replaced by Core SAS
in 2009. The latter is still being implemented and aims to create a competitive SAS. Moody‟s
and Standard & Poor‟s, known for their credit ratings, claims that SAS possess high (poor)
credit risk, face uncertainty and challenges with meeting their long term financial
obligations2,3
. Thus, we find it interesting to analyze if Core SAS can actually improve SAS‟
competitiveness and financial situation in the long term perspective. Airline professionals
claim that aviation recently has undergone their toughest years ever4. The fact that SAS have
received government-bailout confirms this. An interesting observation for us is that LCCs
have survived without taxpayers‟ money. Thus, perhaps LCCs are better equipped to succeed
in this industry compared to SAS.
The operational performance of SAS is interesting to analyze and benchmark since it will
provide us knowledge of where they face challenges and/or opportunities. Resources,
1 Doganis 2 http://www.business.dk/transport/konkurstrussel-over-sas-fordufter 2 http://www.business.dk/transport/konkurstrussel-over-sas-fordufter 3 SAS‟ credit ratings: Moody‟s = Caa2 & Standard & Poor‟s = B- (according to data from Business.dk) 4 http://www.iata.org/pressroom/pr/Pages/2010-01-27-01.aspx
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capabilities and core competences influence operational KPIs, which is why these are
interconnected. Therefore, resources such as the fleet, employees and route map are
interesting to assess since they can give us a better understanding SAS‟ operational
competitiveness. A known example is that employees‟ unions are considered strong in SAS
and clashes between employees and employers have often been a reality, which decrease
competitiveness.
SAS‟ financial situation is strongly connected with the macroeconomic development, which is
why a macro-analysis is constructed. External factors, such as ongoing terror-threats, impact
of pandemics, the political and economic development, have inspired us to devote significant
resources in order to thoroughly construct a macroeconomic analysis.
As argued for above, we aim to assess SAS‟ performance and competitiveness. Rather than a
pure valuation of the airline, we find it highly relevant and interesting to conduct a scientific
analysis of SAS. In our opinion, an assessment of their competitiveness would create more
value for stakeholders compared to a valuation due to SAS‟ financial distress. Valuations of
SAS, by previous students, already exist and therefore we differentiate ourselves since
important internal resources and the connection with external market possibilities are more or
less neglected in previous research. In order to assess their competitiveness, proper
knowledge of the internal perspective needs to be assessed. Most scholars apply popular
economic and business models, frameworks, perspectives, etc, such as 5 Forces, PEST,
Diamond, Blue Ocean Strategy, 4 Ps, BCG Matrix, etc., to create SAS‟ market potential and
this may be limited since it neglects the crucial internal view. Therefore, we argue that our
analysis will significantly contribute to the literature, since a relatively small amount of work
has been conducted on SAS with a deep internal scientific perspective. We aim to analyze
SAS from a “new” angle and our connection between SAS‟ internal resources, and external
risks and possibilities, is rare. In our view, this connection should substantially benefit SAS‟
stakeholders.
We wish to generate a picture of the strategic surroundings in order to understand why SAS is
struggling and how their positioning could develop in the future. A strategic positioning is
interesting since it illustrates how SAS is performing in the industry, as well as assessing the
external factors influencing the corporation. We wish to create a strong scientific theoretical
foundation by reflecting over applied literature. Scientific reflections are the core of our
research and the empirical case study of SAS have emerged from scientific views.
Finally, we hope that the strong scientific and theoretical reasoning will inspire future
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students to emphasize the importance of the internal view and the possible connection with
market opportunities.
Our thesis looks at a firm from a “new” angle and we highlight that it may be insufficient, as
our framework may have certain limitations, where notable will be discussed in chapter 8. We
hope that our work can inspire future scholars to further-develop our notions about SAS and
the applied theories, since much more theoretical and empirical (scientific) research can be
done in this area.
1.1.2. Research Question
We highlight that the objective of this thesis is to analyze SAS‟ competitiveness and strategic
position in the market. Their strategic position is influenced by internal resources and
capabilities, external micro –and meso factors, as well as macroeconomic forces. Therefore,
our main research question is:
What is SAS’ current strategic position in the market?
Which internal and external factors influence this?
What are the future opportunities?
This main question will serve as the underlying catalyst throughout the thesis. In order to get
a holistic of SAS‟ positioning, the internal and external factors as well as their
competitiveness, we need to further explore and analyze:
SAS‟ resources, capabilities and competences
Their corporate strategy
The product/service portfolio
External factors influencing SAS
Factors influence the Scandinavian aviation industry
Their operational performance
The future strategic options for SAS?
The internal view is crucial, since resources, capabilities and competences can create
competitive advantages. An analysis of the internal potential will provide us with a better
understanding of SAS‟ competitiveness. The corporate strategy is an interesting aspect since
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SAS implemented the Core SAS program to enhance profitability, competitiveness, etc. The
product/service portfolio provides us with a more comprehensive understanding of SAS‟
offerings for customers. Assessing the macroeconomic environment is also important due to
SAS‟ strong correlation with its development. An industry -and benchmarking analysis is
conducted in order to understand which industry forces that exist and how they influence
SAS. The benchmarking indicates SAS‟ performance and competitiveness. Finally, we
present future scenarios for SAS, which can serve as ways out of their present situation.
1.1.3 Delimitation
During our research we have encountered several limitations, which this section will address.
Firstly, our focus is mainly on the Nordic and European markets and the main data collection
ended at July 31, 2010. Furthermore, we focus entirely on SAS‟ passenger traffic (by far the
biggest revenue stream), which excludes divisions like cargo, ground services, etc. Besides
this, it is difficult to analyze and benchmark products in this industry, since the price and
condition of the product is highly influenced by dates, time, duration, destinations, reservation
system, etc.
The authors of this thesis are graduate students at CBS‟ Finance and Strategic Management
(FSM) program. The expertise is within these fields and we are highly influenced by the FSM
courses and its contexts, i.e. bounded rationality influence the writers. Additionally, CBS
have certain official rules, regulations, etc. which creates certain limitations and boundaries
for our research.
Applied theoretical perspectives have limitations, which we are aware of. This will be
explicitly stated when we criticize frameworks and theories later on. Additionally, we
highlight that the target group of this thesis are scholars with knowledge of business and
economics on Master‟s level, or equivalent. Therefore, “basic” theories and notions will not
be explicitly derived unless else is stated or the authors feel a certain need to do this.
1.1.4. Target group
Our research is primarily aimed towards CBS and our supervisor. However, our analysis of
SAS‟ competitiveness can also bring value for various other stakeholders, such as journalists,
analysts, scholars, students as well as SAS themselves. Thus, our work aims at a large scope
of stakeholders.
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1.1.5. Thesis Structure
The thesis consists of eight chapters as illustrated in Figure 1. Throughout the thesis we have
created part summaries in order to make it easier for the reader to derive main findings and
maintain a holistic view. These part summaries also include brief bullet points, where notable
findings are presented. Chapter 1 provides the reader with knowledge about our reasons for
examining SAS, research question and delimitation.
Source: Own creation
The methodological part also consists of data collection, where we present and criticize
applied theoretical perspectives. We end the chapter with a critique of empirical sources. In
Chapter 2 we analyze their history, cost -and revenue structures, corporate governance, their
corporate strategy as well as the products and services offered. Chapter 3 continues the
microeconomic view by analyzing SAS‟ internal potential. We are applying notions from
various theories, such as The Resource Based View, Dynamic Capabilities, Core
Competences and Asset Specificity in order to assess SAS‟ resources, capabilities and
competences. Chapter 4 expands the microeconomic view as SAS and their context is
analyzed. We construct a macro –and meso economic analysis by applying models, such as
PEST and Porter‟s 5 Forces, which will provide valuable information about industry and
macroeconomic conditions and developments. Chapter 5 focuses on SAS‟ operational
performance, which also are benchmarked toward notable competitors. Next chapter will
illustrate our main analytical findings synthesized in SWOT-presentation, notable main
findingss are discussed. Chapter 7 presents our view on potential future scenarios for SAS,
Figure 1: Thesis structure
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before we in Chapter 8 will present our conclusions. Additionally, we finish the thesis by
putting some of our thoughts and reflections into perspectives.
1.2. Methodology
This section presents our methodological framework, which is illustrated in Appendix A. This
is done by applying the works of Steinar Kvale (2009) and Ib Andersen (2005). We will start
out by presenting and criticizing theoretical perspectives, as well as empirical data, since
these is an important aspect of conducting a valid and reliable scientific analysis. Afterwards,
we present our research design.
1.2.1. Theoretical Perspectives
This section aims to present, reflect and criticize applied theory. We will go through internal
perspectives, strategic models and tools for industry analysis. The resource-based view (RBV)
and dynamic capabilities (DC) are applied since they look at a firm‟s resources and
capabilities instead of looking at the end products like traditional economists. Thus, we find
them interesting to apply since they provide a better view of a firm‟s resources and thereby
future competitiveness and potential. DC is applied in order to cope with dynamic contexts
and learning. Besides these, several perspectives come from The Positioning School, which is
dominated by renowned strategy-guru Michael E. Porter and management consultants
(Mintzberg et al., 1998). Here we apply Ansoff‟s Growth Matrix (1957) and Porter‟s work on
generic strategies (1979). These views will provide us with a better theoretical understanding
of corporate and product strategy. Moreover, we have supplemented the mentioned theories
with Kumar‟s strategic framework for competing with low cost rivals (2006). This is because
it is highly relevant in the case of SAS.
The Internal View
The essence of the RBV is that, in order to create competitive advantages, one must have
superior resources available (Barney, 1991; Wernerfelt, 1984). Barney introduced four
important notions a resource should possess in order to provide competitive advantages.
Strategic assets (Amit & Schoemaker, 1993) should contain conditions, which can be labeled
“VRIN”-features, i.e. Valuable, Rare, Inimitable and Non-substitutable. Thus, market power
appears to arise from controlling key (scarce) resources. Barney & Hansen (1994) categorized
the resources as being physical, human, or organizational capital, which are used to develop,
manufacture and deliver solutions to customers. In other words, they view a firm‟s resources
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as a mix of tangible and intangible assets, which should be optimized in order to create
competitive advantages. Thus, a resourced based view might imply that strategy is about
balancing between exploiting current resources and creating new ones.
In order to cope with dynamics and learning, we synthesize the RBV-literature with dynamic
capabilities (DC). DC should be flexible, open for adaptation and change since they build,
integrate or reconfigure other resources (Teece et al., 2007; Eisenhardt & Martin, 2000).
Moreover Mintzberg et al. (2009) argue that these notions are derived from the RBV and their
transformation happens through strategic learning. If we develop these notions further, DC
and VRIN may improve competitiveness.
Transaction Cost Economics (TCE) theory can be beneficial when explaining strategic
conditions of SAS‟ assets. Transaction costs are normally categorized as costs of conducting
an economic transaction or exchange (Coase, 1937). Williamson (1981) identifies three
important characteristics regarding transactions, which are: Frequency, uncertainty and asset
specificity. Asset specificity is by far the most famous and influential notion, which is why
this will be further elaborated upon. If conditions of assets and capabilities are dedicated for
one or few specific transactions, the less flexible it is for being used elsewhere. Put
differently, asset specificity is about an asset‟s ability to be redeployed and/or transformed.
Williamson presents several types of asset specificity like physical (specific tools), site
specific (location specific assets like airport hubs), and human specificity (training), together
with reputation (brand value and loyalty) and dedicated assets (assets which are dedicated
toward a specific purpose or customer). Additionally, favorable asset specificity may improve
a firm‟s competitiveness.
Prahalad & Hamel (1990) argue that we can neglect the strengths of our competitors by only
looking at their products, which classical economists did (Mintzberg et al., 1998). This is
partly why we have included the RBV, dynamic capabilities, core competences and the TCE
perspectives. In addition to this, Prahalad & Hamel (1990) provide us with three tests to
evaluate if it is a core competence or not: Core competences should: 1) Give accesses to
new/more markets, 2) contribute significant to its customers and 3) be difficult to imitate.
Creating competitive resources and capabilities can often be time-consuming, expensive and
complex. Thus, inter-organizational collaboration may provide shortcuts to competitive
advantages. Fine (1998) stated that a corporation is its chain of capabilities, which is business
partners and their own capabilities. Haakansson & Snehota (1989) apply a geographical
metaphor by deriving that “no business is an island”. This is the very essence of network
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theory and the later perspectives on supply and value chain management. Thus, firms should
focus on their primary activities, or core competences, as Porter‟s (1996) “Value Chain”-
model suggests. Barney (1999) extended the RBV of a firm into an inter-firm (network)
perspective. He claims that gaining access to additional resources can be achieved by: 1)
cooperating with firms that possess the needed capabilities, 2) by developing the needed
capabilities internally or, 3) through M&As. Powell (1990) argued that firms were
institutions, which were all a part of a network influencing each other. Instead of looking at
organizations like they were in an isolated iron cage, the network perspectives extended the
orthodox economic way of looking at a firm. Networks make it possible to: gain access new
technology, economics of scale and scope, tap into others firms‟ resources, share risk, create
synergy, know-how, tangible resources, pooled negotiation power, coordinated strategies, etc.
(Powell, 1990; Goold & Campbell, 1998). Additionally, alliance-formation may also bring
added credibility and brand value. Furthermore, international partners have different
comparative (location specific) assets and advantages, which can be beneficial for the overall
alliance (Teece, 1986). From a RBV-perspective, firms are not only interested in accessing
their partners‟ VRIN-resources through collaboration, but also to protect their own VRIN.
Macro- and industry level
We cannot analyze SAS‟ competitiveness without assessing the macro context due to their
strong correlation. Thus, the PEST-analysis is applied in order to get a better macroeconomic
view of SAS‟ contexts and focus on political, economic, social and technological conditions.
Conducting a PEST analysis is important for airlines due to the strong correlation between the
macro and industry development. Additionally, Troelsen (2003) argue that macroeconomic
analysis is even more important in industries where the public has a big interest, e.g. like
aviation.
The industry-level is of utter importance to SAS since the industry has undergone tremendous
changes. An industry-analysis is conducted due to our goal of assessing SAS‟
competitiveness, which cannot be done without some external reflection. The industry is
influenced from the following 5 forces: Entry barriers, suppliers, buyers, substitutes and
rivalry. Threat of new entrants is our first force. Entry barriers are created through:
Economies of scale, product differentiation, capital requirements, cost disadvantages
(experience curve effects), access to distribution channels as well as government policies. The
second force is bargaining power of suppliers. Poor supplier relations can lead to higher costs
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(and thereby prices), which decrease competitiveness. If there are few (large) suppliers, i.e.
high supplier concentration, this will reduce the bargaining position of the buyer. It is also
important to analyze how crucial the purchased components are for the focal firm. Unique
components (such as aircrafts) can build up switching cost that increases the supplier‟s
bargaining power. Finally, the power over suppliers is also influenced by buyer‟s size.
Next force is the buyers, which may be the ultimate stakeholder. Buyers are powerful
stakeholders if they are concentrated, and, like in the supplier-scenario, buyers ordering large
volumes will become powerful since they will dominate suppliers‟ revenue stream. Similar
reasoning goes with strong product differentiation, which enhances supplier power. However,
if buyers want to purchase (homogeneous) standardized solutions, which multiple suppliers
can provide, this will give the buyers bargaining advantages. We argue that customers may be
the most influential stakeholder and force since they can punish and bless firms.
The next force is substitution. The more standardized solutions, the more competition may
exist in the market. Highly skilled and complex products and services can be difficult to
substitute or imitate. This implies that higher product quality increase barriers. Buyers‟
willingness to switch products (and the cost of doing so) also affects the industry competition.
Rivalry is the 5th
and final force and is influenced by numerous factors. For effective
competition to take place, competitors should have roughly the same size and power. Thus,
incumbent market leaders might reduce the rivalry within the industry. High switching costs
will also reduce rivalry since it will be difficult/expensive/inconvenient for buyers to switch
products and perhaps substitute products are not even available. The corporate strategies also
affect the rivalry, since incumbents may have a more defensive and reactive strategy, where
the objective is to “milk” the market, whereas smaller firms (LCCs) might apply aggressive
generic growth strategies.
Until now, we have touched important theoretical notions from RBV, DC, CC, TCE, PEST
and the 5 Forces. In order to assess a firm on a strategic level, we also feel the need to get a
better understanding of the actual corporate and product strategy, which is next.
Corporate- and product strategy
SAS‟ corporate strategy is analyzed by applying the “Generic Strategies”-framework from
Porter (1980). The essence is that, a firm can choose to target a narrow or broad segment, by
applying a low cost leadership or differentiation (niche) strategy. In other words, firms should
decide upon a specific strategy, in order to create competitive advantages. If multiple
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strategies and objectives are chosen, the firm will be “stuck in the middle”, which appears to
be the worst position for a firm due to vaguer competitiveness. Regarding product strategy,
we apply Ansoffs‟ “Growth Matrix” (1957). The matrix includes four growth strategies,
which are market penetration, market development, product development and diversification.
Market penetration is a less risky growth strategy, since it focuses on serving existing markets
with existing products, i.e. increasing market share. Market development is a bit more risky
since it involves penetrating new markets. Product development is about creating new
innovative products towards the existing market or customer segment. The final strategy is
diversification, which is the most risky since it involves innovative product development in
new markets with much ambiguity and uncertainty. This matrix will get us a better
understanding of how SAS perform product and market development.
Porter‟s important notions on generic strategies are synthesized with Kumar‟s framework for
fighting low-cost rivals (2006), figured in Appendix C. This is applied since SAS is extremely
pressured by LCCs. Kumar argues that a price-war, perhaps aiming at low cost leadership,
can have severe consequences for incumbents, due to low-cost rivals‟ (LCCs) more attractive
cost structures. Moreover, this supports notions from our internal perspectives, as low-cost
rivals possess more satisfactory resources and capabilities. Put differently, if an LCC can
capture customers, an incumbent will have difficulties competing on price. Therefore,
differentiation is crucial, but only if customers are willing to pay extra for this. Kumar‟s
framework creates significant value for our thesis, since it aims specifically at incumbents
competing with low-cost rivals.
1.2.2. Critique of theoretical perspectives
The RBV has been criticized for being too static and having a homogenous view. VRIN-
resources might enhance a firm‟s competitiveness, but we argue that this is insufficient in
order to maintain and sustain competitive advantages. Peteraf (1993) stated that VRIN-
resources need to be heterogeneous, due to the fact that if competitors had similar
homogenous resources, the resource would not provide competitive advantages. We can argue
that the RBV represent a useful tool to scientifically analyze resources. It is questionable,
though, how RBV will perform during dynamic changes or even hypercompetitive contexts
(D‟Aveni, 1994). We highlight the Nordic aviation market is not hypercompetitive, but it is
becoming more dynamic. When contexts becomes dynamic, new innovative resources are
required in order to defend and develop competitive advantages, i.e. competitive advantages
should be won over and over again in a dynamic environment (Fine et al., 2002). The
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importance of incremental organizational learning is emphasized and this is neglected in the
RBV-literature. Therefore, in order to cope with learning and dynamics, we found it
interesting to apply notions from the dynamic capabilities-framework. Mintzberg et al. (2009)
argue that transforming resources and capabilities (through learning), into competitive
advantages, is central. Additionally, Kay (1993) argues that the real core competences might
be the ability to learn and adapt your resources toward the environment‟s expectations.
Strategizing toward stakeholder and market demands seems to be a more reactive than
proactive strategy. These notions may belong to Mintzberg‟s “Environmental School”.
We support the internal analysis with Williamson‟s (1985) notions regarding asset specificity.
The degree of asset specificity enhances our knowledge about SAS‟ resources and
capabilities, dynamics and how easy it is to redeploy SAS-assets. On the basis of this, we
claim that there may be a theoretical positive correlation between low asset specificity,
dynamic capabilities and competitive advantages. By this, we also (indirectly) argue that there
may be a correlation between high asset specificity and scientific management. Employees
(human assets) trained by beliefs inspired by Taylor (1911) may be difficult to reconfigure to
other types of work. This is due to the staffs‟ highly skilled (but narrow, and perhaps static)
core capabilities.
Moreover, we apply important notions from network and alliance-theory, although we
criticize it for being too narrow. Inter-firm actions may create synergy and competitive
advantages, but can, however, also lead to reduced (strategic) control of internal VRIN.
Networks are tradeoffs between being able to procure VRIN-resources from other actors
without losing control of internal VRIN-resources through unintended spillover effects.
Moreover, network-perspectives often neglect the importance of internal knowledge-creation,
which leads to competitive advantages. On the other hand, joint-collaboration can lead to
improved efficiency and effectiveness. In order to remain successful in the long-term
perspective, internal knowledge creation has to occur, i.e. innovations will not happen without
investments in internal capabilities. Alliances also offer trust challenges between actors, as
well as agency problems, conflicts of interests, free-riding, etc. Another downside of
alliances, seen from a stakeholder perspective, is the lack of transparency. Daniel Sokol,
professor at University of Florida, claims that when alliances enter difficult financial times,
they increase collaboration and thereby create potential cartels5, i.e. they can share risks and
5 http://www.ugebreveta4.dk/2009/200934/Baggrundoganalyse/Kartellerne_blomstrer.aspx
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
Page 16
costs.
Therefore, it may be difficult (or even impossible) for external stakeholders to analyze who
contribute with what within a strong partnership. Put differently, external stakeholders such as
customers, authorities, NGOs, etc. might have high transaction costs when making
transactions with alliances. They have to spend time and resources on evaluating the potential
of one alliance-partner and what it is actually capable of. From a RBV-perspective, we could
argue that it is difficult to analyze, which partners contributes with VRIN-resources in the
alliance and which are free riders.
It is also important to make the connection between corporate strategy and RBV. The strategy
formulated by management is highly influenced by the organizational resources, capabilities
and core competences. At least the strategy should be formulated by taking internal potentials
into consideration. Thus, corporate strategy and internal capabilities are inter-connected. We
apply Porter‟s “generic strategies”-framework on SAS, but we argue that the model neglects
important internal capabilities. Applying a given strategy from the matrix is good, but it
should always be synthesized with available resources. Put clearly, a firm should not apply a
“low-cost leadership”-strategy if they do not have the cost structures, resources or
competences to perform this strategy successfully. Perhaps Porter was inspired by Ansoff‟s
earlier work on the growth matrix during the 50s, since we observe similarities regarding
strategy and market segmentation. They differ in a way that Ansoff integrates product strategy
as a growth mechanism, whereas Porter mainly focuses on corporate strategy and competitive
advantages. Ansoff also integrates the potential of entering new markets. Thus, we synthesize
Porter and Ansoff‟s matrices in order to get a better understanding of SAS‟ products and
corporate strategy.
Regarding “Porter‟s 5 Forces”- model, we criticize it for being too static. Emerging and
dynamic industries can be difficult to analyze with the 5 Forces tool, since it may require
some degree of stability when assessing the forces. In a more scientific manner, Porter‟s 5
Forces might not perform well under “Hypercompetitive” environments (D‟Aveni, 1994). For
SAS, this becomes relevant since the Scandinavian aviation-industry once were monopolistic
and static, but now have become more dynamic than ever. Mintzberg et al. (2009) also
highlight time difficulties within the framework. They claim that the industry-analysis will be
based on the historical and present development of the industry. In other words, we assess the
future by applying data from the past, i.e. a time gap. Mintzberg et al. (2009) also emphasize
that Porter neglects internal capabilities and resources, or as we put it, VRIN, dynamic
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Page 17
capabilities and core competences. Basically it implies that individual company performance
is highly influenced by different forces like the market, suppliers, competitors, etc. We
highlight, however, that company performance is also influenced by internal capabilities. This
is because competitive advantages and profitable positioning cannot occur without VRIN-
conditions. Additionally, we criticize Porter‟s main entry barriers, since we believe that the
importance of knowhow and capabilities are neglected. Inexperienced new entrants will face
severe challenges even though they may have large capital resources in the airline-industry.
Experience, knowledge and capabilities do not come easy, which is why new entrants will
have a steeper experience curve than existing firms. To synthesize our internal perspectives,
dynamic VRIN-resources and core competences will create competition barriers towards
competitors (especially new entrants), and thereby enhance the firm‟s strategic positioning
and competitiveness. In other words, organizational learning and capabilities are important, as
well as it might be worth mentioning that the 5 Forces framework can bring important notions
about market positioning. Unfortunately, it does not create a strategy.
It might also be worth mentioning that the 5 Forces framework can bring important notions on
market positioning, but it is not a tool for creating a true corporate strategy (Hamel, 1997).
Conducting a 5 forces analysis has never created a strategy as it rather identifies industry
factors. Harvard strategy professor Robert Kaplan applied a different view on the 5 Forces
model, during a lecture at Copenhagen Business School in May 2010. He argued that Porter‟s
5 Forces is in fact a tool for risk management. This is because it focuses on risks that
industries face (forces pressuring the industry). We support this claim and extend the view by
arguing that the framework can be used to identify various downside and upside risks. Thus,
the 5 Forces framework can be interpreted to be more than a tool for industry-analysis. It can
also be viewed as a way of assessing stakeholders or as a risk management model.
1.2.3. Empirical data collection and critique
We have tried to get primary data from SAS, which made it clear that they do not wish to
provide any additional information beside what is already stated in their public material. We
interpret this defensive stakeholder policy of closure as a bad sign. According to the old
saying: “If you have nothing positive to say, do not say anything at all”, this information
policy towards stakeholders do not provide positive assumptions. However, we have still
managed to remain objective. In various publications from SAS, we have encountered
strongly biased information regarding the airline. Thus, we interpret the annual report as
being biased and perhaps a marketing publication towards investors. Therefore, we are highly
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Page 18
critical toward published information in SAS‟ reports since they often try to place themselves
in an optimal position. However, the financial information should be valid and comply with
international financial reporting standards (IFRS). Significant mount of data comes from
respective airlines‟ annual reports, monthly traffic reports and newspaper articles. SAS
Annual report 2009 is the airline‟s latest yearly report and is one of our main sources of data.
We have also found great value from “Flying Off Course” by Rigas Doganis. He practically
wrote the book on airline economics and is generally considered among industry analytics,
scholars, etc., as a reliable and valid source. However, we are aware that Doganis may have a
more commercial. On the other hand, he has valuable industry experience from managing a
larger European airline. Essentially, the book gave us a better understanding of the economics
and background in the industry.
We have used secondary data from several media, such as Børsen, Business.dk, boarding.dk,
the Economist, ekonomifakta.se, IATA, Business Week, DagensNæringsliv, Kapital, etc.
Some of these sources tend to have a negative view on SAS. However, they do provide us
with valuable industry knowledge. In addition to this, we tried to supplement our empirical
data collection with investment analysis from investment banks. During our contact with
investment banks, we were told that there is limited interest for SAS in the market. However,
financial institutions in Scandinavia (e.g. First Securities) often follow SAS, largely due to
their rival Norwegian which (financially) may be more attractive.
We have collected valuable qualitative macroeconomic data through various governmental
websites, the International Monetary Fund, OECD, World Bank and other NGOs. These have
been helpful when assessing the macroeconomic context. Our benchmarking-section also
offers qualitative data, which is used to derive airlines‟ performances. Much of this traffic
data is published by the airlines themselves, which may make them biased. Therefore, we
have remained highly critical toward material used in order to stay objective.
1.2.4. Framework and research design
During this project we have encountered several limitations regarding the framework and
research design. We have chosen to focus more on annual reports, investor analysis and
presentations, industry analysis, traffic reports, etc. This means that we have chosen to reject
primary data from SAS since they were not interested in collaborating. By not collaborating
with SAS, we have gotten more “freedom” and time to conduct our analysis and interpretation
in areas, which we find most interesting. As a result of this, SAS have not created limitations
for our work. On the other hand, primary data may provide useful information and we could
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Page 19
have avoided unnecessary “noise” from secondary data. However, this information would
also be biased. Data collection methods such as interviews and questionnaires have been
excluded since we felt that secondary sources would provide a better outcome. During our
research, we encountered that stakeholders generally have rather negative views on SAS,
perhaps due to the negative media attention. Moreover, by applying secondary data we have
also saved time, which were spend on creating a better analytical foundation instead of
collecting data and operationalizing questionnaires, interviews, etc. (Andersen, 2005).
According to Andersen (2005) projects are influenced by formal requirements, rules,
resources, the purpose and the thesis stakeholders, i.e. framework limitations. For us, this
means that CBS and the Danish Ministry of Education provides certain formal requirements
and boundaries for our work, e.g. time duration, page limitations, etc. Additionally, SAS
could also have certain requirements if they wished to collaborate. The purpose of our
research is influenced by our (previous and current) knowledge and resources with this field.
