Fasten-Belt Light Isn't Off at SAS
SAS has pulled itself out of a tailspin.
The Scandinavian airline is expected in the year to October to have made its first annual profit since 2007, thanks to an aggressive restructuring. Its shares have soared almost 120% this year, making it the best-performing airline stock in Europe.
But the skies are never clear for long in the aviation business.
A year on from an ambitious cost-cutting plan that Chief Executive Rickard Gustafson described as SAS's "final call," the airline has made good progress. It has cut hundreds of administrative jobs and teed up a deal to sell its ground-handling unit to Swissport. Wage cuts and revised working hours for its crews mean greater flexibility to add capacity in peak periods. SAS already has booked about 1.5 billion Swedish kronor ($226 million) in cost savings, half the amount it is aiming for by 2015.
The snag: The sales outlook has dimmed.
Fears over Ryanair Holdings RYAAY -0.96% ' plans to fly into more Nordic cities look overdone; the low-cost carrier doesn't serve main airports like SAS. But SAS flies wing to wing with low-cost regional rival Norwegian Air Shuttle NAS.OS +0.51% on 70% of its routes. And Norwegian is adding over 30% to seat capacity in the final quarter of this year alone. Norwegian has started flying long haul so some of that will be outside Scandinavia. SAS is only expected to add 3% to 4% to capacity throughout fiscal 2014, according to HSBC.
SAS reckons it can boost sales by attracting more leisure travelers, where demand is forecast to rise 6% to 8% a year compared with a flat market for business travel. And SAS's restructuring aims to cut unit costs 15% by 2015, making it more competitive.
But the flag carrier's unit costs still are roughly double Norwegian's before adjusting for its longer average routes. Even assuming holiday travelers are willing to pay a premium to fly SAS, it isn't clear how the carrier can compete profitably in the long term.
SAS might look like a good value at 2.8 forecast 2014 earnings before interest, taxes, depreciation and amortization, when peers like Deutsche Lufthansa LHA.XE +1.71% and Air France-KLM, AF.FR -1.06% which also are restructuring, trade at more than three times.
Even so, small changes in sales will have a big impact on still-fragile earnings.