• Strategy
  • CFO Europe Magazine

Midair Maneuvers

CFOs of Europe's mid-tier flag carriers are leading radical strategy overhauls.

A new four-year growth plan sets tough targets to increase annual pre-tax profits to SKr4 billion while reducing costs by SKr2.8 billion. It plans to do that by selling stakes in Spanair, Air Greenland and BMI of the UK. The carrier will also re-evaluate the rationale for keeping support operations such as SAS Ground Services and SAS Technical Services in house, according to CFO Gunilla Berg.

The only thing preventing SAS from completely dominating the north European market is Finnair. Lars Heindorff, a Copenhagen-based analyst for ABG Sundal Collier, points out SAS-Finnair is an obvious merger that has been talked about for many years but the Finnish government — which owns a 57% stake in the carrier — is unlikely to sanction it.

Heinonen says SAS’s cumbersome industrial relations would be a major barrier. “[SAS] is a company with 39 labour unions so it’s not a very easy concept to merge with. Labour unions are very strong in this industry; very often in mergers that can become rather difficult. So we are now focusing on our organic growth and restructuring ourselves and having the Oneworld Alliance [a marketing agreement with other airlines], and other partners complementing our services.”

SAS knows it must tame the unions to achieve growth. The airline has dealt with 100 strikes in the past decade — two, in the second quarter of this year, cost the company SKr200m. The new strategy seeks to quash industrial unrest by involving employees in a share ownership scheme and offering unions a “new model of co-operation.” CFO Berg knows the strike culture must change and that without a focus on market opportunities, SAS will find it difficult to stay profitable and independent.

Hybrid Models

Greg O’Sullivan, the CFO of €1.1 billion Irish flag carrier Aer Lingus, knows all about the difficulty of maintaining independence. O’Sullivan and the rest of the Dublin-based management team have been facing intense takeover pressure from Irish budget airline Ryanair. Many industry commentators point to Aer Lingus as the best example of a successful middleweight European airline, although that hasn’t always been the case. From near bankruptcy after September 11th, the carrier has gone through what one corporate financier describes as “one of the best restructuring stories in the airline industry.” Its hybrid model — comprising a low-cost, low-fares short-haul business and a long-haul business servicing Ireland-US routes — is unique in the industry.

“Demand for air travel at low fares continues to increase,” says O’Sullivan. “We met that challenge by reducing costs, expanding our short-haul network, focusing on point-to-point services, reducing fares and — as our advertising strapline states — providing a product that is ‘way better’ than the other low fares carriers.”

“Way better” means passengers fly to more centrally located airports, have a pre-assigned seat, can use the airline’s automated check-in kiosks to avoid long queues and are looked after in times of disruption. “The evidence is that people appreciate some of the value for money that we provide,” says O’Sullivan, adding that in the first five months of 2007, short-haul passenger traffic increased 6% on the year. But the recent introduction of small fees for booking online with a credit card, checking in bags and reserving popular seats, may dilute that appreciation.

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