Our resources, knowledge, interests and competences within this area are influenced by CBS-
courses, professors, CBS library, books, etc. Both of the authors currently obtain a bachelor in
economics and business administration, have studied finance and strategic management on
master‟s level as well as having several managerial electives. All these factors influence our
knowledge and therefore our research. Thus, our interests are within strategy, management
and competitiveness which influence the work. Regarding stakeholders, we find that our main
stakeholder is the recipient of the thesis, i.e. our supervisor. Our supervisor‟s knowledge and
interests within management, strategy and SAS have influenced our work significantly. We
believe that the main motivation for our supervisor is to receive a good well structured
project, which obtain innovative research. Thus, we emphasize that it is important for us to
satisfy our supervisor, but we had a strong focus on conducting individual research in order to
leave our own markings on the thesis.
Andersen (2005) highlights that the research process possess certain limitations like the
research question, theoretical foundation, empirical delimitation, project organizing, access to
data, research design and data collection techniques. Andersen highlights that a well-
constructed static research question may help the researcher throughout the process. However,
in our research, we have integrated the research question in a more dynamic manner. We
argue that creating strong static research questions in the beginning of a project may provide a
certain degree of structure, deliberate strategy, but also create severe limitations. During our
research process we have gathered information incrementally and applying a static problem
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Page 20
statement may offer challenges with this. Put differently, we have chosen to reject a deliberate
strategy and applied a more emergent form. Our research question gave us structure, but was
more an ongoing process and under continuous development in order to cope with
incremental learning.
Our empirical delimitations are created in order to narrow down and specify our research
area. This has provided the researchers with a better structure and clarity, especially during
the data collecting stages. The project organizing was, among others, an ongoing dialogue
with our supervisor by e-mail and meetings. Correspondence by e-mail gave us brief answers
on current challenges and our meetings generally obtained a deeper discussion of empiricism
and science. This guidance provided us with great value.
We apply quantitative data in this thesis when we have extracted traffic figures, operational
performance, macroeconomic indicators, etc., i.e. in chapter 5. These are measurable
developments which have been created and influenced by external stakeholders. However, as
Andersen (2005) argues, there often exists a tendency to believe that quantitative data may be
more reliable, if it is created in a proper methodological manner. In addition to this, we have
applied secondary qualitative data such as news paper articles and analyst reports. Another
(primary) qualitative data could emerge through the meetings with our supervisor. Theoretical
knowledge was “easier” to find as our course materials and the CBS library offer excellent
opportunities to find information. During the process of data collection we have reflected in
relation to the data‟s validity and reliability. In short, validity “measures” the connection
between relevance and the applicability of the data when connecting it to the research
question. Put in a more academic manner, validity may measure the connection, or gap,
between empiricism and theory. In essence, to which degree is the data relevant for us when
we wish to answer our research question. On the topic of reliability, we find it important to
consider to which extent our data actually measures what we want to analyze. How applicable
and reliable is the information? An example of diffuse or challenged reliability could be our
operational benchmarking. Airlines tend to merge with other airlines (merge statistics and
performance), change methodology regarding traffic statistics, etc. These may, all things
equal, question the reliability. In addition to this, we apply deductive reasoning. An example
could be when we analyze the corporate structure. Here we apply theoretical notions to
examine the empirical data. The essence of our methodology process is that we have had a
strong dynamic connection between the research question, theoretical perspectives,
empiricism and our findings, as Andersen suggests (appendix A).
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Chapter 2 – Analysis of SAS
In this section we start with a brief historical presentation of SAS and factors which have
influenced the Nordic airline-industry. Afterwards we turn our attention toward the cost -and
revenue streams of SAS, which are of utter importance for our analysis. Then will we move
on to the corporate governance-section in order to assess the ownership structure of the airline
before we analyze SAS‟ corporate –and product strategy.
2.1. History
Figure 2: Notable historical events influencing Scandinavian aviation
Source: SAS investor relations
In Figure 2 we have listed notable events influencing SAS from 1940 to present.
Scandinavian Airlines System (SAS) was formed in 1946 from Det Danske Luftfarselskab
A/S (DDL), Det Norske Luftfartselskap (DNL) and Svensk Interkontinetal Lufttrafik AB
(SILA – the daughter company of Swedish firm Aktiebolaget Aerotransport - ABA). The
same year the airline opened services to North –and South America. Already by 1947 the
airline had carried more than 18,000 passengers over the Atlantic, earning a reputation as a
pioneer within the industry. In 1951, DDL, DNL and ABA formed the present SAS
consortium, where the ownership was allocated as the following: 2/7 Danish, 2/7 Norwegian
and 3/7 Swedish. SAS had an exclusive license to fly to various destinations within the United
States from the Scandinavian countries and in the mid-50s, the airline established a base at
Søndre Strømfjord in Greenland, which made it possible to fly to long-distance over the North
1940- 1970
• World War 2 ends
• 1946: SAS formed from Det Danske Luftfarselskab A/S (DDL), Det Norske Luftfartselskap (DNL) and Svensk Interkontinetal Lufttrafik AB (ABA)
• 1951: DDL, DNL & ABA merges
• 1960: First Hotel is opened - SAS Royal Hotel Copenhagen
• 1965: SAS introduces electronic reservation system
1971- 1990
• SAS pruchases the popular Boeing 747, the "Jumbo Jet"
• 1973: Oil crisis
• 1979: Oil crisis
• 1980: SAS opens first non-Scandianvian Hotel, SAS Kuwait Hotel
• 1982: SAS is awarded "Europe's most punctual airline"
• 1984: SAS awarded "Airline of the Year" by Air Transport World
• 1986: Spanair is founded
• 1989: Fall of the Berlin Wall
1990-1999
• 1991: Dissolution of USSR and end of the Cold War
• 1992: The current EU is created through the Maastricht treaty
• 1992: Eurobonus is introduced
• 1994: Deregulation of the Scandinavian airline industry
• 1995: SAS creates AirBaltic in a JV with the Latvian state
• 1997: SAS is a co-founder of Star Alliance
• 1997: Asian financial crisis
• 1997: SAS acquires Widerøe
• 1999: SAS acquired Air Botnia, nowadays' Blue1
2000-2006
• SAS stock is listed on exchanges in Stockholm, Copenhagen & Oslo
• 2001: 9/11 attacks & invasion of Afghanistan
• 2001: Braathens aquired
• 2002: The € is created
• 2003: Iraq war
• 2003: SARS epidemic
• 2003: SAS aquires 49 % of Estonianair
• 2003: LCC subsidiary Snowflake was created
• 2004: Snowflake gets terminated
• 2004: EU East expansion
• 2005: SpanAir controlled
• 2006: SAS divests Rezidor Hotel Group
2006-Present
• 2007-2008: Dramatic increase of oil price
• 2007: Finance crisis
• 2009: Cores SAS is initiated
• 2009: Spanair sold off for 1 €
• 2009: AirBaltic divested
• 2009: SAS awarded "Europes most punctual airline" again
• 2009: Swine flu
• 2009: Treaty of Lissabon is signed
• 2010: Volcano eruptions on Iceland
• 2010: SAS receives financial support from investors.
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Page 22
Pole. In 1960, SAS opened their first hotel in Copenhagen, SAS Royal Hotel and five years
later they introduced the world‟s first electronic ticket-reservation system for airlines. After
surviving the energy crisis in the 70s, SAS were awarded “Airline of the Year” in the 80s.
The airline‟s success could largely be attributed to the longest-serving CEO of SAS, Jan
Carlzon, who had an ambition to create the business man‟s airline. This required the
introduction of several programs with the aim to improve customer service, i.e. “charm
schools” for their employees, as well as the mileage-program Eurobonus. The program was
launched in 1992 and still remains the most awarded frequent flyer program in the industry.
The 90s meant political changes due to the deregulation of the Scandinavian airline-industry,
which resulted in increased competition. Moreover, the treaty of Maastricht and the
dissolution of the Soviet Union meant new Eastern European possibilities for SAS. They
entered a joint venture with the Latvian state and airBaltic was founded in 1995. Two years
later, in 1997, Star Alliance was founded by five airlines: Air Canada, Lufthansa, SAS, Thai
Airways International and United Airlines. The overall idea was to create a global network of
code share flying and thereby offering better, faster and more flexible opportunities for
travelers. The SAS-share was listed on the stock exchanges in Stockholm, Oslo and
Copenhagen in 2001. The catastrophic events of 9/11 resulted in tough times for aviation.
Increased terror-alerts have also increased the need for efficient security processes, which
apart from increasing safety-levels also affect security costs6. Moreover, the SARS-epidemic
worsened the situation for the global airline-industry. In 2003 SAS entered the low cost
market through their LCC-subsidiary Snowflake. The initiative, however, was terminated few
years after. 2003 also meant a new Baltic expansion as SAS acquired 49% of the shares in
Estonian Air. More recently, SAS divested their hotel. Apart from the increased competition
in aviation and general low airfares, the industry has been influenced by the increasing oil
price, which peaked in 2008. The financial crisis also began to take off, which resulted in the
desire to create a more cost-efficient and lean SAS. Core SAS was introduced, which implied
divestments of various airlines. In 2009 SAS were awarded the most punctual European
airline. Early 2010 SAS (again) needed support from investors, as well as the implications
from the Icelandic volcano eruptions. Thus, we see that SAS and the Scandinavian airline
industry are highly sensitive towards political, economic and environmental changes. Today,
the SAS Group consists of Widerøe, Blue1 and SAS.
6 http://www2.parl.gc.ca/Content/LOP/ResearchPublications/prb0572-e.htm
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
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Destructive extraordinary events for SAS
SAS have been involved in several unfortunate incidents the last decade. In 2001, SAS
experienced their most fatal accident in Milan where 118 peoples lost their lives7. In 2007
SAS had three accidents due to problems with their Dash 8-400 planes. Again, in 2008,
Spanair had an accident in Madrid where 150 people were killed. In 2001, SAS and Maersk
Air engaged in a cartel on the Copenhagen-Stockholm route and were fined almost €40
million by the EU Commission8. Again, in 2007, SAS was investigated concerning possible
cargo-cartels and were prosecuted by the EU Commission. In 2008, SAS Cargo was fined 250
million DKK for breaking the American antitrust law. Once more, in 2010, SAS were accused
of illegal industry espionage on Norwegian and had to compensate Norwegian for damages in
the amount of 160 million NOK. Thus, it seems that SAS cannot obey the rules and norms of
standard decent business behavior, which their owners to a certain extent create. These
incidents during the last century have certainly damaged SAS‟ credibility, brand value and
maybe revenue potential.
2.2. The cost & revenue structures of SAS
Appendix B illustrates the income statement for the
SAS Group (2007-2009) and we observe that that
SAS‟ operating expenses have declined almost 13%
from 2008-2009 and accounted for 43,4 Billion SEK
in 20099. The specific costs are presented Table 1,
where we note that their main cost factors are payroll
expenses and jet fuel. Flying expenses are
characterized as direct operating costs and account for
roughly 70%10
. Airline professionals claim that a
healthy percentage should amount to 55-70% of total
costs (Doganis), i.e. SAS‟ are in the upper area of this
scale. Passenger-related expenditures are characterized
as indirect operating costs and account for roughly
30% of the SAS Group‟s costs11
. Next we will elaborate upon the most important costs.
7 http://www.business.dk/transport/sas-faar-elendig-placering-paa-ulykkesrangliste 8 http://europa.eu/rapid/pressReleasesAction.do?reference=IP/01/1009&format=HTML&aged=0&language=EN&guiLanguage=en 9 Operating expenses, however, does not include leasing costs, depreciation, share of income in affiliated companies or capital gains/losses 10 Flying expenses include payroll expenses, maintenance, jet fuel, leasing costs and government user fees. 11 These costs include catering, handling, selling and computer and IT costs, which are not directly dependent of aircraft operations.
Table 1: The
SAS Group's
costs
2007
2008
2009
Payroll
expenses
34,9% 34,8% 38,9%
IT 4,5% 4,4% 4,6%
Technical
aircraft
maintanance
6,9% 6,1% 2,6%
Handling costs 3,9% 3,5% 3,8%
Catering costs 2,8% 2,6% 2,6%
Government
fees
9,2% 8,9% 9,5%
Jet fuel 16,4% 18,5% 16,6%
selling costs 1,4% 1,3% 1,3%
leasing costs,
aircrafts
5,2% 4,4% 5,0%
Other 14,8% 15,6% 11,3%
Environmental
costs
1,0% 1,0% 1,0%
Total 100,0% 100,0% 100,0%
Source: Own creation based on data from SAS annual reports
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Page 24
Payroll expenses: In 2007-2009 accounted for 34,9%, 34,8% and 38,9% of SAS‟ total costs,
respectively. The 2009-increase in payroll expenses may be related to the Core SAS-program
and staff reduction. We derive that salary are increasing on short-term basis due to layoffs. In
order to get a better understanding of salaries at SAS, we have benchmarked with other major
European network carriers due to the similarities in cost-structures and business focus.
Table 2 show the annual expenditures for
airlines measured in US$ per 1000 PAX-KMs
(Doganis, 2010). This is a measure of
expenditures per passenger-levels per kilometer
and we observe that SAS spend more financial
resources on their passengers than competitors.
These passenger service costs could be due to
marketing, sales, administration and other
service processes. Thus, we derive that British Airways have 0,2 % lower passenger services
expenditures compared to SAS. Air France has 5,2 % lower expenditures, Lufthansa 15,9 %
and Finnair 28,4 %. This table shows that SAS have substantially higher expenditures than
notable network competitors.
Table 3 presents the expenditures
related to pilots and cabin attendants.
Regarding pilots, SAS actually performs
more satisfactory than Air France, but
significantly worse than British
Airways. With regards to the rest of the
cabin crew, SAS is performing lower than the notable competitors. Air France has 14% lower
expenditures on their cabin crew, Lufthansa is 40 % lower and British Airways 48 %. In
addition to this, we highlight that the cost-difference gap is even higher on intercontinental
and LCC-flights. American and Asian airlines tend to operate with 50-60% lower salary-
levels than SAS and similar trends are observed with Norwegian, Ryanair and easyJet12
.
Higher salary-levels among staff are usually associated with a higher activity-level. However,
according to a study by Sydbank in 2008 on annual flight hours for pilots, SAS‟ pilots are
working less than their colleagues in other airlines13
. EU have a maximum security limit on
flight hours for pilots, which is 900 hours per year and SAS‟ pilots have an average of 570
12 Doganis p. 100, table 5 13 http://www.business.dk/transport/sas-piloter-arbejder-mindst
Table 3: Annual Pilot and Cabin Attendant costs
(US$000s)
Airlines Pilots Difference
to SAS
Cabin
attendants
Difference
to SAS
SAS 233,8 97,2
Air
France
316,7 35% 83,3 -14%
Lufthansa 225 -4% 58,7 -40%
BA 178,8 -24% 50,8 -48% Source: Own creation based on data from Doganis
Table 2: Annual passenger services costs
Airlines
US$ per
1000 PAX-
KMs
Difference to SAS
SAS 19,75
BA 19,71 -0,2%
Air France 18,73 -5,2%
Lufthansa 16,61 -15,9%
Finnair 14,15 -28,4%
Source: Own creation based on data from Doganis
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Page 25
hours per pilot per year. The general trend for European pilots is that pilots, on average, have
39% more flight hours than in SAS. In essence, SAS‟ pilots work considerably less than the
industry average and are paid significantly more for their services. Reasons may include the
strong Scandinavian unions and shorter routes, which may lead to reduced flight-time and
block hours. Thus, SAS‟ three hubs require coordination.
Another important aspect of payroll expenses is that SAS have built up significant pension-
obligations, which are properties newly-started LCCs do not possess to the same extent as
SAS, hence, they operate with lower cost-structures. This is supported by a Norwegian
financial magazine, Kapital (February 26, 2010), which wrote an article on the new
accounting-rules taking affect from 2012, where pension-obligations should be included in the
balance sheet. They claim that this will have severe consequences for SAS.
Jet fuel: This is SAS‟ biggest expenditure after
salaries. In 2007-2009, this accounted for
16,4%, 18,5% and 16,6%, of the annual costs,
respectively. Figure 3 shows a graphical
illustration of the jet fuel cost development for
SAS. We observe that the costs increased in
2007-2008 which may be related to the increase
in oil prices. The recent decline may be related to Core SAS since reduction of operations
may influence jet fuel consumption –and costs. According to Goldman Sachs (2010) fuel-
costs may increase by approximately 20% from 2010-2011. It may, however, be reduced
through factors such as hedging and modernizing the fleet. SAS have a policy where they
hedge 40-60% of their anticipated fuel consumption14
. The remaining fuel is purchased at
market price. Lately, SAS have hedged in periods of 1 year, and in 2008 the group managed
to save $155.6 Million by hedging 53% of its fuel, compared to purchasing jet fuel at the
market price. Except through hedging, fuel cost may only be reduced by investing in new
fuel-efficient aircrafts, negotiating lower fuel prices with oil companies or by flight specific
means, such as lighter aircrafts, lighter baggage and lower cruising speed. However, SAS may
not have financial strength to renew their fleet and they have chosen to continue their
attractive baggage policy. The increased focus on short-haul flights may also influence jet-
14 SAS Annual Report 2009, p. 51
Figure 3: The SAS Group’s jet fuel costs
Source: SAS annual report 2009
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Page 26
fuel costs. This is due to increased fuel-consumption when a plane takes off and the time
before it reaches their preferred altitude compared to the actual cruising (Doganis, 2010).
Thus, longer flights leads to lower jet-fuel consumption per kilometer, as illustrated in
appendix D. As a result of this, the focus on short-distance flights may become an expensive
fuel strategy. Additionally, if the Scandinavian governments choose to enhance their green
profile by increasing oil taxation, this will also influence SAS negatively.
Technical aircraft maintenance: These are costs related to maintenance of aircrafts. From
2007-2009, this accounted 6,9%, 6,1% and 2,6% of SAS‟ costs, respectively. The significant
2009-reduction may be related to the divestment of SAS Ground Services, downsizing of the
fleet or the use of operational leasing.
Other notable costs are related to government fees, IT, handling, leasing, environment as well
as sales costs which are low due to use online booking and sales. The last category is “Other”,
which we cannot interpret since the annual report does not elaborate upon these expenditures.
Now that we have presented cost structure we will turn our attention towards the revenue.
Revenue
Appendix B illustrate that SAS‟ revenue have
declined 15% from 2008-200915
, and their
revenue amounted to 45 Billion SEK in 2009.
Table 4 illustrate the revenue created by the
different airlines in the group from 2007-2009.
Due to the implementation of Core SAS,
Scandinavian Airlines is operated as one
company in the group, together with the two
airlines Widerøe and Blue1. Thus performance is
measured on the entire Group. It is to be observed
that 88,5% of SAS Group‟s revenue is linked to
SAS operations. Widerøe and Blue1 account for 7,4% and 4,10% of revenue, respectively. In
addition to this revenue construction, Appendix E shows the revenue allocated on various
segments. It shows that the annual passenger revenue (the main source of revenue) has
decreased by approx. 15 %, from 2008 to 2009. Thus, we have generated a picture of SAS‟s
15 SAS Annual Report 2009, p. 45
Table 4: SAS Group's revenue breakdown
2007 2008 2009
Scandinavian
Airlines
88,5%
SAS Norway 21,4% 22,4%
SAS Danmark 18,5% 19,0%
SAS Sweden 14,0% 13,5%
SAS
International
12,1% 12,7%
Widerøe 4,9% 5,5% 7,4%
Blue1 3,2% 3,2% 4,1%
SAS Ground
Services
9,6% 10,0%
SAS Tech 7,7% 8,4%
SAS Cargo 5,3% 5,4%
AirBaltic 3,2%
Total 100,0% 100,0% 100,0%
Source: SAS Annual reports 2007, 2008, 2009
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revenues and derived that the main source of revenue, which is declining, comes from
transporting passengers. As a result of this, we wish to get a better understanding of which
customer groups that are important for SAS.
Figure 4 illustrates the revenue by
different customer categories. We
clearly observe that business travellers
are the biggest customer segment for
the SAS, leisure is the second largest
source of income and charter travel
account for 10 %. Thus, we derive that
the business segment is of utmost
importance to SAS.
Revenue is influenced by increased competition, especially from LCCs and charter-firms due
to more options for customers. Therefore, LCCs and charter-firms may reduce the market
share for SAS (especially on the leisure-market). As charter-companies continue to expand
their value chain and operate own flights, we see challenges for SAS in this segment. As
leisure and charter segments become more challenging contexts, the importance of the
business segments increases. The tendency, which will be derived later on, indicates that
corporations tend to increasingly focus on price (short-haul). This makes competition from
LCCs even more challenging. In short, SAS‟ revenues from charter, leisure and business
segments will be tested further in the future, especially on the short-haul market.
Now that we have covered both costs and revenues, we will move on to our corporate
governance-section in order to get a better idea of SAS‟ investors‟ influences and objectives.
2.3. Corporate Governance
This section aims to analyze the ownership structure of SAS and how it influences corporate
strategy. The essence of corporate governance was pointed out by Adam Smith (1776), who
stated that directors of companies, managers of investor‟s money, cannot be expected to
watch over it with the same attention with which they watch over their own. In other words,
Smith derived that what economists nowadays label as agency problems and these are at the
core of theory of the firm and corporate governance. Since the objectives of SAS should be
the same as their investors‟, i.e. similar utility functions (Frank, 2003), it is important to
analyze the ownership structure, investor profiles and management incentives.
Source: SAS annual report 2009
Figure 4: SAS' customer categories measured on revenue
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2.3.1. Ownership structure, concentration and identities
Appendix F illustrates that firm value and performance is influenced by ownership
concentration (Thomsen, 2008). It shows that it might be beneficial to have large investors,
although a too high ownership
concentration will result in
diminishing performance. The
ownership of SAS is described in
Figure 5 and we observe that 50
% of SAS is government-owned.
The largest state-owner is
Sweden (21,4%) and the
Norwegian and Danish state own 14,3% of the airline, each. Institutional investors have 30-
35% of SAS and private hold the remaining 15-20 %. More specifically, Appendix G
illustrate that other notable shareholders include a Wallenberg Foundation, an American
pension fund, the Danish National Bank, etc. In addition to this, it is to be noticed that
Swedish investors hold almost 50% of the airline‟s shares. SAS have a high ownership
concentration since four investors own almost 60 % of the company. This implies that they
have an incentive to perform active ownership, which involves: Hiring and firing board
members, as well as select management and influence the corporate objective, mission, vision
and strategy. Put differently, they have incentive to monitor and control management in order
to reduce agency-costs, i.e. perform active ownership (Thomsen, 2008). A downside of this is
that these investors may hire executives based on (nationalistic) nepotism instead of
capabilities. Another weakness of having large investors (governments) is that these owners
may become risk averse, which again may reduce possible innovations and competitive
advantages. With respect to SAS, governments are investing taxpayers‟ money and politicians
who defend SAS may lose popularity largely due to bad performance of the airline. Thus,
several politicians want to sell their governments‟ shares16,17
. Another reason for selling
shares is conflicts of interest with other investors. The Scandinavian governments all have an
interest in having a strong, efficient and profitable (multi)-national airline, which is important
to keep in mind. They wish to maximize firm performance and value, but also maintain an
effective air infrastructure in the Nordics. In addition to this, some might even argue that
aviation is also a matter of national security. Thus, their interests may differ with other more
16 http://www.dr.dk/Nyheder/Indland/2010/04/27/053534.htm 17 http://borsen.dk/investor/nyhed/176190/
Source: SAS annual report 2009
Figure 5
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profit-oriented investors, which may influence the corporate strategy. Owner identity becomes
critical in SAS since they possess different utility functions and ways to maximize it, i.e.
efficient infrastructure vs. mere financial objectives. Thus, we elaborate upon this topic next.
2.3.2. Investor profiles
The Scandinavian governments may have common goals with SAS. However, respective
countries‟ infrastructure may be especially a wish for governments as well as increasing their
countries‟ international competitiveness. For instance, Danish politicians may want to focus
more on a SAS, which optimize the Danish airline market rather than maintaining a domestic
route-map in e.g. Norway. Financial profitability aside, investors have different views on the
“right” corporate strategy. Hart et al. (1996) argue that governmental ownership also means
an increased focus on output instead of financial return. Scandinavian governments may want
a strong profitable SAS, but also an efficient transportation infrastructure domestic in the
respective countries, together with intra-Scandinavian and European routes. Besides a
developed route map, they may also show special interests in affordable ticket prices for
customers, safety, employment relations and other factors besides profitability, i.e. “softer”
non-financial key performance indicators (KPIs). Put differently, “non-profit” maximization
is often a governmental objective in welfare economies since large governments are expected
to correct market failures (Arrow, 1969). This may be a reason for why some government
enterprises, e.g. SAS, are performing unsatisfactory financially. Even though, when looking at
other parameters, i.e. efficient infrastructure for Scandinavian citizens, then they may perform
satisfactory.
Scandinavian governments are usually considered to be wealthy, which is why the financial
performance of their enterprises may be met with patience. Another aspect of governmental
investors is that the governments‟ shareholder positions are ultimately managed by ministries
and top-management here is usually politicians. Thus politicians have a controlling influence
on SAS‟ corporate strategy since these politicians indirectly can hire and fire board members,
influence corporate strategy, etc. Politicians generally aim for a strong and profitable SAS,
but they also want votes so they can remain in power. This implies that SAS may be operating
inefficient and unprofitable routes in order to please voters, and these routes may reduce
competitiveness. On the other hand, voters might be tired of financing SAS through their
already high taxes.
The most significant and interesting institutional investor, for us, is the Swedish Knut and
Alice Wallenberg Foundation, which own 7,6 % of SAS. The family has investments in
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multiple Swedish companies and SAS is just one of their many portfolio investments. This
type of institutional investor is considered patient, a low degree of risk aversion, long time
horizon on their investments, possess substantial financial resources and is mostly occupied
by financial gains (Thomsen, 2008). The strong focus on financial success means that they
have a different investment profile than governments. The Wallenberg Foundation engages
active ownership through Jacob Wallenberg, whom is a member of the board at SAS.
We will now assess the top executive management-level, in order to assess if management
serve their owners‟ interests.
2.3.3. Management structure and remuneration
The majority of investors have Swedish roots and we
argue that this influence the managerial structure of the
company. When analyzing the historical CEOs of the
SAS18
, we observe that the majority of CEOs have been
Swedish, which is also illustrated in Figure 619
. In other
words, we argue that there seems to be a correlation
between investor nationality and their preferences
regarding hiring CEOs, in our SAS-case. Put
controversially, perhaps the major Swedish investors
promote and hire managers based on some sort of
nationalistic nepotism instead of competences and
meritocracy. Hiring foreigners, that may have a different
view on the situation, may prove to be beneficial for SAS
since they can offer new blood, knowledge and ideas.
We argue that it may be easy for SAS to attract highly
skilled top-managers, since there is much pride and prestige of managing a large MNC like
SAS. However, it is also a tough job description where the “failure rate” is high. Thus, being a
top-manager in SAS is a risky career move, which could scare off potential competent
leaders. This is supported by CBS-Professor in Strategy and Management, Steen Poulfelt20
.
SAS is headquartered in Stockholm, perhaps due to investor demands. However, we find
difficulties explaining the connection why the majority of the investors are Swedish, the
CEOs have traditionally been Swedish, the headquarter is in Stockholm and the biggest hub is
18 SAS Investor Relations 19 http://www.sas.dk/da/Om-SAS-Danmark2/Historie/SAS-koncernchefer/ 20 http://borsen.dk/nyheder/karriere/artikel/1/190538/ekspert_ny_sas-chef_skal_vaere_energibombe.html
Figure 6: CEOs of SAS
Source: Dagens Næringsliv, 11/8-2010
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located in Copenhagen. Stockholm possesses the majority of the managerial knowledge and
financial resources. The operational levels, however, are located in other countries, which
may result in inefficiencies and increase the importance of knowledge sharing, learning and
reporting.
Creating incentive systems and aligning owner-manager interests are important aspects of
proper corporate governance. Performance pay is present in SAS, but is exercised in a more
Scandinavian social-democratic manner compared to incentive-systems in other countries
(Thomsen, 2008). The Board of Directors has great influence on managerial remuneration,
due to the high ownership concentration being present. According to SAS Annual Report
2009, President and CEO, was employed on the January 1st 2007 and mainly remunerated as
the following21
:
A Fixed yearly salary of 10.000.000 SEK
A variable salary of maximum 20 % of the yearly fixed salary
A premium contribution pension plan of 35 % of his fixed salary
A pension lump of 8.000.000 SEK if he is still employed on 31st of December 2011
Severance pay accounts for 12 months of salary (9.400.000 SEK) if the CEO resigns due to:
SAS is acquired by any industrial or financial owner(s) and cease to exist as an
independent firm.
