Wednesday, November 19, 2008

SAS Group: No Buyers, Bankruptcy Looms

SAS Group: No Buyers, Bankruptcy Looms (NSI News Source Info) November 19, 2008: SAS Group is facing the daunting task of having to restructure on its own in the middle of a deep economic downturn after Star Alliance partner Lufthansa pulled out of talks to take over the Scandinavian airline group. Lufthansa had been quietly negotiating a takeover of SAS similar to the way it integrated Swiss International Air Lines and will include Brussels Airlines. SAS would have kept its own brand and management while taking advantage of group synergies and Lufthansa's sales and marketing power. The deal would have also enabled the governments of Sweden, Norway and Denmark gradually to shed their shareholdings in SAS. Today, they still control 50% of the Nordic region's largest carrier. But Lufthansa, Europe's No. 2 behind Air France-KLM, walked away from the talks, company executives say, largely because of the mounting losses at SAS's Spanish subsidiary, Spanair. Last year as part of a strategic rethinking, SAS's then new CEO Mats Jansson decided to focus on Scandinavia rather than keeping shareholdings in other European airlines. Spanair was put up for sale, but negotiations with a consortium led by Spain's biggest airline, Iberia, failed. Jansson then decided to forego the sale and initiated a tough restructuring at Spanair. The airline targets annual savings of €90 million ($112.5 million) from 2009 by cutting 15 aircraft and 1,000 workers, roughly a third of its staff. That turnaround has become much more difficult since the Aug. 20 crash of a Spanair MD-83 at Madrid-Barajas Airport in which 154 people were killed. Following the accident, Spanair's traffic instantaneously dropped off by 27% and has been recovering slowly, at far lower yields than usual. Spanair took an operating loss of 641 million kronor ($80 million) in the first nine months of the year, significantly exceeding the 91-million-kronor loss of a year earlier and in spite of savings measures. To make matters worse, SAS had to write off the value of Spanair on its balance sheet by more than $240 million, reflecting the unit's weaker performance. An SAS official nonetheless pointed out that the plan announced in the summer to seek a "structural solution" for the entire group is still valid. Analysts say selling the airline to a stronger partner is likely to be the only way to avoid bankruptcy in the longer term. Standard & Poor's cut SAS ratings on Nov. 6, and says a takeover "could potentially lead to an outlook revision or upward rating momentum." (Standard & Poor's, like Aviation Week & Space Technology, is a unit of The McGraw-Hill Companies.) However, Lufthansa was seen as the only reasonable buyer. Air France-KLM could theoretically be another investor with the financial wherewithal to acquire SAS, but the French-Dutch group has never shown much interest in the Scandinavian market, which is highly decentralized and deeply infiltrated by low-cost carriers. SAS's thin long-haul network is split up among three bases in Copenhagen, Stockholm and Oslo, partly for political reasons. In the current global financial crisis, it is also tough to imagine a private equity investor risking purchase of a big asset with questionable commercial viability such as SAS. Indeed, while Spanair may be the biggest single issue at SAS, it is hardly the only one. In the first nine months of the year, SAS had an operating loss of 2.7 billion kronor, compared to a profit of 1 billion kronor a year earlier. Jansson cites "the economic trend that both impacts total demand and alters the behavioral patterns of business travelers and the continued high price of oil during the period." While he sees the recent drop in oil prices as good news, that effect is "offset by the rising dollar and the further deepening of the recession by the financial crisis." S&P writes that its rating downgrade reflects the "marked deterioration of the group's financial profile, its weakening liquidity position and the adverse effect of recessionary business conditions in many of the group's markets." Jansson says he is "focusing intensely on assessing various structural solutions and alternatives." But, regardless of those discussions, he urges that "it is of the utmost importance that we rapidly close the remaining cost gap that we have in relation to comparable competitors." SAS is therefore advancing measures of its Strategy 2011 program aimed at reducing annual costs by 3-4 billion kronor.

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