An external owner acquires a controlling stake corresponding to at least 30 % of the
votes in SAS
Above we have listed the most notable conditions in SAS‟ CEO-contract. If we make a
hypothesis that the Scandinavian governments will sell their shares early 2012, the SAS-CEO
will be remunerated with a fixed salary of 9.400.000 SEK per year (783.333SEK per month),
pension lump of 8.000.000 SEK and severance pay of 9.400.000 SEK. Thus, SAS-CEO may
have an incentive to sell SAS after early 2012, as this will result in personal financial gain.
This, however, could also be a part of the governments‟ interests, as several politicians want
to sell SAS. Hence, both owners and management have incentives to sell SAS.
From our corporate governance and ownership analysis we now move on to describe the
corporate strategy.
21 SAS annual report 2009, p. 68
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2.4. Corporate strategy - Core SAS
Core SAS is the airline‟s corporate strategy and was
launched in February 2009. It aims to enhance the
Group‟s positioning, profitability and competitiveness
and focuses on five pillars as illustrated in Figure 7:
1: Focus on Nordic home market.
2: Focus on business travelers and strengthened
commercial offering.
3: Improved cost base.
4: Streamlined organization and customer-oriented
culture.
5: Strengthened capital structure.
The pillars will be elaborated before we present the latest status update from SAS.
Pillar 1
In order for SAS to maintain their strong position in the Nordic market, secondary non-core
activities are being divested or outsourcing. Examples of non-core activities are ownership in
airlines, catering business, administration, SAS Ground Services, SAS Tech, etc. Thus, Blue1,
SAS and Widerøe are the core-businesses and by divesting or outsourcing airlines, divisions
and business units, SAS aim to reduce business risk –and complexity of the organization. In
addition to this, it will help the SAS management to focus on their core activities.
Pillar 2.
Business passengers are SAS‟ largest customer group and in order to increase earnings, Core
SAS aims to improve the focus on profitable business destinations as well as strengthening
commercial offerings. In other words, services on the leisure-segment should be downsized or
at least not have as much focus as the business segment. As a result of this, an enhanced
Eurobonus, customized corporate offerings, SAS Credits, “convenient services (mobile
check-in), etc. becomes increasingly important. Additionally, minimizing travel-time for
customers (improved punctuality and flexibility) becomes interesting. Moreover, Svenske
Jernbaner (SJ) and SAS have started up a partnership to link air and rail services22
. Frequent
travelers may choose to travel by SJ‟s rail services, which can be faster and more convenient
22 http://www.sj.se/sj/jsp/polopoly.jsp?d=13753&a=107003&l=sv
Source: SAS annual report 2009
Figure 7: Core SAS
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on shorter domestic Swedish services, given that the customer buy a SAS yearly pass23
. These
initiatives aim to enhance loyalty, convenience and satisfaction among travelers.
Pillar 3.
Core SAS has a strong focus on cost-savings and the time-line for cost-savings is illustrated in
Appendix H. It is to be observed that after the implementation of Core SAS, the airline have
saved 7,8 Billion SEK as of March 2010. These cost-savings aim to close the cost-gap with
competitors and ensure future profitability. Means include freezes –and reduction in salaries
for employees, changes in working conditions as well as improved product development. In
addition to this, 8800 full-time employees are affected by Core SAS
Pillar 4
Core SAS aims to create a more customer-oriented
culture through various means, such as simplifying
the organization, divesting sub-companies, etc. This
involves that different units should have
responsibilities for different services, i.e. long –and
short-haul flights. An example of this is SAS‟
increased focus on long distance flights from
Stockholm and Copenhagen and not Oslo. This
should result in shorter time-to-market, simple and convenient contact with customers and
other stakeholders, etc. As observed in Figure 8, and in Appendix I, decision-making have
been centralized to a merged joint administration and production. The argument is that SAS
will become more efficient and transparency. The corporate structure has been simplified and
centralized, i.e. increased power to central management. Centralization of ownership and
decision making could result in increased simplicity, easier decision making and enhanced
overall organizational performance, according to Mintzberg (1979).
Pillar 5.
This pillar aims to enhance capital structure in order to implement Core SAS, improve
balance sheets as well as make SAS able to deal with economic downturns. SAS invited
23 http://www.dr.dk/Nyheder/Udland/2010/05/25/142323.htm?rss=true
Figure 8
Source: SAS annual report 2009
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Page 34
shareholders to participate on a rights issue in March 2010. This should strengthen
shareholders‟ equity in relation to total assets. Financial KPIs are expected to improve due to
these activities, as well as net debt is expected to decrease from approximately 19 Billion to
14 Billion SEK. Loans and credits have also been renegotiated by expanding maturity dates.
Latest status on Core SAS
Figure 9 shows the latest status update on Core SAS, with Pillar 1-5 and the respective
initiatives. According to this, Core SAS is proceeding as planned. SAS still need to reduce the
fleet and capacity by additionally 10 and 20 %, respectively. Moreover, cost reductions of 4
Billion SEK still needs to be implemented. However, divestments of non-core activities and
increased amount of outsourcing are now a reality, and the Service & Simplicity-initiative has
been launched. Moreover, the organizational structure has been simplified and the capital
structure is strengthened.
SAS is now moving from being a broadly diversified group, to being an airline focusing on its
core services and markets. This transformation aims for a more customer-oriented, cost-
efficient and profitable SAS. The airline aims to become stronger in its home market by
offering attractive routes and services, especially targeting the business segment. In order to
analyze the airline in a more scientific manner, we will now apply the work of Porter next.
Figure 9: Status on Core SAS
Source: SAS Investor Relations. Tele Conference 4Q2009
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2.4.1. Porter‟s Generic Strategies on SAS
Porter‟s framework on generic strategies
applied on SAS is illustrated in Figure 10. Porter
(1985) argues that competitive advantages can
be created through differentiation or cost
leadership, together with targeting specific
segments. We derive that SAS‟ historical
corporate strategies have had a strong focus
on differentiating themselves through
investments in other airlines, Snowflake,
hotels, catering business and various service-functions. The target group of the airline is broad
since the product/service portfolio integrates multiple different services aimed at business
travelers, leisure, governmental travelers, private and business customers, etc.
The launch of Core SAS has transformed the differentiation-strategy into being more narrow,
transparent and simple. The increased focus on cost reduction (instead of differentiation),
implies that SAS move toward the left side of the matrix. Cost reduction, however, does not
mean cost leadership since SAS operate with different cost-structures than LCCs. Even
though SAS is working on improving their cost levels, they are still making an effort to be a
differentiator. Examples contributing to differentiation include Eurobonus and Star Alliance,
which LCCs at present time cannot match. SAS are focusing on business travelers – a
customer group, which implies a narrow target. Thus, we can derive that SAS believes in a
narrower target segment, cost reduction and some degree of differentiation. This corporate
strategy places SAS somewhere in the middle of Porter‟s matrix, due to focus on both
differentiation and costs. Porter categorizes this as being “stuck-in-the-middle”, which refers
to companies who performs below industry average, has few choices and niches. He could
very well be talking about SAS and their low degree of competitiveness. Thus, we argue that
a weak strategy with several focuses (low cost prices, differentiation and new intercontinental
flights) may become challenging. We will now move from Corporate Strategy to the products
and services SAS provide, before we are able to assess how SAS is a differentiator.
2.4.2. Products and complementarities
This section will analyze SAS‟ products and complementarities. Flying is the airline‟s
Figure 10: Generic strategies and SAS
Source: Porter (1985)
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primary service, but in today‟s dynamic industry, airlines compete on complementarities as
well. Secondary services or supplements of the primary offerings could be Eurobonus and
Star Alliance. These are services travelers tend to value, which is why we will address these
and further analyze them in the RBV-section. For now, we consider them as products and
analyze SAS in a more „traditional‟ way.
Star Alliance is difficult to assess since a development of this service is mainly done by
expanding the alliance‟s route map. Therefore it may be more interesting to focus on
Eurobonus as a product. SAS offers three different ticket classes on their European flights,
illustrated in Appendix J, which are Economy, Economy Extra and Business Class. In
essence, prices, level of comfort and flexibility tend to separates these classes. Comfort at
SAS is related to factors of convenience, e.g. comfort at airport lounges, enhanced leg-space
during flights, etc. Means of flexibility include ticket change against fee or change without
any fee and full refund, meals served aboard the aircraft and Eurobonus mileage earnings. On
domestic services in Denmark, Norway and Sweden, only once level of comfort is available,
hence, the aircraft only offer one class. However, flexibility may differ. Economy Extra and
Business Class target the need of business or frequent travelers, SAS‟ largest source of
revenue. Additional comfort for the business segment include Fast Track Security (no
queuing and no waiting through security), the mid-seat free (Business Class only) as well as
travelers are credited with more EuroBonus points. To further target the business segment,
SAS Group have launched SAS Credits, which gives companies an opportunity to collect and
earn points when employees are travelling, besides just crediting the traveler.
For SAS, EuroBonus and Star Alliance are two important sources of differentiation. The
Eurobonous program is integrated into Star Alliance and vice versa. The multi-rewarded
bonus program is a good secondary service, which complements the primary flying services.
When travelers buy airfares, airlines are not solely chosen based on lowest price, departure
time etc. Travelers often consider flying with SAS or its Star Alliance partners as much as
possible since this will give then bonus points, easier baggage handling, gates located closer
to each other etc., i.e. a more comfortable and convenient travel experience. Thus, Star
Alliance and Eurobonus are important services offered to customers, and are a way of
competing and differentiating themselves from LCCs. The benefits from Star Alliance include
economics of scale due to cost savings on connecting flights (Peng, 2009) and access to a
global network of code-share flying, which brings significant value for travelers. For frequent
flyers, the program is even more beneficial since members can get upgraded to higher
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membership levels.
Table 5 shows the main differences
between membership levels of Eurobonus.
We observe that silver and gold members
get enhanced airport services, hotel
bookings and car rental conditions. We
also see that citizens who live in Norway
have easier access to gold status than the
Swedes and Danes. The essence of the
bonus program is, that, by frequent
EuroBonus usage, customers will benefit
financially and conveniently. The SAS
Group has multiple partners, besides Star Alliance partners. Examples include car rental
agencies, e.g. AVIS, SIXT and Hertz, various hotels chains, e.g. Best Western, Radisson and
Scandic Hotels, credit card companies, e.g. Mastercard and Diners Club card, etc.
Additionally there are also unorthodox agreements with Hugo Boss, Canal Digital, The
Economist, Apollo and others. SAS Eurobonus have also created the “SAS Eurobonus Shop”
which sells different merchandize, accessories, travel products and much more. Eurobonus
also have a feature called “Match Me”, which can match the amount of points the members
have with potential destinations. This feature is highly innovative and has been awarded a
“Loyalta Award”. Other notable Eurobonus conditions are that Apollo-travelers also receive
points on charter-travels operated by SAS and the Diners Club agreement got enhanced. Thus
we derive that the Eurobonus program is a highly competitive dynamic service, which adds
value for SAS customers.
Matts Janson recently opened up for a potential divestment of Eurobonus24
. We interpret that
SAS management sees Eurobonus as a secondary support activity, which do not create
significant value for the organization, since they wish to divest this. Other reasons may
include that SAS want to capitalize a valuable service and that they might get more potential
out of their bonus scheme with perhaps more dedicated owners.
Above we presented SAS‟ main offerings and the next section will present customer
preferences, in order to understand if SAS knows their customers.
24 http://www.na24.no/article2653163.ece
Table 5: The Eurobonus membership levels
Basic Silver Gold
Required points per year
for residences of:
Denmark 0 20.000 55.000
Norway 0 20.000 45.000
Sweden 0 20.000 70.000
Or one-way flights per year
for residence of:
All countries 0 20 40
Norway 0 20 35
% more points on flying 0 15 25
Enhanced airport services ++ +++
Enhanced car rental
conditions
+ ++ +++
Enhanced hotel conditions ++ +++
Source: Own creation based by data from SAS website
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2.4.3. The business segment and its preferences
IATA made a survey in 2007 on what business travelers
experience as most important factors when flying short-
haul. These findings are illustrated in table 6. According
to this study, business passengers tend to value price over
comfort on short flights. Moreover, factors such as
mileage programs, convenient (frequent) departures and
arrivals, seat comfort and punctuality tend to be
appreciated as well. However, non-stop flights, value for
money and low fares also score high. These are factors
LCCs specialize in.
We also argue that SAS‟ focus on factors such as their
route network, e-tickets, convenient airports, quality of
service may have limited value business travelers,
according to the study. Airport-location may have limited
meaning, as business passengers often use taxi services to
and from the airport. E-ticketing and route network also score relatively low. This may be
related to the well-developed market for air travel within Europe, as well as check-in today
usually is efficient and expected to be available. We can derive that SAS focus on certain
initiatives, which may have little or no value for their business travellers. Furthermore,
Eurobonus, punctuality and time departure has great value for customers and are also
integrated into the corporate strategy.
We highlight that the analysis is made prior to the crisis. There we interpret that today‟s
customers may be even more price-sensitive than in 2006-2007. This is also supported by
Carlson Wagonlit Travel, a world leading business travel management, who states that the
demand for expensive business class tickets on short haul in Europe is declining. Their
findings are presented in Appendix K, but their main conclusion is that nine out of ten
business travels inside Europe is on Economy Class. This illustrates that corporations are
getting more price sensitive on short-haul flights. Additionally we argue that business class
tickets may be too expensive compared to their value. Essentially, on short haul flights,
customers pay several thousand KRs more for, besides flexibility, a free meal, drinks and
coffee. There is less value for money, which may be why customers are abandoning
expensive business class tickets. Next section will integrate Ansoff‟s famous product matrix
Table 6: What
business passengers
value on short-haul
%
FF/mileage program 44
Most convenient dept/arr.
Times
31
Non-stop flights 30
Punctuality 28
Value for money 25
Seat comfort 21
Offered lowest fare 19
Safety standards 18
Quality of service 17
Connection time 16
Route network 16
Previous good
experience
15
E-ticketing available 15
Convenient airport 15
Best for connections 15
Several other factors all below 15%
mention
Source: Own creation based on data from
Doganis
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in order to get a better view of how SAS does product development.
2.4.4. Ansoff’s Product/Market Grid on SAS
In order to summarize what mentioned above
in a more scientific and theoretical manner then
we will see that SAS has a strong focus on
product development, differentiation and
maintenance their Nordic market shares.
Traditionally, SAS have had a strong focus
on innovation and developing through what
Ansoff label “diversification” or “product
development”. This was a more risky
expansion strategy. They focused on serving
markets with existing or new products. Figure 11 illustrates our interpretation of SAS‟ present
product strategy by applying Ansoff‟s matrix. SAS may focus more on serving existing
markets rather than trying to enter new markets, which places them in the bottom. The recent
decade‟s divestments have shifted focus towards serving existing (core) markets, i.e.
narrowing the market segments as our “Generic Strategies”-analysis derived. They apply both
“market development” and “diversification”, where market development may be more
present. An example of this is the strong focus on having an innovative Eurobonus system,
which creates significant value for. Eurobonus primarily targets existing Scandinavian
markets, which is why we argue that “market development” may dominate the product
strategy.
Besides performing innovative product development themselves, SAS could also choose to
become a second mover and thereby reduce R&D-expenditures and risk. By learning from
first movers, SAS may have advantages since they can avoid making the same mistakes as
first-movers. On the other hand, first-movers may possess advantages, such as early publicity
and pioneer-status, market know-how, internal development and asymmetric competition.
2.4.5. Part summary on corporate and product strategy
We derived that Core SAS aim toward the home market (Scandinavian business segment),
where they are strongest. SAS have changed their organizational structure in order to become
more transparent, effective and centralized. They have also divested and/or outsourced
various business and activities in order to focus on their primary activities. Cost reduction is
Figure 11: Ansoff’s Matrix on SAS
Source: Ansoff (1957)
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the essence of Core SAS and by March 2010, SAS have reduced costs by 7,8 billion SEK.
We argue that Core SAS is in fact a short term cost reduction program, perhaps not a long
term corporate strategy. Moreover, we argued that SAS is applying a mixed strategy of strong
differentiation and cost leadership. Thus, we found that SAS is “stuck in the middle”,
according to Porter‟ matrix. We interpret Core SAS as a reactive instead of a generic
proactive strategy.
SAS product strategy is highly focused on Eurobonus and Star Alliance, as a mean of
differentiation. Other means of differentiation appears through service and simplicity. We
derived that some of these service are initiatives, which the business segment do not value
that much any longer, i.e. the market is changing. SAS‟ product strategy focus on innovative
product development (mainly through Eurobonus, routes and Star Alliance) aimed towards
the home (existing) market. Thus, SAS do not try to penetrate new markets in a search for
high growth rates. Important notions from this section were:
Focus on the home market and cost reductions
Dual strategy focused on low cost and differentiation (stuck-in-the-middle)
Increased centralization of power and decision making
Not a corporate strategy, but a reactive cost savings program
2.5. Findings from Chapter 2
In Chapter 2 we derived that SAS‟ cost structures may be less competitive and the revenue is
declining, which leads to higher prices. Thus, SAS tickets are typically higher than the
industry average, which is why the passenger revenue is declining, since passengers choose
substitutes. We derived that the main costs are fuel, labor and government fees, as well as 60
% of their revenue come from the business segment. In short, SAS suffers from uncompetitive
cost structures and as we shall see later on LCCs‟ costs are even lower.
SAS‟ corporate governance is unique and a strength, but also a weakness. Governmental
owners tend to favor SAS in political and competition disputes. However, they may also
require the maintenance of potential unprofitable routes. The high ownership concentration
means that the major owners can, and do, perform active ownership. The managerial
remuneration is constructed in a way, that the CEO has a short term perspective, which we
find problematic.
Core SAS mainly focuses on cost reduction, the home market, a transparent structure, focus
on business travelers and a strengthened capital structure. We derived that SAS performs a
reactive strategy aimed at a market where they are already incumbents. SAS apply a mixed
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
Page 41
corporate strategy since it both favors differentiation and low cost leadership. Thus, SAS do
not appear to have a clear and concise corporate strategy. Their product strategy focuses
innovative initiates mainly within Eurobonus, the route map and Star Alliance. They typically
only aim at the existing market and do not really create “new” services. They expand their
original ones.
We argue that SAS is in a challenging situation due to that fact that they have:
Cost structure that are relatively higher than competitors
SAS‟ pilots (& cabin attendants) have high earnings, but works the least
Revenue is declining
Most important customer segment is business passengers
Higher ticket prices that pushes customer towards other airlines
Not created a long term corporate strategy with a clear focus
A strategy which in fact is a short term cost reduction program
Business passengers value mileage program, flight schedule, direct flights, punctuality
and value for money
Product development that emerge through the existing service platform
An overall reactive strategy aimed at a market
A hierarchical decision making structure
Governmental owners that have other goals than mere financial KPIs
A strong focus on a mature Scandinavian market, where SAS is already incumbents
Chapter 2 had a strong focus on aspects, such as SAS‟ history, their corporate and product
strategy, and the unique corporate governance. These are all topics that influence the
corporate strategy and market positioning. Besides this we believe it is important to assess the
internal resources and capabilities since these influence the strategy and positioning as well.
Thus, next chapter will focus on the important internal perspective which will be next.
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Chapter 3 - Resources, capabilities and competences
This section extends the traditional neoclassical economic way of analyzing a firm, which is
through examining prices, products and services, i.e. the output. Prahalad & Hamel (1990)
emphasize the importance of analyzing resources and competences since these, according to
various scientists, are the true competitive factors. We will analyze important resources, such
as employees, fleet, Eurobonus, Star Alliance, Route map, political resources and brand value.
There are several more, but we have chosen to focus on these since they influence SAS
significantly. Throughout this chapter it is important for the reader to remember the essence
of TCE, RBV, DC and CC, which we derived in section 1.2.1.
3.1. Resources
3.1.1. Employees
SAS have had several employee reductions in the past and this trend will continue in the
future due to Core SAS. The influence of employees and their labor unions on SAS will be
analyzed on a strategic industry-level later in the Porter‟s 5 Forces. For now we look at
employees as an important resource.
Conflicts of interests between SAS management and labor unions have existed for a long
time. This is especially due to layoffs, which might be due to those human capital resources
may be static and inflexible. Employees have generally been employed in SAS for many
years and achieved lucrative contracts and job descriptions. SAS wants to change this in order
to become more dynamic and competitive. Employees, like the cabin crew, have been a
valuable resource, due to their high qualification, which may enhance the flying experience.
Centuries ago, they were also rare, but today it is easier to train employee-resources. Thus, it
might be easy for competitors to create the same resources cheaper by hiring low cost
personnel. Put clearer, it is easier for competitors to substitute and imitate SAS‟ employee
capabilities since customer preferences are changing. It is not that big a deal to fly today as it
was earlier. Employees may not be dynamic, since they (or their unions), are highly unwilling
to change, adapt and reconfigure due to learning. This means that the resources become static
and inflexible, which hardly can create any form of competitive advantages. It is difficult to
reconfigure or manipulate the employees‟ implicit (and explicit) contracts since this will
promote union-clashes (Watson, 2006). Contracts may be very explicitly designed with little
room for implicit flexibility, which may reduce dynamics and agility, and this may result in
contractual hold-up problems (Hendrikse 2007) as we have seen with SAS.
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Changes in employee contracts and social construction may become problematic for pilots,
since their job designs may not match their initial work orientation. In the 80s it was
privileged to fly and pilots had a certain status in the society. Today, their role and prestige
tend to be reduced, perhaps due to LCCs like Ryanair, where pilots may function more as
“glorified bus drivers”, i.e. some employee groups get the identity changed from being a
worker with prestige, into being an “ordinary” employee. By reducing employee rewards
(salary, prestige, power, etc.), SAS is actually influencing the work orientation, and job
perception, since it is becomes more challenging to maximize monetary gains, career
potentials, social rewards, status etc. Thus, the initial argument for strategic exchanges
between employees and SAS is changing and conflicts appear due to contractual explicit and
implicit manipulation. These changes in employees‟ contractual conditions may lead to
alienation since workers may feel exploited. Moreover, this may lead to micropolitical
actions, like strikes, or other forms of mischief, as an emotional and economic response due to
exploitation.
Suppliers of human capital, like employees, have high asset specificity. This is due to that
employees are only capable, or allowed by their unions, to do what is stated explicitly in their
contracts (Hendrikse, 2007). The high degree of asset specificity also emerged from
Talyorism, which we assume to be significantly present within the airline business. Division
of labor is strong, since pilots only fly aircrafts, stewardesses only do service and security,
luggage units only handles luggage, etc. The strong degree of specialization means that
workers can focus on specific processes and create unique capabilities. However, it may also
enforce asset specificity since they then cannot be easily redeployed or transformed which
reduce strategic flexibility and operational agility. Transactions with the staff are frequent
since they occur daily. There is high uncertainty for SAS‟ transactions with employees since
they never know if employees will become dissatisfied. They have a big portion of senior
employees, which they have obligations towards. Contracts cannot be renegotiated easily, and
this may reduce the airline‟s flexibility. Thus, strong labor unions mean, that SAS‟ human
assets have high specificity, which reduces strategic flexibility and operational efficiency.
Besides the static capabilities of the workers, we also derived that they may be financially
uncompetitive due to their high salary costs and relatively low working hours. This
inefficiency was derived in section 2.2.
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3.1.2. Fleet
The SAS-fleet, their physical resources (Barney & Hansen, 1994), is relatively old compared
to notable competitors, as illustrated in Table 7. Old aircrafts are less fuel-efficient and
produce more CO2 than modern ones, which implies higher fuel –and environmental costs.
Table 7: SAS' fleet compared to notable competitors
SAS
Group
Lufthansa Finnair Norwegian Cimber British
Airways
Ryanair Easyjet
Fleet 240 722 66 44 26 245 181 181
Owned 104 571 38 5 n/a 105 135 101
% of total 43,3 79,1 57,6 11,4 n/a 42,9 74,6 55,8
Leased 127 151 28 39 n/a 80 46 80
% of total 52,9 20,9 42,4 88,6 n/a 32,7 25,4 44,2
Total 96,3 100 100 100 n/a 75,5 100 100
Future ordersnext
5 years
5 146 32 54 n/a n/a 119 35
Fleetexpansaion
(%)
2,1 20,2 48,5 122,7 n/a 65,7 19,3
Potential totalt
fleet 2015
245 868 98 98 n/a 300 216
Average age 12 11,2 6,1 10,5 12,8 11,6 3,1 3,4
Aircraft types
concentration
Multiple Multiple Multiple Medium n/a Multiple high high
Sources: Annual reports from SAS, Lufthansa, Finnair, Norwegian, Cimber, British Airways, Ryanair &
Easyjet. Airfleets.net
We observe that SAS own 43 % of their fleet and lease the rest. Some airlines purchase major
parts of their aircrafts and thereby are able to get beneficial discounts, i.e. they exploit
economies of scale and purchasing power. Here SAS could learn something, instead of
applying a mixed purchasing and leasing-strategy. We also observe that SAS has multiple
different types of aircrafts compared to Easyet, which has few and Ryanair which has one.
When airlines only operate few, or one, different aircrafts, cabin crew only need to gain
licenses and knowledge of operating and servicing one type of aircraft compared to several
ones. Thus, few aircraft types will reduce costs of employee training, complexity, as well as
enhance core competencies regarding flying a specific aircraft. We can also derive that SAS
have the oldest fleet, on average, together with Cimber.
With respect to the RBV, SAS‟ fleet resources are neither valuable, rare, non-imitable, or
non-substitutable. This is because competitors have newer aircrafts than SAS‟ old and less
efficient ones. Rare (expensive) aircrafts with new innovative technology involve significant
investments, resources SAS do not possess. SAS‟ old fleet may easily be imitated by
competitors. However, who would do this since it seems outdated? Thus, substituting
becomes easy for competitors in order to achieve competitive advantages. Regarding DC, we
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derive that the old fleet is static and is not really efficient according to the benchmark of
relevant competitors. Old, outdated technology and capabilities of the fleet may make it
difficult for SAS to redeploy, -integrate or –configure the aircraft assets in another way. An
example of an aircraft with dynamic features could be the Boeing 747, where passenger seats
can be removed so the aircraft can be converted into a cargo flight. This is an example of
dynamic capabilities.
Also the tied up capital makes it more difficult to redeploy aircrafts since a large portion are
owned instead of leased. Additionally, their mixed purchasing/leasing strategy may be
expensive, inflexible and may eliminate potential benefits from economies of scale. Finally,
aircrafts cannot efficiently be redeployed and used in another way than flying, which means
that these dedicated assets have high asset specificity.
SAS wants to increase their competitiveness and be more environmentally responsible.
Therefore, modernizing the fleet is required. SAS-management states that the company is
”waiting” to acquire new airplanes until they become even more fuel-efficient”25
. According
to economic rationality, this strategy seems good. However, this statement completely
neglects SAS‟ financial status. Moreover, this may be an expression of managerial pseudo
jargon where managers cover things up by expressions which stakeholders may not
understand (Watson, 2006). Thus, the real argument for postponing fleet-modernization is that
SAS currently do not have the required capital. Thus, according to our analysis, it may be
difficult for SAS to create competitive advantages from their fleet.
3.1.3 EuroBonus
Eurobonus is a valuable strategic asset since it captures traveler preferences. It is rare in a way
that other competitors (e.g. Norwegian) do not have the same variety, depth or flexibility
within their programs. It is difficult to imitate for these competitors, since some agreements
have been developed over the last decades. In other words, airlines such as Norwegian might
not have been able to negotiate the same lucrative agreements like SAS. SAS have had a
strong bargaining position and historical relationships with their partners. Eurobonus also
offers the important point system when flying with Star Alliance partners, which is almost
difficult to imitate for LCCs. Eurobonus is hard to substitute since SAS have an in-depth
version of their frequent flyer program, which may be difficult or impossible to substitute by
i.e. offering similar services or lower prices on tickets. We derive that Eurobonus is a VRIN-
resource, which offer a dynamic nature, since SAS keep upgrading, reconfiguring and
25 http://www.business.dk/transport/kriseramt-sas-vil-koebe-nye-fly
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adapting the program in order to capture customer preferences.
The bonus program has medium asset specificity, since SAS have the option to change offers,
conditions, features and services. However, it is important to realize that the bonus program
might be difficult to redeploy since it is very specific and customized towards the
Scandinavian travelers‟ needs. It is popular and lucrative for frequent flyers, which makes it
difficult to implement changes. Even though it is possible to transform the program, it will
affect customers‟ preferences, which is why there is a moderate degree of specificity present.
3.1.4 Star Alliance
Star Alliance was created 14th
of May 1997 by five airlines: Air Canada, Lufthansa, SAS,
Thai Airways International and United Airlines. The overall idea was to form a global
network of codeshare flying and thereby creating better, faster and more flexible opportunities
for the customers. By combining complementary resources and services, the airlines could
“capture” customers, by offering shared favorable services, and “force” them to fly within the
alliance network. In other words, airlines secure and exchange customers. Additionally, a
strong focus was on potential synergies between partners, such as shared resources,
knowhow, technology and environmental responsibilities.
Appendix L shows relevant Star Alliance‟s members‟ revenues, passengers, employees, fleet
and the year they joined. Late 2009, SAS accounted for approximately 4,5 % of the alliance‟s
revenue, 3,75 % of passengers, 3,27 % of workers and 5,6 % of the alliance‟s fleet. SAS may
have seniority advantages since they are one of the initial founders. We also see, for instance,
that the Lufthansa Group contributes more resources. Star Alliance offer excellent travel
possibilities and flexibility around the world through the network consisting of 26 member
airlines, approx. 4.000 aircrafts, almost 20.000 daily departures, more than 1.000 airports and
represented in more than 175 different countries around the world, just to make a short
presentation26
.
Since it is difficult, inefficient or expensive for SAS to operate long haul services themselves
then they exploit the American and Asian airlines‟ comparative advantages. Instead of
developing the needed capabilities themselves (Barney‟s second way of achieving resources),
they cooperate with partners/competitors (Barney‟s first notion) in order to be able to offer
efficient long distance services to SAS-travelers. Regarding Barney‟s 3rd
notion, gathering
VRIN-resources through M&As, Lufthansa is a good example of this due to acquisitions of
26 http://www.staralliance.com/en/about/airlines/
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Swiss, Austrian, etc. Put in a scientific manner, TCE associated with long-distance flying
services are medium. Some scholars argue that when firms‟ transaction costs regarding
economic exchanges are neither high enough to justify for internalizing, nor low enough to
purchase on the market, they should collaborate (Gereffi, Humphrey & Sturgeon, 2005;
Gulati; 1995; Williamson, 1985).
This network is a major advantage for SAS, especially compared to LCCs without alliance-
access, which brings SAS and their customers increased value and this is why we find it
important. The Star Alliance-asset is rare in the sense that external airlines (e.g. LCCs) do not
have access to the same effective network. Finnair‟s and British Airways‟ membership of
Oneworld and Air France-KLM‟s membership of Skyteam are similar initiatives, which are
competitors to the Star Alliance. For Scandinavian residents, Star Alliance may be the most
efficient and relevant program due to SAS‟ position as a market leader and offerings.
Additionally, Star Alliance is more advanced than competitors‟ network. This resource is
difficult to imitate and substitute since it offers additional lucrative services for the
Scandinavian residents. The resources are difficult to imitate since Star Alliance‟s dynamic
nature integrates new international airlines and generally enhances customer travel
experience. Star Alliance offer close cooperation for more than 13 years and this creates
competitive tangible and intangible assets. Thus we see the Star Alliance asset as a VRIN-
resource which also posses the crucial dynamic capabilities.
The Star Alliance-asset has high asset specificity, since SAS may have difficulties changing
or cancelling their membership. SAS has been in the alliance for more than a decade and is an
integrated unit inside the alliance. Switching alliance or going solo, is costly since it requires
creating a new frequent flyer program, shutting down and opening other routes, which are
more desirable according the new alliance, etc. As a founder of Star Alliance, SAS also
possess seniority, which will disappear if they entered another alliance. Thus, we argue that
Star Alliance is a vital and integrated part of SAS‟ resources and strategy, which cannot easily
be transformed or changed, i.e. asset specificity is high. As mentioned already, the network
enhances the individual airline‟s route map which is why this will be next resource.
3.1.5 Hubs and route map
SAS follow a hub-to-hub strategy, which implies subsidized transportation on connecting
flights. Moreover, SAS operates several “unprofitable routes”, perhaps due to political
reasons, which are being financed by the popular ones. The airline has three “main” hubs,
namely Copenhagen, Stockholm and Oslo. Challenges when operating services from more
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than one main hub includes extra attention towards ground handling, staff, coordination etc.
This result in increased crew, communication- and maintenance-expenses compared to the use
of one major hub, i.e. complexity and reduced economies of scale. Moreover, baggage
handling becomes more complicated when operating from more than one main hub, due to
connections. Basically, we argue that having one main hub may create significant economies
of scales, which SAS miss out on.
Benefits with operating a hub-network with more than one main hub may be that if one
airport experience a snowstorm or ash-skies, flights may be directed to other hubs in the
network, hence, a sense of diversification. Moreover, the geographical conditions in the
Scandinavian countries involve that more people have access SAS‟ flight networks by the use
of more than one main hub, i.e. infrastructure.
SAS‟ hub-network leaves the airline in a vulnerable situation from competitors. As an
example, LCCs often specialize in point-to-point services with low fares to/from cheaper
secondary airports. This threat and the low-cost model will be addressed later. SAS‟ Northern
European route map is shown in Figure
12 and European and World route maps
can be found in Appendix M. Our study
of the route maps illustrate that Northern
European air infrastructure is well
covered by either SAS, Widerøe or Blue1.
We notice the many destinations in
Norway, which may cause SAS problems
due to less demand on these routes.
Additionally, we also see that the Sweden
is well-covered and Denmark is only
covered marginally. Moreover, we
highlight that the SAS Group also operates several routes to/from and inside Finland.
Appendix M illustrate that Copenhagen Airport offers the largest portion of flights to
destinations within Europe (compared to Stockholm and Oslo). According to SAS Investor
Relations, SAS operates 86 scheduled destinations from three hubs – Copenhagen, Oslo and
Stockholm. In 2008, 21.5 Million passengers travelled with SAS through Copenhagen, 19.3
Million through Oslo, and 18.1 Million passengers travelled through the Stockholm-hub.
Figure 12: SAS Northern European route map
Source: SAS website
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Including Widerøe and Blue1, the group offers 134 destinations27
. Additionally, including
Star Alliance, more than 1.000 destinations are operated. To put in to context, Norwegian
serves 87 destinations, Finnair serves approximately 70 themselves and 700 through their
Oneworld-membership28
. In short, SAS and Star Alliance‟s route map is highly advanced and
valuable. It is rare since others do not have the same resources and thereby do not fly as
frequent as SAS. It is difficult and costly to imitate since imitation in practice will result in the
creation of new routes, which cost money, knowledge and time. It is challenging to substitute
and we assess the network as having dynamic capabilities, since the route map is
reconfiguring, adapting and upgrading in order to increase marginal value for the travelers.
Thus we derive that SAS has competitive resources in their route map, especially through Star
Alliance.
The map have a certain degree of asset specificity since opening new routes and terminating
others are costly, time consuming, require knowledge, experience and relations with new
airports. Thus, it is difficult to change routes. Additionally it is difficult to change the Star
Alliance route map since SAS might not have much to say about which routes Lufthansa
should focus on. The route map is an important resource for SAS, but perhaps not as
important as the political connections, which are crucial for SAS and will be analyzed next.
3.1.6 Political resources
Political resources are firm assets, human resources, capabilities or other resources that allow
the firm to use the political process to improve its efficiency and profitability (Frynas, Mellahi
& Pigman, 2006). It is no secret that the Scandinavian governments have been forgiving and
flexible towards SAS‟ performance. SAS get financial support from the governments, which
imply unfair competition within the Scandinavian airline industry. Thus we see SAS‟ political
resources as valuable since they provide SAS with additional (financial) resources. These
political resources are also rare since other Scandinavian airlines do not have access to the
same resources. Access to key government officials may result in a firm‟s advantageous
treatment by political decision-makers. For instance, Rigsrevisionen in Denmark criticized
SAS for performing 11,114 flights, from 2006 – 2009, without doing the required safety
procedures prior to departure29
. The report was conducted by Rigsrevisionen, which also
criticized the Ministry of Transportation and Statens Luftfartsvesen for not living up to their
standards and reprimanding SAS. This could be an example of SAS‟ lucrative political
27 SAS Annual report 2009, p. 3 28 http://www.finnairgroup.com/group/group_8.html 29 http://borsen.dk/nyheder/transport/artikel/1/188835/sas_foretog_over_11000_ureglementerede_flyvninger.html
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resources, which favor SAS. By neglecting these procedures, SAS save money, time, etc. and
therefore it is an advantage. Thus, the relationship with authorities (their owners) seems to be
favorable. Political resources are in scarce supply and difficult to obtain, i.e. very rare. They
cannot be imitated or substituted, so we derive the political resources as being a VRIN-
resource. This interpretation is supported by Frynas, Mellahi & Pigman (2006) who argues
that political resources or capital may be one way of gaining competitive advantages and
Shaffer (1995), who argued that governments biased influence on firms may provide
improved corporate performance.
Political resources are not dynamic and we believe that the political forgiveness and patience
might vanish in the future, especially in a democratic society where citizens are getting tired
of financing SAS through their already high taxes. This may become a problem for SAS since
they will have to compete on equal conditions as other airlines. SAS‟ political resources
cannot be redeployed. Thus, the asset specificity is high since they cannot, or do not want to,
survive without political resources.
SAS‟ political resources may diminish in the future, due to the public‟s and competitors‟
dissatisfaction towards SAS, since they compete on unequal terms. Thus, SAS seems to be
surviving on taxpayers‟ money, rather than on their actual operations. If the ownership
structure were about to change in the future, and private or institutional interests in the
company increases, SAS will have to become more profit-oriented and competitive since the
political assets may vanish. Thus they would have to finance themselves and compete on
equal market terms, which might provide challenges.
3.1.7 Brand Value as a resource
SAS‟ brand value has historically been seen as a competitive advantage, which competitors
cannot easily imitate. However, a strong brand can easily be harmed. The brand value and
reputation is challenged after years of negative media activity, employee layoffs, safety
problems and aircraft crashes, governmental political and economic support, general
inefficiency, low performance, creation of illegal cartels, industry espionage, fines, etc. On
the other hand, when passengers travel, especially on long distances, they may “feel like
home” as soon as they see the SAS-logo at the gate. For these passengers, SAS represent
some sort of Scandinavian pride and symbol. Additionally SAS offer hassle-free convenient
flying through their “service & simplicity” concept. Comfort, service, simplicity and high
quality are all conditions, which create warm associations towards SAS.
Put into a RBV-context, the brand value may be less valuable, rare, substitutable than before,
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but it is still non-imitable. The brand was once valuable, but today‟s poor media attention
against SAS, poor financial and operational performance, unfair competitive actions, etc. has
changed this. The brand is not that rare, since multiple other airlines all invests in brand
management as well. It is difficult to imitate SAS‟ brand since it is a national symbol. Thus,
we do not see, for instance, Norwegian having the same brand value as SAS. Nevertheless, do
customers really want to pay extra money to fly with SAS, compared to Norwegian, due to
the brand value? Declining sales and brand value say “no”. Thus we see declining VRIN-
potential and the brand also seems more or less static. However, this intangible asset could be
utilized better and applied as a differentiator.
SAS‟ brand value is not that strong, which means that customers are not that loyal towards
SAS. The intimate relationship with their core customers is gone. This means that the asset
specificity is low(er) since changes in the brand profile can only improve the customer
loyalty. The brand is not necessarily specific and the pride that Scandinavians feel toward
SAS may be decreasing. However, business passengers might have good associations with the
brand since they enhanced frequency, flexibility and comfort. Leisure, on the other hand,
tends to get higher fares compared to LCCs, which individuals have to finance themselves
and thereby get poor associations.
We believe that the brand value is crucial for a firm in SAS‟ position, since it is a strong mean
for differentiation from LCCs. The small Scandinavian region, together with increased
competition, makes the brand crucial. Creating intimacy and strong (tacit) relations with
customers, through branding, is vital in order to maintain, or even increase, the current
declining Nordic market shares.
3.2 Core Competences
In the previous section we analyzed SAS‟ resources, their capabilities and derived their
degree of asset specificity. Notions from that section will be applied in this, where we will to
a closer look at SAS‟ potential core competences. As mentioned earlier, Prahalad& Hamel
(1990) provide us with 3 tests to evaluate if it is a core competence or not. Core competences
should give access to new/more markets, contribute significant to its customers and be
difficult to imitate. These notions are important to have in mind throughout this section. There
are several other competences, but we have chosen to focus on punctuality, Eurobonus,
network flying, IT, service, comfort and flying frequency. These categories of core
competences are crucial when serving business travelers who are the main source of income
for SAS. This is why we find these competences interesting.
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3.2.1. Punctuality
In 2009, statistics showed that SAS were the 3rd
most punctual airline in the world, as well as
Europe‟s most punctual airline30
. Punctuality is
considered one of SAS‟ significant core
competences. In Table 8, we observe that Intra-
Scandinavian services operate with high
punctuality. We also see that flights to London
Heathrow operate with significant “worse”
punctuality compared to the Nordic market. This
may be related to airport size, i.e. Heathrow is
considered a “full” hub, thus, airlines need more
time to process through the hub31
.
Apart from efficient Nordic hubs, a lack of safety
procedures by SAS prior to flights, as mentioned
in section 3.1.6., may also positively affect
punctuality. In short, neglecting important safety procedures will save time and money for
SAS. A future observation will be if SAS‟ score on punctuality can be maintained when
stakeholders are aware of SAS neglecting safety procedures.
A high degree of punctuality and regulatory on SAS departures gives SAS‟ customers a
reliable added value. This core competence gives travelers lower uncertainty, higher
predictability and thereby SAS competitive advantages. Punctuality brings significant value to
travelers, it is difficult to imitate since value chain management (logistics) optimization is
complex and perhaps it also opens up new markets or attracts more corporations since
passengers can rely on SAS‟ time durations.
3.2.2. Frequency
SAS‟ three main hubs are located relatively close to each other in flying distance, and can all
be reached with a flight-time of 60-70 minutes from each other. Daily frequencies between
main Scandinavian hubs are illustrated in Appendix N and have approximately 20 departures
(to and from) every day. It is to be observed that SAS to a large extent offer the highest daily
frequency of departures on destinations where SAS perform relatively well. Exceptions from
30 http://www.sas.dk/da/Alt_om_rejsen/Traffikmeddelelser/Punktlighed/?WT.ac=Forside_Punktlighed
http://www.rejseliv.dk/sas-til-tiden-0 31http://www .telegraph .co.uk/tra vel/travel news/63973 46/Heathro w-voted-wo rst-airpor t-in-the-w orld.html).
Table 8: SAS' Punctuality on notable
business routes
Departure Arrival # Flights
operated
On
time
(%)
Stockholm-
Arlanda
Copenhagen 587 96%
Copenhagen Stockholm-
Arlanda
577 95%
Oslo-
Gardermoen
Stockholm-
Arlanda
333 96%
Stockholm-
Arlanda
Oslo-
Gardermoen
333 96%
Copenhagen London-
Heathrow
331 90%
London-
Heathrow
Copenhagen 329 93%
Oslo-
Gardermoen
Copenhagen 321 98%
Copenhagen Oslo-
Gardermoen
321 96%
Stockholm-
Arlanda
London-
Heathrow
304 87%
London-
Heathrow
Stockholm-
Arlanda
303 89%
Sources: flightstats.com & boarding.dk
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Appendix N include destinations like Amsterdam, Paris and Helsinki. These locations are the
main-hub for network carriers such as Air France-KLM and Finnair, and their customers
require easily accessible transport to and from these hubs. However, our research, indicate
that larger airlines, such as airlines within the Lufthansa Group, outperform SAS on
frequencies from Scandinavia to various points Germany, Switzerland and Austria. An
explanation might be the strategy the respective airlines follow, i.e. significant transportation
to and from their main hubs. Thus we derive that SAS‟ core competence of having high
frequency, mainly occur on routes with already tough competition and smaller margins, i.e.
SAS choose to focus on competitive routes, e.g. to London, where they have experience.
We find frequency an important core competence since it brings value to travelers. Imitation
is difficult, since starting up new routes is costly and risky due to SAS status as market
leaders on multiple routes. Finally SAS may seem attractive for new customers around
Europe who often travels to Scandinavia. Thus we find the flight schedule a core competence
since it gives SAS competitive advantages on certain routes.
Star Alliance supports SAS focus on frequency aimed for Nordic passengers since attention
can be held, to a certain extent, on transportation to and from the hubs. This means that SAS
may choose to “reduce” engagement on, .i.e. German routes. This is illustrated through
Lufthansa-departures operated by SAS and vice versa. Thus, Star Alliance and frequency is
inter-connected, and is why we choose to analyze Star Alliance and Eurobonus next.
3.2.3. Eurobonus and Star Alliance
Eurobonus can also be interpreted as a core competence. The program brings enhanced
flexibility, efficient partner-benefits when renting cars, booking hotels etc. Put differently,
Eurobonus-members get significant value compared to non-members, as illustrated by
numerous awards for the program. EuroBonus is an innovative and dynamic program, which
is difficult to imitate by competitors.
Star Alliance is also interpreted as a core competence. The global network brings significant
value to all SAS customers since they get increased flexibility, transfer of bonus points, more
available destinations, enhanced flight schedules and duration, alliance airport lounges and
also reliable smaller regional/domestic airline partners since airlines must have a certain
standard and quality in order to be a member of the alliance. In short, Star Alliance brings
significant value to customers. It definitely provides access to new markets since, e.g. code-
share flying gives SAS access to American travelers who travels to Scandinavia for instance.
The network, route map etc. is also difficult to imitate since it has taken years of development
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to reach status quo. Optimizing route maps through Star Alliance give SAS core competences,
which LCCs do not have. Thus we see Star Alliance‟s opportunities as a competitive
advantage for SAS. Star Alliance simplifies travel, and through transparent pricing, SAS‟
customers benefits. We will now analyze simplicity and transparent prices next, since these
may enhance competitiveness.
3.2.4. Transparent Prices and Simplicity
At first glance, one may not think that competitive advantages involve transparent prices.
Some LCCs, such as Ryanair and Norwegian, are “creative and innovative” when it comes to
adding/creating costs for travelers. They are often accused of having low price transparency
since they “force” travelers to spend money on web check-in, baggage, (often unnecessary)
insurances, and certain fees like administrational, service or sales costs. However, this may be
interpreted as innovation since LCCs are good creating new revenue streams. Transparent
prices mean that customers can rely on the initial price they see when they choose departures,
which make customers more satisfied. The pricing-strategy can of course be imitated by the
LCCs mentioned above, but this would mean that their initial price could increase and thereby
not seem as “competitive” as before. Additionally, SAS also flies to main airports and not
smaller ones far away from city centers in order to reduce airport taxes. Sometimes travelers
have to add extra traveling time and costs by flying with LCCs. With SAS it is simple -
travelers pay for what they see and get what they pay for, i.e. no unpleasant fees will be
added. Thus we see price transparency as a core competence since it may enhance customer
experience and satisfaction. Additionally, this may lead to new markets and customers, as
corporations become more and more aware transparent pricing.
3.2.5. IT
SAS know the possibilities offered by efficient use of IT, i.e. the opportunities the internet
offers, mobile services and others. Their SMS check-in service is one function which might
enhance the travel convenience for travelers32
. Efficient use of IT services enhances travel
convenience. IT may not give access to new markets, and can probably be imitated by
competitors, but by being innovative, or perhaps even a pioneer, will always attract
customers. Additionally, it is free of charge to check in online or by SMS compared to other
airlines. As a new IT-initiative, SAS have also installed Skype in their lounges so that
32 http://www.sas.dk/no/Travel-Info/Check-In/SMS/
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travelers can call their business partners or loved ones33
. Thus we derive that SAS‟ IT
capabilities are a core competence but perhaps not as strong as the others we have mentioned.
For SAS‟ internal point of view, effective use of IT can reduce employment costs, as IT-
systems are standardized and customers can check-in themselves.
3.3. Findings from Chapter 3
Table 9 is a summary of our analysis on VRIN, DC and asset specificity. We derive that
employees are a valuable but not rare human asset. They can be substituted, imitated and
might not possess dynamic capabilities, since reconfiguring is difficult due to potential
clashed with employees and their unions. Thus, they possess high asset specificity. The Fleet
is old compared to competitors‟ and this does not grant status as VRIN-resources or having
dynamic capabilities. They have high asset specificity since aircrafts cannot be redeployed in
other transactions or processes. Eurobonus, Star Alliance and the route map are true strategic
assets since they possess several VRIN- and DC-conditions. They provide dynamic and
innovative solutions and processes for SAS and many of its stakeholders, i.e. they add
significant value for the travelers and partners. Furthermore, the asset specificity is high since
it is difficult to transform the assets without impacting internal and external stakeholders. The
political resources are also VRIN-resources since they give SAS advantages, which other
airlines do not have. The brand value is significant for SAS compared to LCCs. The historical
presence as a national flag carrier and Scandinavian symbol is beneficial. However, industry
changes, negative media attention, strikes, crashes, etc., are activities which might harm the
33 http://www.sas.dk/da/Alt_om_rejsen/For-rejsen/Lounges/Lounge-services/Arbejdsfaciliteter/?vst=true
Table 9: Summary
of findings on
Resource/Features
Valuable
Rare
Non-
imitable
Non-
substitutable
Dynamic
Capabilities
Asset
specificity
Employees YES (-) NO NO NO HIGH
Brand value No NO Yes NO YES HIGH
Fleet NO NO NO NO NO HIGH
Eurobonus
YES YES YES YES YES Medium
Star Alliance YES YES YES YES YES HIGH
Route Map YES YES YES YES YES HIGH
Political Resources
Source:
Own creation
YES YES YES YES NO HIGH
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brand value. Thus, the brand value is struggling.
The core competences of SAS are punctuality, frequency, service and simplicity, Eurobonus,
Star Alliance and IT. These are effective competences that create value for (premium)
passengers. However, we must highlight that SAS seems resource-starved and that their
competitiveness is declining due to less significant resources, capabilities and competences.
In order to summon up, our main findings from this chapter are:
Employees and the fleet do not offer competitive dynamic VRIN conditions
Eurobonus, Star Alliance and route map obtain VRIN-features
Political and brand resources have, historically, offered VRIN, but may be declining
Core competences include Eurobonus, Star Alliance, punctuality, service, frequency
Competitive advantages is mainly created through competences like Star Alliance
collaboration, Eurobonus, punctuality and service
Declining competitiveness
Until now, we have analyzed SAS‟ and their internal potential. This has been done since it
influences their market positioning and strategy. Besides the internal view, SAS‟ market
position is also influence by other external stakeholders, such as industry competitors,
political and economic developments, customers, suppliers, etc. Thus, next chapter will
analyze the important macro and meso level.
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Chapter 4 – PEST and Industry analysis
It is important to assess the external factors influencing the aviation industry and is enabled
through a PEST-analysis, which assesses certain political, economic, social and technological
conditions having an impact on the industry. Porter‟s 5 Forces will give us an idea of the
forces, which create pressures on the airline industry, i.e. we will present the competition
intensity within the industry. This chapter will focus on macroeconomic and meso-level.
4.1. Macroeconomic Level
SAS is influenced by several macroeconomic factors,
which are important to analyze when assessing the
potential of SAS today and in the future. PEST-
mapping is especially crucial when it comes to firms
that operate in areas in which the public shows great
interests in (Troelsen, 2003), e.g. the aviation. Thus, we
will start out by creating a Scandinavian PEST analysis,
shown in Figure 13, in order to get a better understanding of the macro context. Additionally,
we will create an industry forecasting in order to present industry economics.
4.1.1. Political Conditions
Denmark, Sweden and Norway share roughly similar political and economic beliefs, history,
culture, religion, traditions and languages. One main difference is Denmark‟s EU membership
dating from 1973 and Sweden from 1995 whereas Norway has yet to become a member. The
EU membership enhances the opportunities of European trade, which are highly beneficial
and of utter importance to the Danish and Swedish economies since these are highly
dependent on their exports. However, since Norway is a member of the Schengen-community
and the EEA, they share roughly similar opportunities regarding European trade. The close
geographical proximity and limited Scandinavian markets increase the importance of having
efficient exportation towards the rest of EU and the globalized world. Thus it is important for
the governments to secure sufficient aviation services. In the SAS-case, the relationships with
the Scandinavian governments are unique in the way that governments act as investors.
Figure 14 illustrate effectiveness of the Scandinavian governments from 1996 – 2008,
assessed by the World Bank. The percentile ranking shows that the Scandinavian countries
governments‟ effectiveness is higher than 95 %, which implies that authorities are efficient,
reliable and predictable.
Figure 13: PEST
Source: Own creation
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In essence, since the start of the new millennium, the governments have become more
effective, which makes it easier for corporations to operate.
Figure 15 shows the development of the Scandinavian political stability, which looks very
promising, except in Denmark. The Danish stability is more volatile, perhaps due to political,
religious and cultural clashes as well as wars in Iraq and Afghanistan.
Denmark also had problems due to the infamous Muhammad-drawings, which created severe
political issues for its citizens and corporations. Norway and Sweden have experienced
similarities, but not as severe as in Denmark. We highlight that wars, terror, epidemics, etc.
will have an influence on the political and economic development and especially on the
aviation industry. Appendix O shows a political instability world map, created by the
Economist Intelligence Unit, where we observe that Scandinavia has low political instability
(strong stability) in an international context.
The Scandinavian governments‟ policies promote fair and free trade in general, but recent
year‟s performance of SAS questions whether fair competition actually exists in the industry.
SAS have multiple times gotten financial support from the governments which could be seen
as a distortion of the competition. Other airlines like Norwegian, Cimber, Malmö Aviation
9596979899
100101
1996 1998 2000 2002 2003 2004 2005 2006 2007 2008
%Figure 14: Government Effectiveness in Scandinavia 1996 - 2008
Denmark
Norway
Sweden
Source: Own creation based on data from the Worldbank , Governance Matters 2009
75
80
85
90
95
100
1996 1998 2000 2002 2003 2004 2005 2006 2007 2008
%
Figure 15: Political Stability in Scandinavia from 1996 - 2008
Denmark
Norway
Sweden
Source: Own creation based on data from the Worldbank , Governance Matters 2009
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etc. do not have access to this additional cash flow (or subsidize), which therefore gives SAS
financial (and political) advantages. The governmental financial support is mainly financed
through corporations‟ and households‟ taxes, which is why taxation will be briefly presented.
Governments‟ taxation policies, powerful political economic tools, influence consumers‟ and
corporations‟ disposable income and thereby travel possibilities. As a result, an increase in
taxes may reduce the disposable income and thereby consumption budget (Frank, 2003;
Salvatore, 2003). Appendix P presents the tax burdens for Scandinavian citizens and EU-15
as well as corporate tax rates. In essence, Scandinavian household taxes are significantly
higher than the EU-15 average. On the other hand, the gross income (before taxes) is also
higher in Scandinavia. Personal income taxes are important for companies since an increase in
these, all things being equal, would reduce consumption resources for citizens. Corporate
taxation is also important for SAS in multiple ways. Taxation affects profits, but since SAS
do not have these we do not analyze this. Economic rationality implies that lower corporate
tax rates in Scandinavia should attract MNCs. These MNCs would then place offices in
Scandinavia and need SAS services for stakeholders, such as their workers, customers,
suppliers, etc. The average corporate tax in EU-27 is 23,3 % in 2010. The Danish corporate
tax rate is 25 %, the Norwegian is 28 % and Sweden is 26,3 %. Thus, we derive that our
corporate taxes are higher than the rest of the EU, which could reduce international
competiveness, especially when trying to attract FDI. In short, an increase in corporate and
private taxes may reduce the travel-budgets for households and corporations, the disposable
income, hence, an increase in taxes will, all things equal, have a negative effect on SAS.
A taxation on bonus-programs is currently being
developed in Denmark34
. We argue that this tax
proposal would lower the attractiveness of
Eurobonus and further increase the competitive
situation for LCCs35
. Our final important
taxation tool is green taxes. Scandinavian
politicians may wish to improve the
environmental situation, as well as our national
brands as responsible countries, by introducing
green taxation.
34 http://www.flyertalk.com/forum/archive/t-84162.html 35 http://www.sas.dk/da/Misc_Container_Page/Help_and_Contact/Policies/EuroBonus-conditions/?vst=true
Figure 16: Comparison of CO2 emissions
Source: Prockl 2009
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Having a greener political profile is important and this trend may strengthen in the future.
Figure 16 show the different levels of CO2-emissions associated with trucking, shipping and
flying. Emission levels for aircrafts are higher than trucking and shipping, which implies that
politicians may want to reduce the damages from the aviation industry. A green tax would
influence SAS negatively, since this would lead to higher environmental costs, fuel costs, etc.
Moreover, as higher “production costs” often leads to higher product prices, the real losers
might be the customers, since these would finance the taxation indirectly by increased prices.
From the political perspective, we will now move on to analyzing the economic situation in
Scandinavia, which influences SAS significantly. The economic crisis has had a severe
impact on the airline industry, which is why we find it important to assess next.
4.1.2 Economic Conditions
The economic growth from 2004-2014 of Denmark, Norway, Sweden, EU and the World is
presented in Table 10. We see the annual percentile development in GDP measured in
constant prices in order to reduce the inflation effect, since this differs among countries.
Table 10: GDP annual growth %, constant prices
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Denmark 2,3 2,4 3,3 1,6 -1,2 -2,4 0,9 1,5 2,6 2,6 2,3
Norway 3,9 2,7 2,3 3,1 2,1 -1,9 1,3 1,8 1,9 2,0 2,1
Sweden 4,1 3,3 4,2 2,6 -0,2 -4,8 1,2 2,5 3,0 3,5 3,9
EU 2,7 2,2 3,4 3,1 1,0 -4,2 0,5 1,8 2,3 2,4 2,5
World
Source: IMF
4,9 4,5 5,1 5,2 3,0 -1,1 3,1 4,2 4,4 4,6 4,5
The respective economies go through positive cycles until approx. 2007-2008. In the end of
year 2007 the financial/economic crisis begins and its effect is still seen today in the table.
The Danish growth from 2007-2011 is limited and if we add the inflation rate, we might get
an economic growth, which is less than the inflation, i.e. a recession. The Norwegian
economy shares similar trends as the Danish except the recession have been weaker. Sweden
has also experienced recession in 2008-2009, but according IMF, they will bounce back and
achieve higher growth rates from 2011-2014, compared to Denmark and Norway. All things
equal, according to the IMF, Denmark and Norway will have growth challenges towards
2014. The Swedish economy, however, seems to be more dynamic and volatile and may have
future higher growth rates.
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According to a study by Boeing, the GDP-development influences the demand for air travel.
Figure 17 show that when GDP increases 1 %, air travel demand increases by 2,5 %, i.e.
positive correlation. This means that the aviation industry is more volatile than the general
economic development and that the industry is highly vulnerable toward economic changes.
Figure 17: Correlation between GDP and air travel demand
Source: Boeing – Current Market Outlook
In times of recession, airlines are especially vulnerable, which is illustrated by the poor
development within the industry the past few years. Besides the current economic situation,
we also see a need to assess the current and future potential for the airline industry. This will
be assessed next.
4.1.2.1. Fluctuations in oil price and currency.
The increases in oil and jet fuel prices, which are positively correlated, are illustrated in
Appendix Q. We observe the sharp increase in prices from 2007 – 2008 and for SAS this
meant 25% higher costs than expected. Thus, they have to reduce these and other costs in
order to respond to the changes in factor prices. The general uncertainty regarding oil price
development, make hedging of jet fuel crucial for SAS, which was also mentioned in section
2.2. SAS is also highly exposed towards currency fluctuations and risks since revenue and
costs flows are done in various currencies. Thus, operating with US$, Euros, SEK, NOK,
DKK, GBP, etc., requires an effective financial risk management in order to reduce potential
losses. From the economic analysis we will now move on to analyze which social conditions
that influence SAS.
4.1.3. Social and Technological Conditions
Social conditions can be distribution of income, population growth, age distribution, labor
mobility, education, living conditions, etc. These are all important factors which will affect
the way a company operates and its strategies. According to certain limitations, we will not
analyze the social development and income distribution since we feel it is common
knowledge, that the Scandinavian countries are welfare states, which promotes a more equal
income and social distribution compared to more liberal countries. Moreover, its citizens are
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generally considered having significant financial resources and living standards. However,
labor mobility is interesting since unemployment influence households‟ disposable income.
Higher unemployment-rates lead to reduced corporate –and private spending on travel.
Therefore SAS is vulnerable towards fluctuations in unemployment and growth. Appendix R
shows the unemployment rates in Denmark, Sweden and Norway computed by OECD.
Unemployment has increased due to the crisis, but may decrease in the near future, which
lead to an increase in consumer disposable budgets. The downside for SAS is that when more
people are employed, all things equal, salaries may increase due to the law of (less) supply
and (more) demand for aviation staff.
Regarding the technical conditions, authorities have much power and influence when deciding
on safety requirements and procedures in the airline industry, especially post 9/11. For
airlines to succeed, or even be allowed to operate, they need to invest in new technology as
required by the governments in order to increase passenger safety. It becomes important to
purchase new machinery (technological assets) and also train and upgrade the staff‟s (safety)
capabilities, so they can understand and use new technologies efficiently. Additionally it is
important to have access to advanced and new aircrafts since these might offer cost reductions
on the operating level and of CO2-emissions. Other basic industry requirement includes
efficient communication channels as well as consumer-efficient booking systems. In this
industry, IT is extremely important since it offers new opportunities for the airlines, especially
on the operating level (Check-in) and in marketing (SMS, E-mail, newsletters).
Since GDP rates provides a picture of the general economic development in a society, then we
supplement this analysis with an industry forecasting. This is done in order to present the
industry economics in the Scandinavian aviation industry.
4.2. Industry forecasting
A forecast computed of the
Scandinavian airline industry
development is presented in Table
11. From 2008 to 2010 the total
airline market value has decreased
in all countries. We can also derive
that the industry may bounce back after 2010. Having IMF‟s estimate on the future GDP-
development in mind, a future industry improvement may seem reasonable to assume. The
Danish market value will increase significantly; the Swedish market will increase more
Table 11: Market Value Forecast from 2008 - 2013 in
Denmark, Norway & Sweden in billion US$
2008 2009 2010 2011 2012 2013
Denmark 3,3 3,2 3,3 3,4 3,6 3,9
Growth % -5,2 -2,8 3,2 4,9 6,1 6,8
Norway 4,8 4,8 4,8 4,9 4,9 5
Growth % -2,4 0 0,5 1 1 1,1
Sweden 2,9 2,8 2,8 2,9 3 3,1
Growth % -1,9 -4,8 1 2,2 3,4 3,8
Source: Datamonitor
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moderately, whereas the Norwegian one seems to be moving slowly. In short, the Norwegian
market value may seem mature and larger, whereas the Swedish and Danish market value
growth seems more dynamic.
Table 12 presents the three markets
measured on passenger levels and
we observe that Norway has the
biggest amount of travelers. The
geographical size of Norway and
Sweden makes air transportation
more important and relevant than in Denmark, which might be the reason for Denmark‟s
lower figures.
Our brief industry forecasting illustrated that, when measuring on market value and passenger
levels, the largest airline market is Norway. It is, however, the one with the lowest growth,
which might be a sign of a mature market. Thus, we derive that the Swedish market may have
more potential due to higher growth rates in passenger levels, market values, and also GDP-
development as illustrated in section 4.1.2. However, IATA predicts that 2011 will be a bad
year for aviation since capacity will increase by 6 %, but demand only 5 %36
. They worry
about state budget debts of several European countries, which may have a damaging influence
on aviation. Moreover, they argue that margins are small and the total industry earnings will
be reduced from 8,9 billion dollars in 2010 to 5,9 billion dollars in 2011. They further
highlight that the slow growth in demand is a big concern and conclude that the aviation
industry has lost money in the last 7 out of 9 years.
4.3. Part summary of PEST and industry forecasting
Our PEST-analysis showed that the Scandinavian countries‟ political effectiveness and
stability are performing well. Political (green) taxation is gaining popularity in Scandinavia
and this will influence SAS. Additionally, we showed how taxation policies may have a
severe influence on SAS, due to changes in corporations‟ and household‟s disposable budgets.
In addition to this, we presented the essence on a “Eurobonus”-tax, which is currently under
development in Denmark. The economic development in Scandinavia is improving and
Sweden seems to achieve higher growth rates. We have showed the important correlation
between GDP development and air travel demand, which is why macroeconomics are vital for
this industry. We demonstrated that unemployment are stagnating and may decrease in the
36 http://borsen.dk/nyheder/transport/artikel/1/191665/triste_udsigter_for_flyselskaber.html
Table 12: Passenger Forecast from 2008 - 2013 in Denmark,
Norway & Sweden (millions )
2008 2009 2010 2011 2012 2013
Denmark 13,2 12,4 12,8 13,3 14 14,8
Growth % 2,4 -6 2,7 4,2 5,3 5,9
Norway 20,6 20,3 20,8 21,5 22,3 23,2
Growth % 0,9 -1,2 2,1 3,6 3,8 4
Sweden 17,1 14,5 15 16,1 17,8 19,8
Growth % 3,2 -16 3,2 7,4 10,7 11,1
Source: Datamonitor
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future. Moreover, when corporations lay off employees, then there will be fewer business
passengers for SAS. Thus, unemployment is a serious issue for SAS. The technological
development in Scandinavia influence SAS, since efficient use of IT may improve SAS‟
competitiveness. Thus, technological development, especially within marketing, sales and the
operating core, is very important.
Regarding industry economics, based on passenger levels, market value and GDP we derive
that based on market value, passenger levels and GDP-development that Sweden has the
highest future growth rates, whereas Norway is mature. In addition to this, we also highlight
that SAS‟ strong presence in a mature region may reduce their competitiveness compared to
airlines operating in more emerging markets. Moreover, our main findings from our PEST-
analysis and industry forecasting are:
Political environment is stable, effective and predictable in Scandinavia
The economic situation is improving
The aviation industry is dependent on the macroeconomic and –political situation
The Norwegian market is the biggest, but also has the lowest growth rates
The Swedish market may have bigger potential due to higher growth rates
The social conditions are improving
The technological development, and legal requirements, is of utter importance to SAS
Year 2011 will be a tougher year for aviation with declining demand and earnings
We have now illustrated that SAS, and the industry, is highly volatile and vulnerable
regarding changes in the macroeconomic and –political setting.
4.4. Industry level – Porter‟s 5 Forces
In this section we create an industry analysis by
applying “Porter‟s 5 Forces” (Porter, 1979).
Figure 18 shows how this model could look like
in the Scandinavian airline industry. This model
is to be kept in mind during the rest of Chapter
4, where we will analyze various forces and
stakeholders that influence the Scandinavian
industry.
Figure 18: Porters 5 Forces in SAS’ industry
Source: Own creation
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4.4.1. Threat of New Entrants
New firms will face trouble when entering the Scandinavian markets since SAS‟ (political)
assets create entry barriers and biased competition. SAS might be in a position where they can
get access to additional capital easier than other competitors since government policies tend to
favor SAS. New entrants should invest in building up an efficient route map, know-how,
purchasing or leasing planes, renting buildings and gates in the airports, hire and develop staff
capabilities, etc. All these processes are expensive, time consuming and risky since the airline
industry is generally considered volatile. To enter and succeed within the Scandinavian airline
market is difficult since airlines like SAS, other Star Alliance partners, Cimber, Finnair,
Malmö Aviation, Norwegian and other LCCs creates an aggressive competitive environment.
New entrants may have scale –and cost disadvantages compared to SAS due to lack of
customer base and experience.
Regarding production experience, BCG founder Henderson (1973; 1979) argued that as a
cumulative production doubled, the marginal production cost per unit would decrease, which
is the essence of the “Experience Curve”. As a result of this argumentation, we highlight that
new entrants may face a steeper experience-curve, when entering the market, which may
result in inefficiencies, higher costs and perhaps output prices. Access to distribution channels
may also become problematic for new entrants as well as “damage” the experience curve
effects. Another example could be lower initial punctuality due to a less satisfactory
experience curve.
Besides this, SAS have long-lasting relationships with suppliers and partners, which may
provide SAS with beneficial terms and conditions regarding their transactions. This creates
industry barriers that lead to more challenges for newcomers. Porter also mentions
“Government policy” as a factor, which can create industry entry barriers. We emphasize the
importance of this barrier due to SAS‟ governmental ownership, which provides SAS with
competitive advantages. Finally, product differentiation and brand value also increases entry
barriers and the SAS-brand has been developed over 60 years, which is challenging to
compete with for newcomers.
New entrants emerges though expansion of route maps
New entrants do rarely arise from dust. Increased competition is typically from LCCs, other
European, North American or Asian airlines, which expand their already existing route map,
i.e. Lufthansa might increase the frequency of flying to and from (new) Scandinavian hubs.
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Thus SAS should not fear competition on the intra-Scandinavian market from Thai Airways,
but focus more on the increased international competition between Scandinavia and Asia, to
give an example. Expanding existing route network may be easier for airlines since they may
already possess the needed capabilities and resources required to start up new destinations.
This implies that network-airlines entering the Nordic market may have experience and
capital, which may enhance their experience curve costs.
New competitors arise from M&As in aviation and vertical integration
Poor performing airlines are often purchased or merged with competitors and alliance
partners. Examples of M&As are KLM and Air France (2004), Swiss and Lufthansa (2005),
Delta Airlines and Northwest Airlines (2010), etc. Additionally, new entrants also arise
through vertical integration. An example is the fast-growing charter industry, where travel
agencies, such as TUIfly and Thomson Holidays, now also operate their own flying services,
which implies vertical integration since they expand their value chain. Charter companies
where once partners and/or customers of SAS, but are becoming major competitors as well
since they impose on SAS‟ leisure territory.
4.4.2. Threat of Substitute Products or Services
The degree of substitutable products and services also influence the competition intensity,
since, all things equal, standardized outputs tend to bring increased competition. Thus, skilled,
complex and high quality products and services can be difficult to substitute or imitate, which
creates industry barriers. Moreover, buyers‟ willingness to switch products, as well as the cost
of doing so, also affects the industry competition level. For instance, SAS offers a beneficial
route map for travelers in Scandinavia. Customers, which depend on this route map, as well as
frequency, flexibility, etc., may face increased costs or inconvenience, reduced flexibility and
quality when switching to Norwegian since they do not offer the same favorable route
network. Thus, switching barriers exists. Additionally, we highlight the importance of having
competitive complementary services, since this will affect the competition as well. This will
be elaborated in section 4.4.3. The Scandinavian airline industry has multiple substitutes,
which we divide into three categories: Short, medium, and long distance substitutes, as
illustrated in Figure 19. Notable substitutes will now be elaborated.
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Figure 20: Train advantages
Cheaper travelling
Reduced duration
Offers more stops – also minor cities
Train typically stops in city centers
No luggage restriction
More environmentally friendly
Trains offer internet services
Better conditions for working
Less inefficient waiting time
Source: Own Creation
Figure 19: Substitutes for SAS
Sources: Own creation
Train and water transportation
The train system is well developed in most of Scandinavia, and cover major, medium and
minor cities. Trains are major competitors on short and medium distances and some
advantages with the train systems are presented
in figure 20. In short, trains may offer
cheaper travelling, reduced time, more
convenient stops, no luggage restrictions,
more environmentally friendly, internet
services, less waiting time at the station, etc.
Trains will become an even bigger
competitor in the future now that especially
DSB and SJ are focusing on international
travel as well. Routes to most of Germany,
Amsterdam, Prague, etc. are increasing and will
compete with Northern European airlines37,38
. Furthermore, the potential arrival of high-speed
trains (TGV) will influence the short distance aviation market in the future39
.
Water-transportation is also a competitor, since multiple locations within Scandinavia are
located close to the water, e.g. Copenhagen, Århus, Stockholm, Gothenburg, Malmö, Oslo,
Bergen and Sandefjord. Citizens who want to travel from Copenhagen to Oslo might choose
the Oslo-ferry instead of flying since it may be an experience to be on a cruise, i.e. this makes
shipping a substitute. In addition, on cargo, ships can transport bigger loads of goods than
airplanes and are more environmentally friendly according to Figure 16 (section 4.1.1.).
37 http://www.dsb.dk/Find-og-kob/Rejser-udlandet/Rejser-til-udlandet/Orange-udland/ 38 http://www.dr.dk/Nyheder/Udland/2010/04/09/215446.htm 39http://www.business.dk/transport/flyselskaber-trues-af-hoejhastighedstog
Short Distance Substitutes (Intra-Scandinavia)
•Car, Taxi, Bus
•Trains
•Ships
•Telecommunication
•Charter companies
•Low cost airlines
Medium Distance Subtitutes (Scandianvia - Europe)
•Car, Bus
•Trains
•Ships
•Telecommunication
•Charter companies
•Low cost airlines
•Traditional network airlines
Long Distance Substitutes (Globally)
•Ships
•Telecommunication
•Charter companies
•(Low cost airlines)
•Traditional network airlines
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IT-communication
Another substitute to flying is telecommunication. Internet and (cheaper) telecommunication
provide people and corporations with excellent possibilities to connect via communication
providers like Skype. Firstly, it may be cheaper or even free to talk on the phone or through
video conferencing. Secondly, regarding companies‟ need for arranging international
meetings, improved IT solutions might become a real substitute for flying. Online or video
conferencing may be efficient since employees do not have to wait hours in airports or sit in
planes where they might be more inefficient than if they were in their offices. An example of
this is Grundfos and the Maersk Group, which save time and money by investing in these new
IT solutions40
. Besides these benefits, efficient use of IT also gives them a greener profile
since they reduce CO2 emissions due to less travelling. Moreover, it could also reduce
workers‟ stress levels, jetlag and time away from family and friends. Grundfos also states that
IT will never eliminate their need for flying to a customer five times a year, but they may
reduce frequency to 2-3 times, which makes IT a substitute.
Traditional Network Airlines and regional competitors
The Scandinavian airline industry is affected by major global network carriers and regional
airlines. Network carriers typically organize themselves in alliances (or networks) like Star
Alliance, Skyteam or Oneworld. Thus, SAS competes with other network carriers, but
competition is also between the respective alliances.
Regarding SAS‟ own view on their competitors, they argue that their main Nordic
competitors are Norwegian, Malmö Aviation, Skyways and Finnair41
. When we expand to a
more international view, SAS also competes with Lufthansa, Air France-KLM, British
Airways and Continental. These are of course all valid competitors, but we wonder why SAS
do not update their view on competitors. To mention a few examples where network
competitors fly on the same routes as SAS, there is: Aeroflot fly on same routes as SAS from
Scandinavia to Moscow42
, Thai Air fly to Bangkok43
, Iberia and Spanair to Spain4445
, Czech
Airlines to Prague46
etc. These are just common examples of competitors that fly the exact
same routes as SAS, which are excluded. The same goes with travels to America and Asia.
40 http://www.travelbroker.dk/uploads/files/borsen_071008_videokonferencer%20afløser%20rejser.pdf 41 SAS annual report 2009, p. 19 42 http://wwww.aeroflot.ru/templates/polet_en/map.html 43 http://www.thaiair.com/index.htm 44 http://www.iberia.com/OneToOne/v3/destinos.do?cntCat=EUROPA&tabId=3&menuId=02100000000000 45 http://www.spanair.com/web/en-gb/Services/ 46 http://denmark.czechairlines.com/en/portal/passengers/where_we_fly/our_destinations.htm
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Figure 21: Properties of the low cost model
Better fleet utilization
Fewer types of aircrafts
More seats available per flight (volume)
Single-class cabin only
No business lounges
No connecting flights
Cheaper secondary airports
Lower remuneration
Bonus salary schemes
Fees on services
Fewer obligations
Source: Own Creation
The increasing popularity of Asian travels, especially vacation spots like Thailand, means that
Thai Air will become an even bigger competitor in the future. The same goes with SAS‟
expansion towards America, which will result in “new” competitors from the American
markets. Thus, we think that SAS should rethink who their competitors are and what their
market position is. Other competitors include LCCs, which have been teasing SAS for years.
These firms have different business models and strategies, which will be assessed next.
The Low-Cost model
The market for low cost point-to-point flying has
experienced a boom after the deregulation and this has
had a huge impact on the Scandinavian airline industry.
Airlines such as Ryanair, easyJet, Air Berlin,
Norwegian, Cimber, Transavia, GermanWings, etc., use different cost structures and are able
to push down prices, which damages major airlines significantly. Table 13 illustrates the costs
of flying 1 kilometer and we observe that SAS operates with highest costs.
This supports our claim that SAS have high cost structures, which we also derived earlier in
section 2.2. As a result of this, LCCs can operate with lower costs, and fares, than SAS.
Reasons for this are presented in Figure 21. These aspects, together with the need for
achieving higher cabin load factors, are
necessary in order to break even for LCCs.
Put differently; volume and economies of
scale are at the core of the LCC business
model. The highly competitive and price-
sensitive market means that SAS is forced
to integrate notions from LCCs into their
business model in order to compete
efficiently. Examples are that SAS-
passengers have to purchase meals and
drinks aboard (excluding the business
segment), higher utilization of the fleet,
single class cabins on domestic flights, one-way tickets, lowered salaries, etc.
Another mean of cost-minimization, is that LLCs often fly to secondary airports, which are
cheaper. In addition, LCCs may offer cheaper flying on the European continent, but they
Table 13: Cost of flying 1 KM (NOK)
SAS 0,99
Norwegian 0,49
Ryanair 0,29 Source: Own creation based on data from
Dagens Næringsliv, 15/2/2010
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rarely operate on intercontinental routes. Since these organizations do not enroll in alliances,
they do not offer efficient long distance flying, i.e. on long distance routes SAS may not
interpret LCCs as a competitor, for now. We believe that it could very well exist in the future.
An example of this is Norwegian, which already has flights to Dubai and Morocco47
.
Furthermore, Finnair and Norwegian have discussed collaborations on intercontinental routes
to Asia48
. Norwegian does not offer these routes, and Finnair wants more customers on these
routes. Thus, the collaboration would include Norwegian transferring passengers from all of
Scandinavia to Helsinki, where Finnair would fly them to Asia.
One weakness of the low cost model is the often criticized lack of transparency, strong
restrictions on luggage, an effective mileage program often do not exist, no alliance-
membership, no intercontinental flights, seat selection costs money, lack of flexibility, etc. In
short, every additional service besides the actual flight is charged extra. Thus, LCCs may
offer severe inconvenience for frequent travelers.
Network airlines also offer low cost services for passengers and examples of this could be
Lufthansa through German Wings and Air France-KLM who manage Transavia. Put
differently, Lufthansa and Air France-KLM both attack SAS on “traditional flying”, which
focuses on comfort, speed and the flexibility. Additionally, they also pressure SAS on price
through their respective LCCs49
.
4.4.3. Substitutes & Complementarities
Charter companies offer flying services, which make them competitors to SAS. When
customers order their full vacation packages at for instance MyTravel, they get hotel, flight,
local transportation, etc., included in the deal. This means charter companies impose on
commercial airline territory by doing these services themselves and expanding their value
chain. Charter companies are also partners. SAS and Apollo have signed major deals in the
past where SAS did the flying and Apollo provides hotel solutions and sell the packages.
Online travel agencies and flight databases, e.g. Expedia.com, are more or less acting as
brokers. They influence the industry in different ways since it may be easier to compare
airline prices, duration etc. on specific flights. Online agencies have access to a huge
international consumer segment and sometimes they can even offer lower prices than the
official sales channel of the airline, e.g. SAS‟ websites‟ booking system. Thus, online travel
agencies and brokers can both be competitors and partners to SAS. These distribution
47 http://www.norwegian.dk/fly/rutekort/ 48 http://borsen.dk/nyheder/investor/artikel/1/190825/norwegian_i_alliance_med_finnair.html 49 http://borsen.dk/investor/nyhed/178005/
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channels may replace SAS‟ official booking system to some degree, which is why we
definitely see them as threats for SAS. On the other hand, they may also give SAS access to
bigger markets and their core competences may be marketing and sales, which are not SAS‟
core competences.
When customers choose an airline, there are obvious parameters like price, duration, comfort
etc., but some supplementary products and services may be equally important as well.
Examples could be a membership program, which offers multiple benefits like bonus points
(miles) and cheaper fares on car rental, hotels, airport lounges, enhanced IT check-in systems,
access to a global alliance flying network, etc. Put differently, frequent flyer programs, like
Eurobonus, offer supplementary services which provide its members with multiple benefits.
These secondary services, or complementarities (Porter, 2000), are important in today‟s
industry since they complement the primary product, air traffic, and thereby makes it more
attractive for customers to prefer travelling with specific airlines or inside the same alliance.
4.4.4. Bargaining Power of Suppliers
This section will analyze the bargaining power of suppliers, such as employees, aircrafts,
airports and financial capital, since we see these as the main suppliers for SAS. One could
also interpret SAS‟ alliance-partners as suppliers, since they supply (exchange) customers to
SAS. Bargaining powers of suppliers is essential in an industry since poor supplier relations
leads to higher costs and prices as well as reduced strategic and operational competitiveness.
Employees
For several years SAS have experienced challenges with their workers‟ unions, especially the
cabin crew. In Scandinavia, there is a strong tradition for workers to organize themselves in
unions, in order to enhance their working conditions and bargaining power. This trend is
problematic for SAS, which have been cutting down on employees for several years.
Table 14: SAS' average number of employees from 2000 - 2010
Year 2002 2003 2004 2005 2006 2007 2008 2009
Average # of employees 35.506 34.544 32.481 26.727 25.323 23.538 24.635 18.786
Change -962 -2.063 -5.754 -1.404 -1.785 1.097 -5.849
%-change -2,71 -5,97 -17,71 -5,25 -7,05 4,66 -23,74
Source: Own creation based on data from SAS website
The annual (and average) number of employees is illustrated in Table 14 and we observe
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yearly reductions from 2002 to 2009, except in 2008. According to Core SAS, SAS still need
to lay off 1700 more employees before reaching an acceptable level. These layoffs mean that
workers may become dissatisfied and thereby organize themselves in unions in order to
optimize their (individual and collectivistic) contractual agreements. Labor unions have been
fighting with SAS management for a long time, which is why we will briefly present how
these influence the industry.
SAS Group‟s labor union structure is illustrated
in Figure 22. Simple calculations show that
there are 14 different Danish labor unions, 15
Norwegian and 6 Swedish. In total, SAS‟
employees are represented by more than 35
different independent Scandinavian labor
unions, which are demanding unique attention.
Moreover, here we have not even included
potential foreign unions (non-Scandinavian)
and other types of NGOs. This makes
negotiations, and layoffs, extremely complex
since employees and their unions have different
interests, goals and requirements. It might be
difficult to satisfy all unions at once since
making standardized agreements seem
impossible. In addition, labor rights and working conditions differ in all countries, which do
not make it easier.
Besides this, unions fight each other in order to get their individual claims and interests
through. This was the case in early 2010 where especially Swedish and Norwegian unions
criticized the Danish union, CAU, for not being in touch with reality, open minded or flexible
enough50
. The Swedes were afraid to lose governmental (financial) support if the Danes could
not meet an agreement. Thus, we derive that it is difficult, or nearly impossible, for SAS
management to create a broad and effective work agreement, which satisfy all work related
stakeholders. SAS have a poor bargaining position towards the Scandinavian employees and
their labor unions, but things might be improving since most unions may have realized that
employee and cost reductions are necessary in order to save SAS. A potential bankruptcy
50 http://www.dr.dk/Nyheder/Penge/2010/03/11/074906.htm
Figure 22: SAS Group’s labor union structure
Source: SAS annual report 2009
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would not be in any ones‟ interests, especially the workers.
Aircrafts
The industry for aircraft manufacturers seems to be rather concentrated consisting of two
major players, Boeing and Airbus. This means that buyers like SAS have poor bargaining
positions towards the suppliers, since relatively few suppliers exist. It is also interesting to
analyze the purchased components and their importance for the focal firm. Aircrafts are
crucial for SAS because without these, they are not able to fly, i.e. it is impossible for SAS to
find substitutes for this asset. Unique components can build up switching costs, which
increase the supplier‟s bargaining power. For SAS, this means that it might involve costs
switching from Airbus to Boeing products since aircrafts might function differently and use
different technologies. This means that cabin staff will need to upgrade their capabilities in
order to maneuver other aircrafts efficiently, which cost money and time. A way of resolving
this could be notions from alliance theory. Perhaps airlines could do group purchasing
through their alliance and thereby achieve a better deal. This could be another advantage of
being in Star Alliance. The supplier power is also dominated by how important the industry
and customer is to the supplier and here SAS may be looked upon as a (small) regional airline
with limited financial resources. We assume that SAS is not a major customer of Boeing or
Airbus, which decreases the bargaining position of SAS.
Airports
One could argue that it is impossible for airlines to be self-sufficient, which is why economic
exchanges between partners in the value chain occur and the condition of interdependence
might increase. In short, it may be inefficient to be self-sufficient. Thus, SAS need to organize
economic exchanges between relevant stakeholders that can perform certain activities more
efficient than others. SAS cannot efficiently maneuver all aspects of the value chain, which is
why some processes are outsourced or allocated to other partners. Airports offer services to
SAS, and vice versa, which increases interdependency. There is strong interdependence
between SAS and airports and they exploit each others‟ resources and competences, hence,
they may reach an individual and common goal: Increased efficiency and revenue. Even
though there is strong interdependence, Copenhagen Airport is creating the new CPH Swift
low cost terminal in 2010. SAS will get increased competition and the airport will increase its
cash flow from multiple (new) airlines. Thus, if we apply Porter‟s argument regarding buyers-
concentration and its importance to the supplier, when the amount of airlines increase in the
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airport, SAS‟ impact on the airport‟s revenue might reduce. This will decrease the bargaining
power of SAS since the airport now have possibilities of earning revenue through multiple
channels, i.e. SAS‟ importance gets reduced. However, we also highlight that SAS is the
biggest customer for many Scandinavian airports, which is why they still have a good
bargaining position. However, airports may be threatened since their biggest customer is
struggling financially. This could be one reason, why CPH Swift is created. As we shall see
later on, SAS may have exploited their customer status towards the CPH Swift project, by
“forcing” increased costs from the airport to the LCCs. In order to assess how buyers affect
the industry, we will now move to this part of the value chain.
Bargaining position of the buyers
Since SAS has operated as a monopolistic firm for many years, liberal market reforms will of
course reduce their monopolistic status and behavior. The bargaining positions for private and
corporate buyers have increased significantly during the last decades. Multiple competitors
offer several alternatives (substitutes) than flying with SAS, i.e. switching costs have been
reduced. In additions to this, we predict that CPH Swift will further promote this development
and improve the bargaining positions of buyers. Thus, we argue that there seem to be a
positive correlation between number of airlines and travelers‟ bargaining positions (thereby
travel alternatives).
Charter agencies‟ bargaining positions are enhanced due to the increased opportunities in the
market. Additionally, charter companies, which rented aircrafts from airlines before, now also
perform airline activities as well, i.e. internalization perhaps due to high TCE associated with
economic exchanges with monopolistic airlines like SAS. Governmental, frequent and
business travelers have also gotten their bargaining power enhanced significantly since the
price has decreased due to increased competition. Moreover, SAS and its Star Alliance
partners offer a more efficient global travel route map than for instance Norwegian, which is
beneficial for frequent travelers. Also there are investor-ties, since governments invest in
SAS, which might provide the government with more lucrative services. When synthesizing,
we observe that customers bargaining power is significant, i.e. a buyer‟s market. This market
condition force airlines to compete on parameters like price, service, flexibility and comfort.
Put differently, airfares are declining due to competition and also industry innovations.
In the next section we will turn our focus toward the rivalry within the industry, in order to
assess the degree of competition between airlines.
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4.4.5. Rivalry
In order to get a better understanding of
the rivalry within the Scandinavian
airline market, we have chosen to
analyze the markets shares of SAS.
Figure 23 illustrate that the SAS Group
has a total Nordic market share of 37%
in 2009. The highest market share is in
Norway (54%), then Denmark (43%),
Sweden (33%) and Finland (15%).
Compared with the previous year
(2008), we observe that the market share
in Norway was 59%, Denmark 46%,
Sweden 35% and Finland 16% in. Thus,
the Norwegian market share has
declined by 5%-points, Swedish with
2%-points, Danish with 3%-points, but
the Finnish market share has actually increased
by 1%-point. Thus, we derive that SAS‟
Scandinavian market shares are declining.
Figure 24 shows the markets share of the
Nordic region in 2009, where the SAS Group is
benchmarked to competitors. By measuring in
ASK we get a better idea of the true operational
potential and capacity. SAS is by far the
biggest actor in front of Norwegian, Finnair,
Ryanair, etc. However, we find it problematic
that the Lufthansa Group is not represented since
these are main competitors. Nevertheless, Figure 24 supports our argumentation regarding
interpreting SAS Group as market leaders in the Nordic region. Since the business segment
contributes 60 % of the group revenue, it becomes interesting to analyze SAS‟ market share
on key business destinations.
Figure 23: SAS Group market shares
Figure24: Markets shares based on ASK
Source. SAS annual report 2009
Source: SAS annual report 2009
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This development is shown in Figure 25
and we observe that SAS‟ market share on
routes to London and Brussels has a
volatile decline after 2009. This is
probably due to increased competition
from other airlines, changed customer
preferences and the economic situation.
SAS‟ markets shares on business routes
to Frankfurt, Paris and Amsterdam have
not been influenced to the same amount
as London and Brussels. An explanation
of this could be that the competition intensity is higher on Scandinavia routes to London and
Brussels, than to the other European metropolises. All things equal, tougher competition may
lead to less consolidated market shares.
In order to get a numerical version of the rivalry, we apply the Herfindahl Index (HI), also
known as Hirschman-Herfindahl index (HHI), which measures the industry structure and
competitor concentration. The extreme monopolistic market structure has a HI = 10.000,
whereas perfect competition has a value close to 0 (Lotz, 2006). The mathematical formula
for HI is:
HI = s12 + s2
2 + s3
2 + ... ... + sn
2
The HI-formula sums up the market shares of the specific companies within an industry and
for the Nordic market it could look like this:
= (32
By applying the HI-formula, we get an index value around 1.400. The methodology is
problematic since our SAS-data lacks Nordic data from Lufthansa, Cimber and other
important airlines. We also see difficulties getting a correct view of market shares through the
use of ASK. ASK measures capacity and says little about demand and profitability. However,
all things equal, the “true” HI-value for the Nordic airline industry must lie below 1.400 since
Source: SAS annual report 2009
Figure 25
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competitors such as the Lufthansa Group, Cimber, Malmö Aviation, etc. will increase
competition and thereby reduce the HI-value. 1.400 equals a moderate amount of competitor
concentration and competition. The airline industry has progressed compared to the old
monopolistic days where the HI-value might have been closer to 10.000. Moreover, the
creation of CPH Swift will most likely further reduce the “true” HI-value.
In section 1.2.4., we criticized Porter‟s 5 Forces and presented several of its‟ limitations and
one might be the time challenges as Mintzberg argued. Industrial forces might work more
static today (t=0) than in the future (t=1), which is more dynamic due to increased
competition and economic development. This illustrates the time gap, which Mintzberg et. al
(2009) mentions. For us this mean, we have to apply historical cost structures and industry
development in our analysis to predict what will happen in the future and this time gap may
create problems.
The framework also focuses too heavily on industry factors and Mintzberg et al. argued that
Porter neglects the internal capabilities and resources of the firm. An empirical example could
be SAS‟ LCC subsidiary, Snowflake. The market for LCCs was booming (e.g. Ryanair and
easyJet was successful), but SAS did not have the needed resources, capabilities or
competences to manage a LCC efficiently. Not only SAS was unsuccessful with this strategy.
Most major airlines launched LCC-subsidiaries during the 1990s and Peng (2009) state that
since:
“…all these operations have been shut down or sold off, indicative of both a lack of
organizational capabilities and a lack of ability to learn new tricks”
(Peng, 2009, p 262).
Thus, there exists a gap between the external potential (which was present) and the internal
capabilities (which SAS lacked), which is why we analyzed the resources and capabilities of
SAS. In addition to this, we also highlight that our Porter‟s 5 Forces analysis do not create a
market positioning or strategy for SAS. It is merely an easy tool for identifying risks, factors
and stakeholders as well as their influence on the industry.
4.4.6. Part Summary of Porter‟s 5 Forces
New entrants have difficulties in entering the industry due to high entry barriers. Entrants
typically do not emerge through true entrepreneurship, but rather through vertical integration
by industries related to aviation (e.g. charter), M&As between airlines, route map- and LCC-
expansions, etc.
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We derived that there are substitutes to flying, such as car, bus or train. Especially, trains may
become a bigger competitor in the future (as observed in Central Europe) since it offers fast
services to city centers, may be cheaper and produce less emissions. Telecommunication is
also a competitor since innovative technology can substitute some of the need for flying,
which is a trend that may further increase. Charter companies and LCCs also offer substitute
services, which might be less complex. Vacation packages might reduce SAS‟ leisure
potential, i.e. from Charter companies offering full-scale services.
LCCs offer competitive products if we neglect parameters like comfort, frequency, points and
network flexibility. On certain routes, LCCs are not substitutes for SAS, since business
travelers might require high frequency of flights, intercontinental services, mileage points,
transfer to main hubs, etc. The last substitute is the services offered by other alliance-
members. These actors share similar features as SAS‟, which is why these may be stronger
competitors on the business-segment than LCCs. Today‟s developed airline-industry also
offers additional complementary services in order to maintain and enhance customer
preferences. Membership programs, airport lounges, alliance-formation and beneficial
discounts are created in order to capture consumers. Thus, airlines do not only compete on
flying services, but also on secondary complementary services, which can be a mean of
differentiation.
Aircraft manufacturers like Airbus and Boeing have a good bargaining position towards SAS
due to the supplier concentration argument and the relatively small size in a global
perspective. However, SAS may benefit from group purchasing with (alliance)-partners, as
alliance theory imply. Airports and SAS may be seen as having strong interdependence since
neither can function efficiently without the other. However, due to the increased competition
by new airlines, SAS‟ impact of the airports‟ income will be reduced over time, which
increases the bargaining position of the airports. In addition to this, CPH Swift may give
Copenhagen Airport more power. Suppliers of human capital, the employees, have a strong
bargaining position towards the industry, which influence all airlines. SAS-employees are
represented by more than 35 different labor unions, which all demand unique attentions,
which increase negotiation complexity and reduce the bargaining power of SAS.
The buyers‟ bargaining position has been enhanced significantly due to increased
competition. Alliance-formation can be a respond to this development which can lead to anti-
competitive behaviors which SAS‟ have been punished for several times. However, we
interpret today‟s markets as a “buyer‟s market”. Especially travel brokers have added to this.
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Rivalry is present and intense due to the political deregulation and stronger competition. We
computed an approx. HI-value around 1.400. Thus, moderate competition in the airline
industry exists and will increase further in the future (lower HI). SAS is the market leader in
Scandinavia, but aggressive competitors might reduce the lucrative market shares of SAS. In
addition to this, SAS‟ competitiveness may be declining due to poor bargaining positions
towards buyers and suppliers, strong substitutes and increasing rivalry. Therefore, our
industry study derives that:
High entry barriers exist due to capital and knowledge requirements and unequal
competition in the market
Strong substitutes already exist from charter companies, LCCs, train, bus, car, etc.
Competition and differentiation is done through complementary services
SAS‟ bargaining position towards suppliers and buyers is generally weak
The market is influenced by a moderate degree of rivalry, which is increasing
4.5. Findings from Chapter 4
Our PEST-analysis showed that the Scandinavian countries are performing well regarding the
political environment. The economic situation is improving and we derived that Sweden may
have higher growth rates. We also showed the positive correlation between GDP development
and air travel demand. The Norwegian market, based on market value and passenger
forecasting, is the biggest in Scandinavia, but also show signs of maturity. As a result of this,
the Swedish and Danish markets seem more promising.
Our industry analysis showed that new entrants may experience difficulties in entering the
industry due to high entry barriers. Therefore, entrants typically emerge through M&As,
vertical integration, route map expansions, LCCs, etc., i.e. not entrepreneurship. Notable
substitutes to flying are car, bus, train and Telecommunication. Charter companies and LCCs
also offer competitive products if we neglect parameters like comfort, frequency, points and
network flexibility. LCCs are rarely seen on intercontinental flights, where network carriers
are dominant and share similar features, business models, services, etc. as SAS‟. We also
emphasized the importance of complementarities like Eurobonus. SAS generally has a
declining bargaining position against buyers and suppliers. Rivalry is increasing and we
calculated an approx. HI-value, which was approx. 1.400. Thus, moderate competition exists
and this may increase in the future and lower the HI-value. During Chapter 4 we derived that:
Political environment is effective and the economic situation improving
The aviation industry is vulnerable towards the macro development
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The Norwegian market is biggest, but the Swedish market may have more potential
The technological development, and legal requirements, is of utter importance to SAS
High entry barriers due to capital and knowledge requirements, unequal competition
Strong substitutes already exist from charter companies, LCCs, train, bus, car, etc.
Competition and differentiation is done through complementary services
Airlines also compete through alliances and complementarities
SAS‟ bargaining position towards suppliers and buyers is generally weak
The market is influenced by a moderate degree of rivalry, which is increasing
Until now we have analyzed SAS by assessing their strategy, resources, and competences as
well as illustrated important macroeconomic and industry factors. The next chapter will
analyze SAS‟ operational performance and benchmark these with notable competitors.
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Chapter 5 – Operational performance & benchmarking
In this chapter, we will analyze SAS‟ performance and productivity by assessing the most
important airline ratios. We will apply specific industry terminology, which is why we will
briefly explain the applied performance indicators. Revenue Passenger Kilometers (RPK)
measures the total revenue SAS may receive from passengers multiplied by the flown
distances. Available Seats per Kilometer (ASK) measures the actual capacity of a flight, i.e.
how many seats are available during the flight multiplied by the distances. This, we have to
keep in mind during this chapter. An expression of this is the Danish ratios, which will be
lower mainly due to geographic. Mathematical versions of RPK and ASK are:
In addition to these, the passenger load factor (PLF), sometimes called cabin factor, measure
how much of the capacity (seats) that is occupied by passengers, i.e. how much of the aircraft,
in percentile, that is full. Passenger levels (PAX) measures how many passengers SAS
transfer and the yield is an expression of profitability and return on investments.
5.1 SAS operational performance
Passengers levels (PAX) of SAS can be observed in Figure 26, and is further explained in
Appendix S. PAX are relatively volatile and increasing after April 2010. We observe a
reduction in these levels from June 2008 - January 2009, which is related to Core SAS and
challenging times for the industry. The reduction of PAX in March-April 2010 is related to
the Icelandic volcano eruptions.
40.000
540.000
1.040.000
1.540.000
2.040.000
Nu
mb
er
of
Pas
sen
ger
Source: Own Creation based on SAS Investor Relations
Figure 26: Passenger levels (PAX) on SAS' markets
Intercontinental
Europe
Intrascandinavia
Denmark
Norway
Sweden
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Page 82
We observe that most passengers travel with SAS on the Norwegian -and European markets,
and levels are followed by their Intra-Scandinavian -and Swedish services. There are
significantly fewer passengers on the Intercontinental routes and the Danish market. This
might be related to a larger focus on the Nordic home market (Core SAS) and short distances
(together with well-developed infrastructure) in Denmark.
Available Seats per Kilometer (ASK) is illustrated in Figure 27. It is measured in Millions
from June 2008 to June 2010. ASK on the European market possess declining tendencies
from mid-2008 – late 2009 and has higher volatility than other markets. This implies a
shrinking capacity and can be related to their corporate strategy as well as the financial crisis.
Excluding the impacts of the Icelandic volcano eruptions, an increase in ASK is observed
from early 2010, as a response to demand. The development in ASK is characterized with
relatively low volatility and they have remained fairly stable. Recently, demand has increased
for intercontinental services and SAS aim to respond to this trend51
, even though it is against
their corporate strategy. This will increase the intercontinental-ASK. Revenue passenger
kilometers (RPK) on various markets are illustrated in (Millions) in Figure 28.
It can be derived that revenue for European and Intercontinental services possesses the
51 http://www.business.dk/transport/sas-flere-langdistanceruter-i-stoebeskeen
0
500
1.000
1.500
2.000
Mill
ion
s
Source: Own Creation based on SAS Investor Relations
Figure 27: Available seat per KM (ASK) in millions on SAS' markets
Intercontinental
Europe
Intrascandinavia
Denmark
Norway
Sweden
0
500
1.000
Mill
ion
s SE
K
Source: Own Creation based on SAS Investor Relations
Figure 28: Revenue passenger per KM (RPK) of SAS' markets
Intercontinental
Europe
Intrascandinavia
Denmark
Norway
Sweden
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Page 83
strongest volatility. Revenue is mainly gathered between April-October, especially due to
more demand for travel in these months. Moreover, the European and Intercontinental
services are affected by longer distances flown than e.g. domestic within the Nordic countries,
together with a larger demand for these services. The trends for the Norwegian, Swedish and
Intra-Scandinavian possess roughly similar trends, which can be related to a stable demand
and their hub-to-hub system. The Danish RPK is relatively low due to the Danish geographic,
but we highlight the importance of good hub-connections to Copenhagen. The highly
competitive environment has resulted in sales campaigns (e.g. Low fare calendar), and
together with subsidizing of connecting flights and short distances, this would result in a
relatively lower RPK. Additionally, high frequency between hubs may increase RPK but it
may reduce the load factor. Passenger load factor (PLF) will be assessed next.
PLF for SAS is illustrated in Figure 29 and we observe that European –and Intercontinental
routes perform well due to high demand and frequency compared the hub-to-hub model.
Excluding intercontinental services, we observe that the Danish – together with the European
market operate with the highest utilization. The relatively low score on the Norwegian and
Swedish market may be related to “political” destinations, which are served in order to offer
efficient infrastructure for citizens. Examples could be some Northern Norwegian routes,
which was presented earlier in the route map in Figure 12, section 3.1.5. Hence, there is a
need for these services, but they operate with free capacity. Moreover, more competition may
also exist on the Swedish and Norwegian market. Here LCCs operates with lower fares which
will captures travelers and reduce SAS‟ PLF. Moreover, the intra-Scandinavian PLF roughly
follow the same percentage as Nordic markets, and is related to the need for providing high
frequency between the Nordic hubs. It is emphasized that PLF is a good indicator on demand,
but it neglects a view on profit.
50556065707580859095
%
Source: Own Creation based on SAS Investor Relations
Figure 29: Passenger load factor (PLF) for SAS' Markets
Europe
Intra-Scandinavian
DK
NO
SWE
Intercontinental
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From Figure 30 it is observed that SAS‟ yield is less volatile than the one of Norwegian. The
rapid expansion and low-cost strategy of Norwegian may explain the unsatisfactory yield-
growth of Norwegian in 2010.
For SAS it is observed that their yield growth shows signs of improvement even though it still
is negative. Put differently, SAS is becoming less unprofitable, and it is noticed that SAS
really performed bad in aviations‟ dark years 2008-2009 and 2010 could only show
improvement in the yield-growth. In Norwegian‟s case we might interpret 2008-2009 as
“average” years, whereas it does not take much to give them a low score in 2010. We argue
that low-fare strategies serve important purposes (e.g. gaining market shares, increasing PLF),
but that it also provides challenges with achieving high yields and profitability. Here volume
is important, as derived in section 4.4.2.
As a sum-up, efficiency on SAS‟ services follow roughly the same trends and we argue that
PLF will remain relatively low on domestic routes in the future as well, which is an argument
in favor of sales campaigns in order to reduce the amount of free available capacity. However,
SAS also need to possess needed flexibility in order to utilize their hub-to-hub strategy, i.e.
citizens living far away from SAS‟ hubs should have the opportunity to fly without hassle to
their final destinations. Substitutes, e.g. cars and trains (described in section 4.4.2.), will also
reduce PLF since it provides competitive alternatives to flying. There are also various means
of increasing PLF, perhaps reducing routes, but we highlight that consequences involved
could be severe, i.e. LCCs would gain market share and Scandinavian passengers could not
benefit as wanted from the hub-to-hub system. Nevertheless, methods to increase PLF include
reduction in frequencies on flights, a larger focus on high-demand routes or sales campaigns.
The yield benchmark proved that SAS is improving and that Norwegian is doing worse due to
their low cost strategy.
-25-20-15-10
-505
10
%
Source: Own creation based on monthly traffic reports from SAS and Norwegian.
Figure 30: Yield growth (%) compared to previous year
SAS
Norwegian
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5.2. SAS‟ performance compared to notable competitors on European services
Figure 31 shows that Norwegian and the Lufthansa Group have the highest growth in capacity
(ASK). Norwegian‟s company size allows higher growth rates than more mature firms.
Regarding Lufthansa, they have undergone (and are undergoing) a number of acquisitions
(e.g. Austrian, Swiss, etc.), which influences ASK positively. Thus, increased capacity
through M&As may partly explain Lufthansa‟s impressive growth in capacity, rather than
solely increased demand.
We observe that most of SAS‟ notable competitors follow the same trend in ASK-
development (Norwegian and SAS excluded). British Airways recent decline may be related
to employee strikes in the summer 2010, which keeps the aircrafts on ground. Moreover,
during the period a weak development from Air France and SAS can be spotted, whereas
Finnair show signs of positive growth. The essence of this graph is that SAS, Air France-
KLM and British Airways are low-performers, Finnair perform better, and Norwegian (and
maybe Lufthansa) can be considered top-performers.
Figure 32 shows the growth in RPK for respective airlines compared to their performance the
previous year. Once again, we observe that Lufthansa and Norwegians growth rates on RPK
are the highest among SAS and their notable competitors. SAS‟ weak performance until
December 2009 may be attributed to divestments of group airlines. Hence, their former
subsidiaries‟ revenue streams are no longer integrated in SAS. Moreover, SAS also reduce
their revenue and kilometer potential when terminating routes.
It is observed that airlines share similar trends (SAS from early 2010) and that British
Airways has the lowest growth in RPK during 2010, which has been challenging for them.
-30
-20
-10
0
10
20
30
40
%
Own creation. Source: Monthly traffic reports from respective airlines
Figure 31: Monthly percentile change in Available seat per KM (ASK) compared to previous year
SAS
Finnair
Norwegian
Lufthansa GroupAir France-KLMBritish Airways
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Next KPI is growth in passenger traffic (PAX), which is presented in Figure 33. We observe
that Norwegian, Ryanair, easyJet and Lufthansa are top-performers. An interesting finding is
that Ryanair is the only airline with positive growth during the Icelandic ash-clouds.
Figure 33 illustrates that passenger growth for SAS is improving and actually recently is
positive. As of June 2010, SAS have roughly similar passenger growth-levels as Air France-
KLM and Finnair. Thus, considering the trend in passenger growth, LCCs are increasingly
capturing travelers, whereas traditional network-carriers‟ growth is slower. It can (again) be
derived that British Airways are the worst performer in our benchmark.
Figure 34 compares the average European ASK -and RPK industry growth performance from
IATA. The effects of the recession and the volcano-eruptions are to be observed. It also
follows the same trend as the airlines in our benchmark.
-60
-40
-20
0
20
40
%
Source: Own creation based on monthly traffic reports from respective airlines
Figure 32: Monthly percentile change in revenue passenger per KM (RPK) compared to previous year
SAS Group
Finnair
Norwegian
Lufthansa Group
Air France-KLM
British Airways
-30
-20
-10
0
10
20
30
40
%
Source: Own creation based on monthly traffic reports from respective airlines
Figure 33: Monthly percentile growth in passenger levels (PAX) compared to previous year
SAS
Finnair
Norwegian
Lufthansa Group
Air France-KLM
British Airways
easyJet
Ryanair
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We derive that growth in ASK and RPK correlates, even though RPK-development is more
volatile than ASK. Therefore, adjustments of available capacity aim to meet demand for air
travel. If RPK drops more than ASK, this will have negative consequences. In section 4.2., we
presented IATA‟s industry forecast for 2011, which implied that the ASK will increase more
than RPK. As a result of this, capacities will growth faster than the demand and revenue.
Figure 35 benchmark passenger load factors (PLF) for notable airlines. We observe that the
benchmarked airlines operate with roughly the same seasonal volatility and trends on load
factor. Ryanair and Norwegian, however, outperform their competitors and have had months
with approx. 90% cabin utilization. It is to be observed that Finnair is the airline with the least
satisfactory recent development in cabin utilization.
SAS operated with the same load factor as Norwegian between May and June 2010. This
indicates that sales campaigns in SAS have succeeded in order to deal with the free capacity.
Besides comparing with the above mentioned competitors, Appendix T illustrate that SAS‟
load factor is roughly in line with the Association of European Airlines‟ average during the
2010.
-15,00 %
-10,00 %
-5,00 %
0,00 %
5,00 %
10,00 %
%
Source: Own creation based on data from IATA
Figure 34: European airlines industry RPK and ASK growth development
RPK growth
ASK growth
505560657075808590
jan
/09
feb
/09
mar
/09
apr/
09
maj
/09
jun
/09
jul/
09
aug/
09
sep
/09
okt
/09
no
v/0
9
dec
/09
jan
/10
feb
/10
mar
/10
apr/
10
maj
/10
jun
/10
%
Source: Own creation based on monthly traffic reports from respective airlines
Figure 35: Passenger load factor for notable SAS-competitors
SAS
Lufthansa
Norwegian
BA
Finnair
Ryanair
Air France-KLM
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Our final operational KPI is block hours, which measures the average time an aircraft
operates, hence the time the plane leaves the gate until it stops at the destination (Doganis,
2010). We observe in Table 15 that SAS and Air France are low-performers. Additionally, we
inform that in 2007 and 2008, SAS operated with block
hours of 8 and 8,2, respectively. This indicates an
unsatisfactory development for SAS. The table also
illustrates that Lufthansa and British Airways are
performing quite well. An explanation might have
foundation in their large focus on long-distance flights,
which, all things equal will increase this KPI since the
aircraft are in motion for a longer period of time. It is
also to be noticed that LCCs obtain high scores without intercontinental routes. Reasons for
this may be their widespread use of secondary airports, which allows faster turn-around due to
less traffic. Reasons for SAS‟ low performance could be related to their hub-to-hub system,
which requires more coordination, as well as the shorter flights within the Nordics negatively,
affect productivity.
SAS‟ high scores on punctuality, as well as little development on block hours indicate that the
airline is satisfied with their scores on block hours. It might be the case that SAS keeps their
aircrafts on the ground for longer between departures since it may give them flexibility and
make it easier to be punctual. On the other hand, it might be the case that SAS cannot perform
much better on block hours due to e.g. their large fleet and relatively complex route-map.
Additionally, as mentioned in section 3.1.6., SAS have received criticism for not performing
the required pre-flight safety checks. In other words, block hours could be affected negatively
for SAS if they performed the required official procedures prior to each flight. Thus, perhaps
the true SAS-block hour value may be lower.
5.3. Findings from Chapter 5
In this chapter we derived that passenger levels, ASK and RPK for SAS have been declining
and these KPIs share roughly similar development. However, improvements are observed
from December 2009 until today. The main reason for this could be increased air travel-
demand, largely due to economic improvement. The passenger load factor has a strong
seasonal volatility and we observe that especially the intercontinental routes operate with high
load factors. When benchmarking SAS‟ yield toward the one of Norwegian, we observe that
both companies face challenges making money. The main reasons for the negative yields are
Table 15: Block hours
Airlines Daily block
hours
easyJet 11
British Airways 10,7
Norwegian 10,6
Lufthansa (2008) 10,3
Ryanair 9,6
Air France (2008) 8,2
SAS 8
Source: Own creation based on data from
Doganis and airline reports
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tougher competition, lower prices and margins, macroeconomic turbulence as well as
generally unfavorable market conditions. We also derived that winter months have lower
yields, which is due to less demand for travel and lower airfares. Less winter travelling leads
to a great amount of available capacity, and means such as the Low fare Calendar have been
introduced. Thus, according to economic rationality, it is better to lose a little than a lot.
The ASK, RPK and passenger level developments for SAS are following the industry. This is
due to airlines‟ strong correlation with economic development. Moreover, we have shown that
a strong correlation between ASK and RPK exist. On load factors, SAS is once again
performing in line with its main competitors and we observe that LCCs and especially
Ryanair score high on cabin utilization. Our final KPI was block hours, where we derived that
SAS‟ usage of their fleet is the lowest among the selected competitors. Our main findings
from Chapter 5 are:
PAX, RPK and ASK is improving due to a strengthened economic situation in 2010
We illustrated the strong correlation of airline performance and economic trend
ASK and RPK is strongly correlated
SAS‟ performs roughly in line with the industry regarding PAX, RPK, ASK and PLF
SAS‟ block hours were the lowest in our benchmark
Chapter 5 illustrated SAS‟ operational performance and next section will summarize our main
analytical findings and discuss these.
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Chapter 6 – Analytical findings and discussion
This chapter will briefly sum up the main analytical findings in prose and form a summary as
a SWOT. We aim to provide the reader with a shorter, more thorough and holistic view of
SAS. Important findings will then be discussed in section 6.2.
6.1. Main analytical findings
The main problem for SAS is their high costs, which have been obtained through years of
negotiations with strong unions. SAS-employees receive high remuneration for their work
compared to workers in competing airlines, as well as they tend to have more satisfactory
working hours. Thus, strategic and financial limitations exist for SAS, which make them
particularly vulnerable in the intense industry-rivalry. LCCs are major competitors for SAS,
as they are able to offer lower airfares than the mature SAS, as well as customers have
become more price-oriented on short-haul services. SAS aim to be a differentiator in order to
provide hassle-free flying with a strong focus on business travelers.
With Core SAS, the airline aims to turn an unprofitable SAS around through initiatives such
as divestments of non-core businesses, general cost reductions and a stronger focus on their
home market. This corporate strategy may not be interpreted as a long-term strategy, but
rather a cost-savings program. In our view, SAS operate a dual strategy, which aims to
compete on price with LCCs, as well as they aim to be a differentiator (comfort, simplicity,
flexibility, Eurobonus, Star Alliance, etc.). Thus, SAS do not possess a clear and concise
focus in their strategy; hence, they may be interpreted as being “stuck-in-the-middle”.
Therefore, competitive advantages are difficult to create. In addition to this, competitive
advantages are often created through the internal resources, capabilities and competences.
We found that SAS has a lack of dynamic VRIN-resources. Findings include their fleet,
which is old and inefficient, the staff is expensive (and tends to work less in other airlines)
and the brand value may have been weakened due to SAS‟ engagement in cartels, unfair
competition, accidents, not following the required pre-departure safety procedures, layoffs,
etc. Moreover, SAS possess significant political resources, factors disrupting competition and
create vital industry barriers. We do, however, argue that these advantages are declining,
especially if SAS should invite more private ownership. In short, the political resources create
competitive advantages, but they will most likely not last forever. We found that the main
VRIN-resources available were Star Alliance, Eurobonus, their route map and political assets.
SAS‟ core competences include IT-knowledge, Eurobonus, Star Alliance, punctuality, service
and frequency. We mentioned that competences related to Eurobonus and Star Alliance could
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
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be challenged in the future. This is because most network-carriers have mileage programs and
LCCs increasingly sees this need. Today‟s LCCs also offer beneficial discounts on car rental,
hotels, etc. Moreover, the Star Alliance-formation is challenged since it is not that unique as it
was a decade ago, i.e. Oneworld and Skyteam are expanding. Furthermore, the need for
network flying inside Europe may be of less importance than before since LCCs and network
carriers increasingly offer competitive services and have well-developed direct route maps.
The Scandinavian airline industry has high entry barriers and strong biased competition.
There are strong competitive substitutes for SAS‟ services in the Nordics. These include
trains, cars, other network carriers and low-cost flying with LCCs. Thus, the industry is
largely influenced by internal rivalry and external competition. In order to differentiate, SAS
aim to offer innovative complementarities.
SAS‟ bargaining position toward buyers and suppliers is generally weak. Tough competition
from other airlines, together with online travel brokers, makes it easy to compare airfares on
price. This has lead to a buyer‟s market. Furthermore, their financial limitations have resulted
in a poor negotiation condition with suppliers. SAS‟ brand value, and public media reputation
(and attention), may also negatively affect their bargaining position. Besides this, we also
derived that SAS have a poor bargaining position toward their employees, as unions are very
strong in Scandinavia. Finally, the market is influenced with an increasing rivalry, but there is
still opportunities for lower HI-values, hence more competition.
When analyzing the results from the benchmark of SAS toward notable competitors, we
observed that SAS roughly perform in-line with industry on KPIs such as ASK, RPK and load
factors. We derived that a strong correlation exists between the economic situation and SAS‟
KPI-performance, as well as SAS‟ block hours are the performing the lowest in our
benchmark. Even though, we highlight that SAS possess significant know-how on the
operational level and this is supported by their high scores on punctuality. Thus, we
emphasize that SAS may be better at the operating core compared to the managerial and
administrational levels. Their operations perform decent, but at too high cost levels. Their
high cost-structures are managerial issues, which top-management should be able to improve
to a certain extent. Moreover, SAS possess significant obligations, which are issues where
management has little control. We derive that SAS possess significant know-how in daily
operations, but have challenges with managing companies and costs.
Our main SAS-findings are illustrated in a SWOT-framework in Figure 36.
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Figure 36: SWOT of SAS
Source: Own creation
Threats
The highly competitive market, price-oriented
customers & LCCs
Eco friendly external substitutes
Currency & oil price fluctuations
Mature Nordic macroeconomic development
External cultural and religious clashes
Epidemics, wars, political disputes
Increased regulation and taxation
Star Alliance (neglecting internal learning)
CPH Swift
Videoconference technology
Opportunities
Business passengers
Core SAS
Eco-friendly airline
Brand
Product development
Eurobonus
Economy Extra
Markets where LCCs are not present yet
(Intercontinental)
EU-expansions = new markets
Strengths
Strong market shares
Brand value and national symbol
Culture and history
Governmental owners
Star Alliance, Eurobonus & Route Map
Product development and innovation
Strong presence in Scandinavian airports
Operational & market know-how, experience
& performance
Customer base
Hassle free flying
Weaknesses
Cost structures, (pension)-obligations
Strong labor unions & old fleet
Different aircrafts requires specific pilot skills
Financial distress
Governmental owners
Strong centralization
The hub system (more time consuming than
direct LCCs flights)
Vague and broad short term corporate strategy
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6.2. Discussion
Core SAS seems quite static and focused on cost reductions (output) and we argue that it
could be replaced with a „real‟ long-term corporate strategy that aims at generating growth.
The strong focuses on cost reductions are necessary, but do not generate growth. Only a
proactive, clear, narrow and sharp corporate strategy does. It seems that SAS-management
have integrated notions from the design and planning schools in multiple ways. The new
corporate structure has consolidated decision-making and power to the CEO (the strategist),
i.e. centralization of ownership and control (Hendrikse, 2007). Therefore, we argue that Core
SAS may have little room for strategic change, adaptation and incremental organizational
learning. The grand design is the plan and this will be followed. Planners (SAS-management)
try to control the future and to calculate it. The strong focus on financial and operational
goals/output, formulated by a perhaps technocratic top-management, is just as taken from the
planning and design schools as well as the system control perspective (Watson, 2006). Here,
very little authority resides at lower or middle management levels (Miller, 1986).
Managerially speaking, it may be argued that SAS have returned to the basic of business
management studies.
Recent industry changes have lead to an increased demand for intercontinental services, a
market which Core SAS exclude. However, SAS is responding with more intercontinental
flights, which is a direct contradiction to their strategy. The fact that SAS possess the
flexibility to increase supply may show positive properties regarding dynamic capabilities. On
the other hand, since SAS apparently have the required resources, without harming other
operations, indicate the airline possess free capacity. If SAS decide to sell off planes, they
should enhance their financial flexibility. The downside is decreased operational flexibility in
order to respond to market demands. Additionally, we derived that their fleet can be
considered costly, outdated and inefficient, which again would provide limited liquidity with
a potential selloff.
As shown in section 2.4.3, the Nordic business travel-market may not exist to the same degree
as earlier. Thus, Core SAS may be aiming for a declining segment, and a focus on business
passengers in a mature Nordic region may be characterized as a risky strategy. SAS have
increased their focus on their premium segment by launching Economy Extra. As business
class tickets historically may have be classified as a “Cash Cows” according to the BCG
Matrix (Henderson, 1973; 1979), see Appendix U, their focus could perhaps be „updated‟ in
order to respond to customer preferences. As a result of this, increased flexibility (Economy
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
Page 94
Extra) and mileage-points (Eurobonus) are factors business passengers tend to value and
could be the future “Stars” of SAS.
Due to important notions from division of labor, we highlight that it may be challenging for
managers in Stockholm to perform successful managerial decisions abroad. Thus, we
emphasize the potential challenges with neglecting delegation of ownership, control and
decision-making throughout the organization (Hendrikse, 2007). SAS could delegate
decision-making to (local/national) managers that have hands-on „day-to-day‟ experiences as
there may be difficulties for the headquarter (CEO) to implement their strategies abroad. They
should utilize local knowledge and comparative competences. Managers, which make
decisions, should operate in the environment and „get their hands dirty‟. In other words,
Stockholm-management may possess bounded rationality (Watson, 2006). Therefore, we
emphasize that significant resources could „support‟ Stockholm from abroad.
SAS already has experience with delegation due to their launch of separate business units in
2004. A McKinsey report argued that the Swedish unit could tailor-made their services to
meet their market demands, which should lead to more efficient competition with LCCs52
.
Examples included 12 new direct routes from Stockholm to European destinations, one-way
tickets, shorter decision making times, a more entrepreneurial management as well and a
general increase in ASK of 8 %-points. Thus, improved autonomy and decentralization can be
highly beneficial and we argue that SAS could adopt a hybrid structure. As a result of this, an
increased focus should be on the links between these units in order to coordinate efficient fare
prices, connecting flights and other network benefits. Thus, the connections between the units
are critical and we emphasize the importance of having communication, reporting standards
and cross-functional learning. A hybrid structure may also improve transparency, make it easy
to benchmark unit performance and perhaps make it easier to negotiate wages with
employees. Thus, SAS could delegate some decision making.
Scientific Management (Taylor, 1911) principles emphasize that hierarchical conditions may
strengthen organizational bureaucracy, predictability, standardization, stability and the
workers know what is required from them. However, it could be argued that SAS‟ strong
centralization may make the workers‟ feel exploited and alienated which may lead to moral
hazard issues, e.g. strikes. Moreover, employee-reductions may have increased dissatisfaction
with SAS-management. This can be interpreted by analyzing the sick leave development,
which has increased from 6,1 % in 2006 to 6,9 % in 2009, i.e. an increase of more than 13 %
52 McKinsey – The McKinsey Quarterly – May 2006 – A new organizational mode for airlines
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
Page 95
in three years53
. Another example of alienation, due to the centralization, is in their marketing
division. SAS‟ Danish marketing director, Christan Linnelyst, has recently resigned from his
position due to the centralization, which he claims are leading to a reduction of the marketing
employees in Denmark by 75%54
. Additionally, Linnelyst‟s decision-making and authority
have been reduced since a major part of the marketing division is now located in Stockholm.
Thus, centralization may lead to workers‟, also on upper management levels, feeling exploited
and alienated. As a result of the centralization, we highlight the importance of reporting
standards and inclusion of middle management.
SAS‟ corporate structure and processes shares similarities with a “Machine Bureaucracy”
(Mintzberg, 1979) since it appears to integrate formal procedures, routine operating tasks,
large-sized units at the operating level, standardization and technocratic activities.
Standardization of processes can lead to improved operational performance, but may also
limit individual development and reduce possible innovations. Moreover, Kärreman &
Alvesson (2004) argue that hierarchical steps within an organization may be an expression of
power, status, seniority, competence and experience. Thus, centralizing decision making into
a machine bureaucratic headquarter may be seen as an expression of meritocracy and the fact
top management believe that they are most qualified to formulate and implement strategies.
Figure 37: Machine bureaucratic features and SAS
Source: Own creation and based on data from Kärreman et al. 2002.
A brief comparison of SAS towards traditional machine bureaucratic features is shown in
figure 37. Machine-organizations typically operate in mature industrial industries, simple and
static contexts and technocratic managers may be seen as efficiency-seekers and process-
53 SAS Annual report 2009 54 http://borsen.dk/nyheder/karriere/artikel/1/191718/sas-direktoer_siger_op_i_vrede.html
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optimizers. Thus, SAS‟ structure could face challenges, since bureaucratic types may focus on
standardization, enforcement of rules, stability, homogeneity, financial and managerial means
(Kärreman, Sveningsson & Alvesson, 2002). These conditions have to operate in a dynamic
context, which will become problematic since it may be difficult to generate organizational
learning.
Employees, human capital resources (Barney & Hansen, 1994), may be the Achilles heals of
SAS. The fact that crew working for LCCs are willing to offer their services for lower
remuneration than employees in SAS support this claim. Moreover, employees may encounter
future challenges, since business travelers tend to have changed preferences on short-haul
flights. Thus, SAS employees‟ valuable skills, historical competitive advantages, may face a
future where increased industry homogeneity, competition and changed customer preferences
may result in challenges.
SAS‟ employees and their unions tend to ”tolerate” industry changes, which is illustrated by
their acceptance of salary reductions and changed working conditions. However, it might be
the case that SAS-employees have difficulties finding an as lucrative salary package and
working conditions elsewhere. Moreover, employees could become more dynamic and
flexible as static workers are one of the main problems of SAS. Moreover, they could also
engage in learning since this may bring advantages, which can generate additional value for
customers. Examples could be cabin-specific knowledge regarding wine, food, services, etc.
for the business segment, which passengers may be willing to pay extra for. We believe that
SAS has problems with facilitating and sharing knowledge, perhaps due to strong
centralization. Years of employee cuts may also lead to difficulties with trust, learning and
motivation. Thus, knowledge creation may have difficulties to appear on the operational level.
More precisely, the centralization may reduce dynamic capabilities as gaps between
management and the operating core exists.
Eurobonus & Star Alliance
These competences and products have solely positive VRIN-features. Competition on
secondary services may increase in the future, as competitors understand that this is one way
of attracting frequent flyers and a mean of differentiation. Alliance-networks‟ bonus-schemes
are generally well developed, largely due to decades of resource pooling and collaboration,
which makes it difficult to imitate for LCCs. However, no-frills airlines (in general)
increasingly negotiate competitive agreements on car-rentals, hotels, city passes, etc. and
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these offers are introduced for the customer when ordering the low-fare ticket. Thus,
continuous development of EuroBonus may be of importance for SAS. The downside of
mileage-programs is that they are expensive to operate, which creates cost LCCs do not
obtain. The CEO has recently opened up for a potential divestment of Eurobonus, which we
find unambitious since it offers value for customers. However, considering the Nordic
geography, it is a fact that travelers will not obtain a significant amount of mileage-points
when traveling on these short distances. This is a shortcoming of Eurobonus and could be
improved in order to increase the attractiveness of SAS. One reason for divesting Eurobonus
could be liquidity and more competent and dedicated owners.
Regarding Star Alliance, we argue that there is less need for this alliance for Nordic
passengers on the European market. LCCs (and network-carriers) cover a large direct route
network from Scandinavian airports to numerous European destinations, which reduce flight-
time and prices. For the price-sensitive traveler, there may be few extra benefits when flying
with Star Alliance within Europe. Star Alliance-members exchange customers, but we find it
difficult to evaluate if this favors SAS. For instance, why should the price-sensitive consumer
travel with SAS if they can fly with an alliance partner at lower price and receive roughly the
same amount of Eurobonus-points? Furthermore, we can easily construct a scenario where
customers receive a certain amount of Eurobonus points (by travelling with SAS-partners) for
which they can purchase a Bonus-point financed ticket at SAS. Thus, Star Alliance‟s
customer-exchange might be costly for SAS. On the other hand, partners also transport
passengers to Scandinavia.
Another potential downside of Star Alliance is that SAS may neglect to pursue internal
innovations. Having Barney‟s (1999) notions in mind, alliances can result in shortcuts to
competitiveness, but it may also reduce internal development. If SAS continues to rely on
their alliance-resources, they will not create any VRIN-resources themselves, which will
reduce future individual competitiveness. Moreover, SAS and Star Alliance are highly
interdependent, which may reduce flexibility and sovereignty. Thus, the membership can
prove to become damaging since SAS is locked into the alliance (captured).
We highlight the importance of unintended spillover effects (Porter, 1998). Competitors can
“steal” knowledge and value from SAS (and vice versa), due to intense collaboration in
airport-clusters. An example of spillover-effects includes low-cost properties. Another
downside of being in a cluster, and Star Alliance, is that competitors can gain access to
information about the Scandinavian market. In other words, it becomes important for SAS to
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create tacit knowledge and intangible assets, which cannot easily be imitated by competitors
or partners. Therefore, we emphasize that alliance participation can result in lack of control,
assisting a potential competitor, have a more short and medium term perspective and perhaps
have difficulties with learning (Collis & Montgomery, 1997). However, Star Alliance may
grant access to more speed and complementary assets.
PEST and Porter’s 5 Forces
Based on our macroeconomic analysis, Core SAS may be aiming at a market with low
growth, small margins and high cost levels. Their divestments of airlines, such as AirBaltic
and Estonian Air can be questioned, as these airlines operate in emerging markets with
lucrative growth rates. Additionally, airBaltic was awarded “Airline of the year 09/10” and a
“Phoenix Award 2010”55
, which demonstrates that the airline must have had potential and,
perhaps, that SAS is not good at managing companies. The EU commission is currently
considering membership applications several Eastern European countries56
, which may play
an increasingly important role in the future of European trade and economic development.
Therefore, we argue that SAS‟ Eastern European divestments may neglect growth
opportunities. SAS could also have benefitted from Eastern Europe‟s lower factor costs,
perhaps on the operational level. On the other hand, these markets are also more volatile.
The development of EU may increase the opportunity for business and growth in Europe.
This may involve opportunities for SAS to transport passengers on the business, economy,
charter and leisure-segment to newly developed destinations within the EU. Therefore, the
political and economic environment and SAS is highly interconnected.
The Scandinavian airline-industry is influenced by unilateral competition, which creates
significant entry-barriers. SAS‟ bargaining position toward their main Nordic airports is
generally strong since SAS is their largest customer. In fact, SAS may have an improved
bargaining position since both the airline and the airport generally speaking share
governmental investors and have long-lasting ties57
. A recent example involves CPH Swift,
where several LCCs are criticizing Copenhagen Airport for favoring SAS regarding airport-
fees and taxation58
. The dilemma is that the difference for airlines to operate in the SWIFT
compared to Terminal 1-3, is claimed to be marginal. As a result of this, LCCs must operate
with higher costs than anticipated, which may affect ticket prices. This would be a threat
55 http://www.airbaltic.com/public/awards_en.html 56 http://ec.europa.eu/enlargement/the-policy/countries-on-the-road-to-membership/index_en.htm 57 An example is Copenhagen International Airport 58 http://borsen.dk/nyheder/transport/artikel/1/187296/koebenhavnsk_lavpristerminal_vakler.html
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towards LCCs‟ successful business model and the SWIFT-example is an expression of SAS‟
negotiation position towards their main airport(s). Thus, SAS could exploit their bargaining
position toward industry suppliers and force them to create costs for LCCs in order to reduce
their competitiveness.
Regarding substitutes, eco-friendly transportation is a major threat for airlines. As politicians
become more focused on improving the environment, they may enhance their focus on trains.
Video – and telecommunication may also play an important role in the future due to lower
prices and increased quality. However, we believe that IT will never substitute flying
completely, especially since it cannot create cultural connections, but it offers effective ways
of promoting a greener image, reducing inefficient travel and is more flexible. We observe
that there are competitive substitutes for SAS‟ offerings on short-haul services, which are
threats that seem to further increase. Moreover, LCCs may also enter the business segment or
intercontinental map in the future, and this would have significant impacts on SAS.
Bargaining powers of buyers are improving due to enhanced competition and technology.
Search engines (e.g. Expedia) offer easy airfare comparison, which increases transparency for
customers, and these trends that may further increase. With even tougher competition from
other airlines and substitutes, SAS‟ bargaining power may decline as well as their market
shares and the HI-value will be reduced. Therefore, in order to turn this around, SAS could
differentiate themselves, since they cannot compete on price. They may create industry
barriers and switching costs, which could improve their bargaining power toward buyers.
Tough competition leads to innovations (as observed with LCCs), but these processes seem to
be more or less neglected by SAS. It seems the airline apply a traditional strategy where they
lower prices instead of benefitting from innovations.
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Chapter 7 – Potential future scenarios for SAS
SAS is resource starved and this chapter will present four scenarios, which can be ways out of
their present situation. These are: 1) SAS succeeds with Core SAS and remain independent, 2)
M&A with Lufthansa, 3) Intercontinental expansion and 4) Liquidation and re-formation of a
new airline. Since SAS have higher cost structures than their competitors, we argue that they
should always differentiate instead of pursuing cost leadership. Thus, differentiation and
innovative product development, as a way of competing, should be kept in mind throughout
this chapter as a common denominator. Additionally, these scenarios might be interconnected.
7.1. SAS succeeds and remain independent
In this scenario, we assume that SAS‟ market shares will increase and SAS will continue as
an independent airline. Expanding their Nordic market shares is challenging due to several
factors, i.e. mature macroeconomic factors, higher cost-levels than Norwegian and other
LCCs, “unprofitable” political destinations, etc. Furthermore, short distances lead to
„inefficient‟ fuel usage as observed in Appendix D.
SAS can increase their market shares by several means, e.g. exploiting cultural and political
assets. For instance, SAS could influence politicians to increase taxation, and other fees,
which would harm LCCs in the Nordic region. Thus, LCCs would have higher costs (and
higher prices) and their competitiveness could decline. Hence, LCCs may choose other
emerging European regions as a focus, which would make life easier for SAS. The main
challenge is to reduce competition from LCCs, or at least harm their competitive advantages
by increasing their cost structures. Manipulating suppliers (e.g. airports) can be a powerful
tool and SAS could exploit their market status. A successful attempt is the CPH SWIFT-
example, which already has been discussed. We highlight that these means of manipulation
are unethical and unfair, but it is competitive advantages, which SAS may benefit from.
SAS could develop VRIN-resources, or reducing inefficient ones, perhaps by outsourcing
parts of the value chain. Examples could be outsourcing the cabin crew and their work to
external partners as already done with meals. Additionally training of cabin crew could be
outsourced to a recruitment agency. SAS internalize training through SAS Flight Academy,
which is time and capital consuming. By outsourcing this, SAS could reduce their ownership
of employees, coordination, training, resources, costs, and thereby enhance financial strength
as well as a larger focus on core competences (Weidenbaum, 2005). The downside of
outsourcing is the obvious lack of control, principal-agent problems, spillover effects, internal
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knowledge creation, etc. However, since procedures of the cabin crew are highly standardized
and homogenous - spillover effects and lack of control may not be a serious issue for SAS.
We highlight the fact that safety requirements in the industry could be considered outsourced
as well, or perhaps performed in collaboration with an external (governmental) supplier.
Moreover, outsourcing of cabin crew may also lead to changes in the supply chain. Middle
managers, which before acted as human resources managers, could then, change job
description into managing supplier (human) relations instead of employees. Furthermore, the
need for efficient reporting from the operating level toward the managerial level would
increase. In essence, outsourcing of employees may reduce some of SAS‟ union challenges
and costs as well as management could focus more on the core business and increase SAS‟
competitiveness. However, politicians, labor unions and NGOs would most likely not be
thrilled by this initiative59
.
SAS could also use their brand value in order to differentiate and capture market shares. Their
corporate strategy placed them in the middle of Porter‟s matrix and we highlighted the
importance of a niche in order to be a differentiator. SAS face challenges when competing on
broad segments such as charter, leisure and business, as their costs are too high and the airline
do not possess “LCC-capabilities”. Thus, we argue that they might narrow down their
customer segments and increase the focus on being a differentiator, which Kumar‟s60
(2006)
model suggests. In essence, he emphasizes the importance of differentiation, as low-cost
rivals possess more satisfying cost-structures than incumbents in an industry. Furthermore, he
argues that setting up a subsidiary for competing with LCCs could be beneficial, even though
strategy has already been unsuccessfully implemented with Snowflake. Lufthansa and Air
France-KLM also pursue this low cost segment through LCCs, such as German Wings and
Transavia. This might be a smart tactic since their LCC-subsidiary attacks SAS on prices,
whereas their parent company attacks on service and comfort. SAS is attacked from multiple
sides and is forced to strategize toward both objectives (service and price), i.e. a dual strategy,
and as literature often suggests, broad, complex and mixed strategies rarely succeed.
A war on price could have fatal consequences as observed during the 90s with multiple LCC-
bankruptcies. Aligning Kumar‟s framework (2006) with Ansoff‟s matrix (1957) in Figure 11,
we believe that a focus on the home market could be beneficial if followed by a clear product
strategy. This would combine market development and diversification (the bottom of Ansoff‟s
matrix) since SAS needs to create new products and revenue streams for their current, and
59 http://www.ys.no/kunder/ys/cms.nsf/$all/2384E37873676A56C12577AE0063966E?OpenDocument 60 See Appendix C
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perhaps new, markets. Since flying may be seen as a homogeneous service, we argue that
SAS could enhance product development on their complementarities and services in order to
further enhance their differentiation. Examples of product development could be integrating
taxi services from airports to business centers. Business passengers spend time and money in
taxis, which could result in bonus points. Perhaps discounts and other benefits with larger taxi
companies in Oslo, Stockholm, Copenhagen, London, Brussels, Frankfurt, etc. could be
created. Another inconvenience for frequent flyers is communication back home to the office.
SAS could negotiate agreements with larger international telecommunication operators so
business passengers can use their phone, e-mail and internet abroad at an affordable price.
Thus, customers would save money on communication and receive bonus points by signing a
“SAS travel (roaming) subscription”. We also emphasize that business passengers should get
more value from their expensive tickets. Business class tickets often cost several 1000s KRs
more and they get little value on short haul besides flexibility and maybe leg space. Put
controversially, in essence, customers may pay thousands of KRs for getting a free meal.
They could focus on their core competences toward the business segment. SAS, the
businessman‟s airline, have traditionally had a strong cash cow (BCG Matrix, Appendix U) in
their business products. This is because SAS traditionally have had high market shares and
growth in this segment, as well as lack of competition from LCCs, whereas SAS mainly have
competed with other network carriers. We argue (as assessed earlier) that SAS should search
for the “Stars” of tomorrow in order to increase competitiveness, growth rates and
differentiation from LCCs and other flag carriers.
We find scenario 1 difficult to achieve, as it is very challenging to compete and improve
profitability in a market with slow growth, low margins, high costs, uncertainty, homogeneity,
volatility and travelers‟ increased price-sensitivity. All things equal, it is difficult as an
incumbent to further increase home market shares when competition is becoming increasingly
tougher and dynamic. Differentiation may be the only realistic option for SAS and we
highlight that they could narrow down their customer segments. However, SAS‟ means of
differentiation could prove to have limited value for customers, as ticket-prices on short-haul
services tend to be a very important factor.
Their political assets should be exploited and SAS could create dynamic VRIN-resources and
core competences in order to create competitive advantages. These are necessities in SAS‟
battle against LCCs as SAS are unable to compete efficient on price. If SAS wish to continue
as an independent airline and improve their performance, we emphasize that they could:
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Exploit political, brand and cultural assets
Create industry barriers by exploiting SAS‟ size
Enhance bargaining position towards industry suppliers and manipulate these
Improve bargaining position against buyers through innovation and differentiation
Further implement cost-minimization, but not apply a low-cost strategy
Create a clear corporate and product strategy, i.e. find their niche
Narrow down customer segments – differentiation focus and not a cost-leader
Search for the future “Stars” – perhaps Economy Extra is one.
7.2. M&A with Lufthansa
In this scenario, we claim that it might be difficult for SAS to survive without a partnership
through an M&A. Benefits from M&As61
may include easier access to capital, economies of
scale, reduction of inefficiencies, access to complementary resources, as well as industry
consolidation. These are important notions, which SAS should be aware of.
The most realistic partner (or acquirer) of SAS is the Lufthansa Group62
, partly due to their
membership in Star Alliance. Leaving Star Alliance is costly, time-consuming and could
reduce SAS competitiveness. Thus, we do not see Air France–KLM, British Airways or
Finnair as possible acquirers. Moreover, Lufthansa apply a decentralized group strategy,
where their acquired airlines tend to operate with own brand, hubs, customer groups, etc. If
Lufthansa choose to enhance their Nordic focus, an increased collaboration with SAS might
be beneficial, since they have Nordic know-how. Their brand value and political resources
may also be interesting for Lufthansa to develop further. Additionally, Eurobonus has a large
customer-base, which Lufthansa might like to access.
Another opportunity is to integrate SAS in Lufthansa‟s hub-to-hub strategy. More precisely,
SAS could maintain their Nordic focus and Lufthansa could develop their intercontinental
routes. An acquisition of SAS may lead to a hub-to-hub strategy, where Copenhagen Airport
will become more dominant. An example is the merger with Swiss and Austrian, which lead
to an increased focus on “hubbing” from Zürich and Vienna. This may be beneficial for the
Danish and Southern Swedish infrastructure, but the rest of Sweden and Norway may be
affected negatively. Therefore, the Danish stakeholders may have incentives for a merger. As
a result, potential SAS-customers living outside the main cities could be harmed since they
will have to spend more money on tickets, get reduced flight frequency and increased flight
61 Brealey, Myers, Allen – Principles of Corporate Finance 62 http://www.business.dk/transport/eksperter-lufthansa-mest-attraktiv-sas
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duration if choosing SAS.
Prettifying for an M&A with Lufthansa may be challenging due to the relatively smaller
Nordic market size, a mature region and moderate rivalry. Moreover, Lufthansa have recently
stated that they do not possess the financial resources to acquire SAS63
. Additionally, they are
also currently busy with an integration of Swiss, Austrian, BMI and Brussels Airlines64
. We
also argue that if Lufthansa have a group strategy, with a strong focus on intercontinental
services, they might choose to focus on emerging markets. Examples of Lufthansa‟s global
presence can be illustrated by their holdings in the JetBlue Airways and Shenzhen Airlines,
which is a substantial investor in Air China65
. Research from Carlson-Wagonlit also showed
that long-distance business flights to Asia and North America have higher growth. This is
supported by GDP-development, where China score high (9,9 % in 2010)66
. In short,
Lufthansa may choose to focus on emerging markets, such as the BRIC-countries, Asian or
Eastern European countries67
. These markets generally offer lucrative cost-levels, business
conditions, as well as growth rates and markets opportunities.
SAS-management have opened up for Lufthansa to buy a smaller share of SAS (and to
increase collaboration) with a following right to acquire the remaining shares of the airline.
However, since SAS‟ cost structures are still too high and Lufthansa is fairly occupied with
M&As, an M&A with Lufthansa may be years away, which is why SAS could learn how to
operate successfully on their own.
In scenario 2 we find important notions such as:
Lufthansa is a realistic acquirer, but is occupied with implementing current M&As.
The Nordic market is mature compared to more emerging zones.
SAS have too high costs and obligations, which might reduce investor attractiveness
Lufthansa operate a decentralized group strategy, which may be interesting for SAS
and their stakeholders
Nordic regions with minor airports may be harmed, which governments dislike
Lufthansa can further utilize their long-distance focus by acquiring SAS
SAS have good operational and market know-how, route map, customer base,
complementarities, etc., which Lufthansa can exploit
63 http://www.business.dk/transport/lufthansa-skal-lokkes-til-sas-koeb 64 http://www.business.dk/transport/lufthansa-afviser-sas-frieri 65 http://www.airchina.com.cn/AboutAirChina/InvestorRelations/CorporateOverview/gskj.shtml 66http://www.chinaeconomicreview.com/dailybriefing/2010_04_22/IMF_raises_China_2011_GDP_forecast_to_99.html 67 http://www2.goldmansachs.com/ideas/brics/index.html
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7.3 Intercontinental expansion
We argue that this is an especially risky strategy since SAS do not possess the financial
strength modernize their fleet and generate economies of scale. SAS have experience in
services to North America, where they initially started flights in the mid-50s. Moreover,
destinations such as New York, L.A. and Beijing are locations where airlines potentially can
achieve higher margins than on i.e. the ultra-competitive European market. MNCs may also
want to fly SAS as they get positive associations with the name (brand) “Scandinavia”.
Toward Scandinavian travelers, SAS could also have a special feeling. As soon as
Scandinavians board a SAS-plane, they already feel like home. Their brand, cultural and
national value is a major competitive advantage since we do not have the same feelings
toward competitors. Moreover, regarding fuel costs, intercontinental flights are more lucrative
than short-haul services as illustrated in Appendix D.
When analyzing macroeconomic growth rates, the general impression is that the Asian region
is more emerging than the Nordic. The Asian economies together with BRIC-countries, could
definitely provide opportunities for SAS, and is something for the SAS-management to
consider. As Asia becomes even more globalized and competitive, MNCs, and Scandinavian
corporations and citizens will have an increased need for travelling there. Finnair has already
realized this and is expanding on their Asian destinations, also by collaborating with
Norwegian. Owner and CEO of aviation consulting firm Aeropol AB, Anders Lidman,
support our arguments for an expansion of SAS‟ intercontinental services68
. He argues that
SAS should take up the fight with Finnair on long-distance flights to Asia due to the higher
potential. Additionally, having the Norwegian-Finnair model in mind, SAS could increase
collaboration with other airlines, e.g. Cimber, Malmö Aviation, etc., which could transport
passengers to Stockholm, Oslo and Copenhagen, where SAS could fly them abroad.
The intercontinental markets are primarily dominated by the major network airlines and their
respective alliances. Therefore, it is a market where the costs are “allowed” to be a bit higher
due to the non-presence of LCCs. SAS might benefit from gaining intercontinental market-
shares and knowledge before LCCs enters. Norwegian are planning to fly directly from
Scandinavia to New York and Bangkok from 2011, which further pressures SAS69
. An
increased intercontinental focus supports our findings in order to differentiate SAS from
competitors and LCCs particularly. Apart from an increased Asian focus, SAS could also
focus more on North American destinations. As the American economy improves, SAS could
68 http://www.dn.no/forsiden/naringsliv/article1976823.ece 69 http://www.business.dk/transport/norwegian-vil-flyve-dagligt-til-bangkok
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start up more direct routes to airports with less competition. Airlines such as Continental,
Delta, KLM and United offer direct flights to America from Scandinavia, which leads to a
tough competitive marketplace. In order to avoid the most competitive routes, perhaps there is
a market for a direct service from Scandinavia to business-destinations such as Houston (oil-
industry), Detroit (car industry) or Portland (energy-industry)? Another intercontinental cost
factor improvement could be achieved by flying direct from Scandinavia to secondary
American airports, as these may offer lower fees and less competition70
.
We also argue that SAS could utilize cheaper foreign staff by employing Americans or
Asians. Even though this may result in clashes with Nordic labor unions, this is something
especially Asian passengers would value due to language and cultural conditions. Moreover,
if governmental investors were to be replaced with institutional ones, we argue that SAS
should take advantage of these opportunities. Country specific comparative factors, such as
low cost (and high quality) labor, higher demand on intercontinental flights, etc. could
provide significant benefits for SAS. Put differently, exploiting competitive advantages of
nations can improve competitiveness for of MNCs (Porter, 1998). It seems like the Nordic
labor unions may be afraid of low-cost, foreign labor, due to their highly competitive
capabilities, acceptance of lower salaries as well as more working hours compared to
Scandinavians. In short, foreign labor may outperform the members of the unions. Moreover,
rules regarding the free movement of workers within
the EU could be utilized by SAS. Table 16 shows
that North American airlines such as United, Delta,
Continental, American, and Air Canada generally
tend to have between 40 – 50 % lower pilot salary
costs and around 60 % lower costs on cabin
attendants. On the Asian markets, Thai has 55 %
lower pilot costs and Singapore airline has 21 %.
Regarding cabin attendants, Thai‟s cabin crew is 75
% cheaper than the one of SAS. This brief cost
benchmarking shows that SAS cannot compete on
costs with North American, European or Asian airlines. If we look humoristic on this
situation, we observe that SAS are world champions in high salaries. Thus, an international
expansion could be done by integrating foreign labor. Another way of lowering costs and
70 Copenhagen Economics – Der er noget i luften, p. 24
Table 16: Annual expenditure on
Pilots/Co-pilots and cabin attendants
(US$000s)
Pilots/Co-
pilots
Cabin
attendants
SAS 233,8 97,2
Air France 316,7 83,3
Lufthansa 225 58,7
BA 178,8 50,8
American 138,3 47,2
Delta 127,3 37,0
Continental 123,6 41,9
Air Canada 119,1 38,4
United 114,9 36,2
ALL Nippon 184,1 44,0
Thai Airways 105,4 52,5
Singapore
Airlines
Source:Doganis
168 25,1
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improving efficiency on could be increased collaboration with other airlines. An example is
the route Copenhagen-New York, which (among others) is operated together by KLM and
Delta. A SAS-example could include Copenhagen-Moscow, where Aeroflot and SAS
collaborate by sharing crew, aircrafts, passengers, etc. These experiences could be applied on
intercontinental flights as well, perhaps by collaborating with other Star Alliance members.
Carlson Wagonlit Travel, Appendix K, illustrate that the only “business”-market with
progress is the North American, as well as the Eastern markets also may seem appealing. As a
result, if SAS want to increase their focus on the business segment, they could do it on the
intercontinental routes since corporate travel policies tend to be more flexible.
The downsides of intercontinental expansions are increased volatility and capital
requirements. Moreover, SAS may possess knowledge about intercontinental flights, but it is
not their home field, i.e. less VRIN-resources and core competences. Additionally, SAS may
not have a strong brand value towards foreigners, especially Americans, who in general, tend
to be more patriotic and might prefer flying with American carriers. Another challenge might
be that most network-carriers already have well-developed mileage-programs themselves. Our
main concern is whether SAS actually possess the cost-structures, financial muscles, internal
resources, capabilities and competences that are required in the global market. Concerning an
intercontinental expansion we highlight that:
Demand for intercontinental flights is improving
Growth rates on the business segments are higher on intercontinental routes
LCCs have low presence on the intercontinental market (from Scandinavia)
Scandinavian travelers may have national feelings toward SAS
Emerging (Asian) regions may provide opportunities for SAS
SAS‟ (cabin) costs are higher than American and Asian airlines
Improved (labor) costs by hiring foreign labor
Most major network carriers have well-developed mileage-programs themselves
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7.4. Liquidation
We interpret liquidation as the worst case scenario for SAS and their stakeholders. Other
airlines would take over SAS‟ assets, e.g. fleet, staff, etc. However, aircrafts may be
unattractive for competitors since they are relatively old and the employees may be too
expensive. Their widespread route-network could also be reduced and thereby focus on the
most profitable destinations. An industry without SAS could lead to a lower quality of
Scandinavian infrastructure, as well as an overall lower degree of competition in the Nordic
region. One may witness a „new‟ SAS where Scandinavian governments may subsidize
certain “unprofitable” routes in order to maintain the infrastructure. For instance, in the Air
France-KLM merger, the Dutch government demanded that the merged group should
maintain certain routes (until a specific date), in order to maintain the quality of
infrastructure71
. These conditions could also be included scenario 2. Scandinavian countries
could also lose a significant amount of tax payments. In an extreme scenario, where all SAS-
employees are without a job, we roughly estimate that taxation income losses could easily
account to more than 10 Billion SEK, as illustrated in Appendix V. The unemployment could
increase which leads to more welfare transactions compared to employed citizens who pay
taxes on their income, i.e. negative influence on the state budgets. The infrastructure may
have a lower quality and the Scandinavian region‟s value creation and degree of globalization
will decline. Additionally, the FDI may also decline as MNCs choose to focus on other
regions with more attractive level of infrastructure. Thus, liquidation could lead to:
Reduced competition and perhaps increased ticket prices in the Nordics
A less developed Scandinavian infrastructure
Negative impact on the state budgets and increased unemployment
Reduced FDI & Scandinavian business conditions
This chapter presented potential scenarios for SAS in the future. Next chapter will summarize
our main analytical findings and we will present our conclusions. In addition to this, we will
put some of our thoughts into perspectives.
71 Copenhagen Economics – Der er noget i luften, p. 35
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Chapter 8 – Conclusion & Perspectives
SAS‟ current strategic position is
challenging and we have observed that
they are resource-starved. Our views on
the Scandinavian positioning of SAS and
notable other airlines are illustrated in
Figure 38. We claim that SAS‟ market
position is diffuse and difficult to assess,
as their lack of focus (low fares, business
class, flexibility, high frequency, hassle-
free flying, Eurobonus, Star Alliance,
different ticket classes, etc.) make them
difficult to evaluate, i.e. they are „stuck-
in-the-middle‟.
We illustrate that SAS perform well at service and complementarities (e.g. Eurobonus), which
we also have derived as their core competences. Their pricing strategy places them in the
middle between LCCs -and network carriers. We also observe that the main European
network carriers tend to be positioned in the upper right corner (complementarities, service,
high prices), whereas LCCs‟ no-frills offers are placed in the opposite square (lower prices
and less complementarities). We might see a future where Norwegian can move to the right
due to an increased focus on complementarities, business passengers and costs. Therefore, we
highlight that SAS might have to choose a clear focus of their operations – do they want to
operate with low fares or should they focus on service and complementarities? A lack of clear
focus places them in the middle where they cannot create competitive advantages.
SAS have increased their focus on a mature Nordic market. Moreover, business travellers are
their most profitable segment, a segment where preferences (e.g. price-sensitivity) have
changed short-haul services. Additionally, the airline aims to offer low fares in order to be
competitive on the Nordic markets, which have tough market conditions and large presence of
LCCs. In short, we have elaborated upon that SAS apply a differentiation –and a low-cost
strategy, as well as their core competences is not within low-cost leadership. Moreover,
indications that they do not possess the needed capabilities to compete in the low-cost market
have been addressed. Therefore, it could benefit the airline if they aim for a narrow target
with clear directions for action. A focus on their most profitable segment, hence, a movement
Source: Own creation
Figur 38: SAS Nordic market positioning
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Page 110
toward the right in Figure 39, might be a target for the airline by focusing more on Economy
Extra. In our scenario analysis, we discussed a market where LCCs may have no significant
positioning in the near future, e.g. on intercontinental services. Here SAS could act.
We have presented the essence of their corporate strategy, Core SAS, and derived that this
strategy has mixed strategic objectives (i.e. cost-savings, low fares and focus on
differentiation and their home-market) as well as a clear deadline is set for the program in the
near future, hence, it has a short-term horizon. Therefore, we have argued that Core SAS
might be seen as a short-term cost savings program with unclear focus rather than a corporate
strategy. Additionally, the program includes different stages of cost-reductions, in order to
reach their incremental cost-saving plans. This means that Core SAS can be seen as a highly
modular program, and the importance of clear links between the different stages are
emphasized. For us, this is a quite static and old-fashioned way of strategizing, or planning, as
strict planning (like Core SAS) may not facilitate learning and innovation, which may be
challenging in the long-term.
It can also be argued that the cost-savings and achieving surplus may be an objective to look
attractive for future investors or an acquirer. What if future potential large investors (or
acquirers) such as Lufthansa do not wish to acquire SAS or do not have the needed funds for
this72
? Perhaps a potential acquirer may focus on more emerging markets with higher margins
than the Nordic market. On the basis of this, it might be argued that SAS could benefit from
having an individual long-term strategy, as well as the importance of finding their niche
instead of a static focus on cost-reductions. Cost savings are usually a good objective, but this
will not generate future growth and financial rewards for the shareholders. Initiatives such as
well developed corporate -and product strategies, as well as investments create future growth,
which indicates that money should be spent in order to earn cash. We have also assessed
means such as a stronger focus on innovative products aimed at emerging markets. In other
words, continuous developments of existing (and new products) are crucial when applying
diversification-strategies in order to generate growth.
The company-structure in SAS can be characterized as a centralized hierarchy. This structure
shares similarities with a machine bureaucracy, and we argue that autonomy may increase
competitiveness, speed and flexibility, and therefore could be decentralized.
Furthermore, we have assessed the airline‟s internal capabilities and it is derived that there is
a lack of sufficient resources, e.g. their fleet, which is relatively inefficient due to multiple
72 http://www.dr.dk/Nyheder/Penge/2010/03/11/132917.htm
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aircraft types and their average age. Moreover, cabin crew have traditionally created
competitive advantages, but due to the changed customer preferences on short-haul services
(i.e. increased homogeneity and price-sensitivity) this might have changed. By examining and
comparing their remuneration, we found that SAS staff tends to work less for higher
remuneration. In short, their fleet and employees do not seem to obtain VRIN-features or
dynamic capabilities, as well as their asset specificity can be argued to be high, as they have
specialized knowledge and clear job descriptions.
Their political resources and brand value have traditionally provided advantages for SAS, but
a widespread exploitation the recent years may have had negative impact on their reputation
and market status. Examples include bailouts and utilization of their owners in the CPH
SWIFT-example. We have revealed that their core competences lie within IT, Eurobonus,
Star Alliance, punctuality, service and frequency. In other words, they have a strong position
on the operational levels, which are competences that can be used further toward the business
segment.
In essence, SAS‟ internal potential may be declining due to the less emphasis on knowledge
creation and building up dynamic VRIN-resources. Moreover, their core competences,
operational know-how, are aiming at short-haul services, where business travellers‟
preferences tend to have changed. SAS‟ internal factors have few VRIN-features and dynamic
capabilities, which may create limitations when trying to create competitive advantages.
On the macroeconomic level, we have illustrated that external factors (such as economic,
political, legal and technological development) significantly influence SAS, and the fact that
development within aviation positively correlates with GDP. The political environment is
stable in Scandinavia and the economic developments tend to be improving after the crisis.
We demonstrated that the Norwegian market value and passenger levels are the largest within
the Scandinavian countries, but it also possesses lower growth rates than Denmark and
Sweden. Additionally, we derived that the Swedish market may offer more future
opportunities for SAS than within the other Nordic countries due to their market‟s potential.
Social conditions also tend to be improving. In short, external factors like the macroeconomic
development is important and our analysis show that the Swedish market may have bigger
potential, due to potentially higher economic growth rates.
Our industry analysis presented material from which we concluded that the Scandinavian
aviation industry has high barriers of entry due to capital requirements, know-how, unequal
competition, etc. Network carriers largely compete on complementarities, comfort and
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service, whereas LCCs are more price-oriented. Substitutes to SAS‟ offers exist and examples
are trains, cars, busses, IT, LCCs, charter firms as well as other network carriers. Moreover,
SAS‟ bargaining position toward buyers and suppliers are generally declining as their
financial strength, market power and brand are performing worse than earlier. As competition
increases so does the bargaining power of the customers. Therefore, we have derived that the
industry is influenced by forces such as competitive substitutes, buyers and suppliers‟
favorable bargaining position, together with a calculated HI-value indicating a moderate (but
increasing) degree of competition intensity.
In our benchmark, we assessed SAS toward notable competitors. Findings include an
operational performance being generally in-line with their rivals. Passenger levels, load
factors, revenue and available seats per km tend to be improving for SAS, which largely can
be attributed to an improved economic situation. Even though, regarding fleet utilization, we
found that SAS perform lower than competitors, as daily block hours are among the lowest in
our benchmark. This chapter also supported our view that operational know-how is fairly
good in SAS.
We have assessed four potential scenarios for SAS, which range quite broad. One outcome is
a successful outcome with Core SAS, which separately should open up interesting options for
the airline. Strength to remain independent could then be gained, together with an increased
probability for an M&A, as successful firms tend to have larger attractiveness for acquirers.
We argue that an M&A of SAS is a realistic option based on views from management in both
SAS and response from a potential acquirer. More risky potential scenarios include a larger
focus on long-distance services. A combination of new focus and partnership is a realistic
outcome here, since an expansion on the intercontinental market involves significant capital
requirements (e.g. fleet-expansion), which SAS do not possess at present time. Arguments
include that these are means for differentiation from LCCs, and we speculated upon routes,
which could result in a SAS with a niche-route network.
Finally, we emphasized that cost-savings are needed for SAS to become more competitive
and perhaps reach a surplus. Years with cost cutting may have reduced employees‟
motivation, company revenue and capacity levels. In short, we claimed that investments are
needed in order to enable future growth. Thus, SAS could benefit from potential expansions
and investments, and perhaps the airline once again could become a pioneer and the
businessman’s airline.
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8.1. Perspectives
We have derived that SAS apply notions from the design –and planning schools, which is
why our focus is structured around these. Moreover, we could have used the learning school
and to a larger degree emphasized on dynamic capabilities, which are needed in order to make
SAS more competitive. Additionally, we would also find it interesting to analyze the
connection between their resources and products, in order to assess the future independence of
the airline. These are topics we will briefly discuss next.
The learning school
As derived in the analysis, SAS apply a static management technique -and strategizing style.
Thus, it would be interesting to analyze if notions from the “Learning School” (Mintzberg et
al., 2009) could create value. The essence of this school of thought is that strategy formulation
and implementation is collective, as well as they are ongoing incremental and emergent
processes. Thus, management continues to evaluate results and adapts (learns/upgrades) the
strategy. This makes corporate strategies more fluent, dynamic and flexible compared to a
more static Core SAS. Moreover, there are challenges associated with static strategies in
dynamic environments. Since adaptations appear incrementally, learning becomes an
interesting notion. This is because successful dynamic strategizing cannot efficiently appear
without organizational knowledge creation and sharing.
As a critique toward ourselves, we could have compared deliberate and emergent strategizing.
Deliberate strategizing may be applied by SAS management and tend to focus on control and
achievement of the initial formulation through effective implementation. Emergent
strategizing emphasizes strategic learning as a main focus. We argue that incremental
strategizing could be an ongoing process of negotiation between various powerful
stakeholders of a firm. It could also be interesting to analyze whether emergent strategy
formulation, through incremental collective organizational learning, actually appears in the
entire SAS organization or only among their top-executives. We are aware that organizational
success often has roots in managerial learning, but we find collective learning an interesting
aspect of management theory.
SAS tend to be rather „old- fashioned‟ and embrace principles of scientific management,
where learning usually appears on top levels. Moreover, the notion of retrospective sense
making (Weick, 1995) is closely connected to emergent strategizing. By transforming this
theory into our SAS-case, we might say that emergent strategizing for SAS could appear
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through a more dynamic and incremental reflection over past behavior, successes and failures.
SAS could try new ideas (act), evaluate/interpret them (make sense) and then integrate, or
keep, this newfound knowledge into their future processes (retention). This could be an
ongoing process, which could help the management to spot strengths and weaknesses as well
as transform their current static deliberate strategy into a more emergent one. This should lead
to a general break from traditional strategic management, which tends to highlight that
formulation is ended before implementation begins.
Although sense making may provide important notions regarding dynamic reflection,
adaptation and learning, we could criticize it for having a too strong emphasis on the past. In
other words, contexts do change, in some industries quite rapid, which is why too much
emphasis on historical results may provide little or wrong knowledge for an organization
about the future. Thus, retrospective sense making may have challenges in hypercompetitive
environments. Moreover, it may be risky and expensive to create new initiatives, pilot
projects, etc., due to their perhaps high failure rates.
Dynamic strategizing can become important for SAS since the industry may become even
more competitive, complex and unpredictable. Static strategizing may work in simple and
predictable industries (perhaps decades ago), but not in dynamic markets. Dynamic
strategizing would promote delegation of ownership and control, as well as decentralization
could make all aspects in the organization able to learn, and not just the central
administration. However, the downside is that a strategy may become weak and diffuse, as
well as negative micro-political actions could be created in order for managers to get their
objectives through.
Due to Core SAS and being an airline in financial distress, there may be little room and
patience for incremental learning. Without a clear and concise strategic foundation, it might
be difficult to implement successful strategies. In other words, it may be difficult to know
which way to drive if you do not know the final destination. Therefore, strategic drifting is a
limitation since dynamic strategizing may provide short-term focus and solutions toward
current challenges and opportunities. Thus, managers may not be strategists, but rather
problem solvers, and we would have enjoyed applying notions from this school since
incremental organizational learning, acting and making sense of these actions and processes
could have provided us with useful knowledge.
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Dynamic capabilities
The integration of learning and knowledge creation into internal microeconomic perspectives
possess limits for the SAS-case since they appear to be rather static. For us, this resulted in
findings that SAS‟ most important resources and capabilities (e.g. employees and fleet) are
highly static and uncompetitive. The low degree of organizational learning in SAS has
therefore resulted in limitations for our framework.
Considering SAS decades ago, especially in the 80s and 90s, notions of dynamic capabilities
might have been better applicable then since SAS may have been more innovative back then.
While reflecting, or retrospectively making sense of our actions, we found that notions of
dynamic capabilities today might be more suitable for LCCs as they innovates the industry
with process optimization, creation of new revenue sources, etc. Their innovations are
performed according to their dynamic capabilities and competences. LCCs try to enact the
environment through various innovative initiatives (e.g. new revenue sources), where their
findings are evaluated and adapted into the strategy. These notions may have less value in the
case of SAS.
Resource or Output?
Another reflection has been to distinguish competences, resources and products. We have
presented aspects such as SAS‟ route map, Eurobonus and Star Alliance as being both internal
potentials, as well as products. These initiatives are internal resources and skills, which
consumers buy. Moreover, it would have been interesting to analyze actual benefits,
limitations and synergies, which emerge through e.g. Star Alliance and Eurobonus. These are
important assets for SAS, but it would be interesting to achieve a more thorough
understanding of their potentials. In general, LCCs do not offer similar alliance and customer
loyalty benefits as network-carriers, yet some appear to be more successful. By observing
LCCs, perhaps initiatives such as Eurobonus are not that relevant in European air travel.
Moreover, it could also be interesting to further analyze how a potential divestment of
Eurobonus would influence SAS.
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Air France-KLM - http://www.airfranceklm-finance.com/
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Austrian Airlines - http://www.austrianairlines.ag/InvestorRelations.aspx?sc_lang=en
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easyJet - http://corporate.easyjet.com/investors.aspx
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Norwegian - http://www.norwegian.com/about-norwegian/investor-relations/
Oslo Lufthavn Gardermoen - http://www.osl.no/
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Stockholm Airport Arlanda – http://www.arlanda.se/en
Scandinavian Airlines Systems – http://www.sasgroup.net
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
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Appendices
Appendix A
Source: Ib Andersen – Den Skinbarlige Virkelighed, p. 40.
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Appendix B
Source: SAS Annual report 2009, p. 45
Appendix C
Source: Kumar (2006)
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Appendix D
Source: Doganis, p.
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Appendix E
Source: SAS Annual report 2009, p. 55
Appendix F
Firm value and ownership concentration
Source: CBS-course Corporate Governance & Finance – Professor Steen Thomsen
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Appendix G
Source: SAS Annual report 2009, p. 26-27
Appendix H
Source: SAS Annual report 2009, p. 12
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Appendix I
Source: SAS Annual report 2009, p. 13.
Appendix J
Source: SAS website
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Appendix K
Appendix L
Important Star Alliance Members
Joined Revenue, US$
Billions
% of total
Annual passengers,
millions
% of total
Employees % of total
Fleet % of total
Air Canada 1997 10,3 6,07 33 5,63 24.700 5,39 335 8,96
Lufthansa 1997 33,86 19,95 70,5 12,02 108.123 23,59 534 14,28
SAS 1997 7,68 4,53 22 3,75 15.000 3,27 210 5,61
Thai Airways 1997 5,68 3,35 19,6 3,34 26.897 5,87 88 2,35
United 1997 20,2 11,90 80 13,64 48.000 10,47 362 9,68
All Nippon Airways 1999 14,2 8,37 47 8,01 43.410 9,47 214 5,72
US Airways 2004 11,5 6,78 66,1 11,27 36.500 7,96 356 9,52
Air China 2007 7,3 4,30 34,84 5,94 20.211 4,41 243 6,50
Continental Airlines 2009 15,2 8,96 67 11,42 42.210 9,21 351 9,39
Egypt Air 2008 1,48 0,87 7,8 1,33 7.300 1,59 50 1,34
LOT, Polish Airlines 2003 0,831 0,49 3,9 0,66 3.720 0,81 49 1,31
South African Airlines 2006 3,67 2,16 6,9 1,18 8.000 1,75 55 1,47
Spanair 2003 1,56 0,92 10,2 1,74 3.036 0,66 45 1,20
Total Star Alliance 1997 169,7 586,6 458.332 3.740
Source: Star Alliance - http://www.staralliance.com/en/about/airlines/
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Appendix M – SAS Route maps
European route map
Source: http://www.flysas.com/en/generic/services/route-map
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World Map
Source: http://www.flysas.com/en/generic/services/route-map
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Appendix N
Source: SAS annual report 2009, p. 11.
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Appendix O
Source: Economist Intelligence Unit
http://viewswire.eiu.com/site_info.asp?info_name=instability_map&page=noads
Appendix P
http://www.ekonomifakta.se/sv/Fakta/Skatter/Skattetryck/Skattetrycket-historiskt/
38
40
42
44
46
48
50
52
2000 2001 2002 2003 2004 2005 2006 2007 2008
%
Tax Burden in Scandinavia and EU-15 from 2000 to 2008
Sverige
Danmark
Norge
EU-15*
Source: Ekonomifakta, 2010
22
24
26
28
30
32
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
%
Corporate tax in Scandinavia & EU-27 from 2000-2009
Denmark
Sweden
Norway
EU27
Source: The Danish Ministery of Taxation, 2010
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
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http://www.skm.dk/tal_statistik/skatter_og_afgifter/4607.html
Appendix Q
Source: United Nations University - www.unu.edu
Appendix R
2,0
4,0
6,0
8,0
10,0
12,0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
%
Unemployment rates in Scandinavia from 2002-2011
Denmark
Norway
Sweden
Source: OECD Economic Outlook 86 – December 2009
Fasten your seatbelts – An analysis of SAS‟ competitiveness Alexander Glud & Eivind Wedding
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Appendix S – SAS‟ operational performance
Source: SAS Investor relations
Appendix T
Source: SAS Investor Relations. Analyst material 1Q2010
Intercontinental5%
Europe40%
Intrascandinavia14%
Denmark2%
Norway29%
Sweden10%
SAS' Pax on their markets
Intercontinental27%
Europe45%
Intrascandinavia7%
Denmark1%
Norway15%
Sweden5%
ASK for SAS' markets, June 2010
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Appendix U
Source: http://www.bcg.com/about_bcg/history/history_1968.aspx
Appendix V
Potential economic consequences of a SAS-bankruptcy
Yearly SAS-salary expenses (SEK) 15.226.000.000
Approx average workers' tax rate (50 %) 0,5
State tax income from SAS' workers' private taxes (SEK, yearly) 7.613.000.000
# of employees being fired (SEK) 18.786
Social welfare transactions to unemployed workers, yearly (SEK) 156.000
Total state expenditure (SEK) 2.930.616.000
Total losses (welfare transactions + loss of tax income, SEK) 10.543.616.000
Source: SAS annual report 2009 Elaboration The yearly salary expenses are taken from the annual report and the average income tax rate is an approx. rate of 50 %, due to enhance simplicity rather than working with 3 different salary levels and tax rates in the countries. Thus, the main idea is that Scandinavia would lose more than 10 billion SEK.