2

Free stories left to read

Airline Weekly subscribers get unlimited access to daily news and weekly issues.

SAS and Norwegian Air See Pre-Pandemic Winter Travel Trends Returning

Edward Russell
August 26th, 2022 at 1:07 PM EDT

Scandinavian airlines SAS and Norwegian Air see what executives describe as a “normal” decline in passenger numbers as they look ahead to the coming winter, comparable to what they saw before Covid-19.

The two competitors, which are the top two airlines in Scandinavia by number of seats, have few concerns over the threat of inflation or a possible economic recession and are making regular seasonal schedule reductions for the coming winter. Norwegian Air, which restructured during the pandemic into an all short-haul budget airline, is making the biggest change with plans to reduce seats by 24-28 percent from the end of October through February compared to its summer schedule.

“I think this is the first time we have done that,” Norwegian Air CEO Geir Karlsen said during the airline’s second quarter earnings call on August 25. “And why are we doing it? Well, because we think that the demand will be lower.”

Karlsen and his management team are laser focused on reducing unit costs excluding fuel to below 0.4 Norwegian kroner ($0.04) and achieving consistent profitability at Norwegian Air, which was plagued with losses prior to its restructuring.

SAS CEO Anko van der Werff, speaking during the airline’s fiscal third-quarter — covering the May-to-July period — earnings call Friday, is taking a more conservative view of winter. He declined to provide guidance for the period given the airline’s U.S. Chapter 11 bankruptcy restructuring and the potential for inflationary or recessionary headwinds. However, he was clear that SAS is seeing the “normal slowdown” in demand after the summer, and adjusting its schedule as it did prior to the pandemic.

The comments of SAS and Norwegian Air’s CEOs echoes those of other airline leaders in Europe and elsewhere. Despite pessimistic economic views, airlines are seeing no corresponding drop in bookings as they transition from the peak summer period into the slower winter. This echoes the broader mismatch in places like the U.S. where economic indicators suggest a possible recession but most businesses, including airlines, see little to no drop off in consumer demand.

“Given the uncertainty at a macroeconomic level … I am not convinced yet about this winter,” Van der Werff said expressing some caution for the upcoming period.

In the meantime, SAS and Norwegian Air continue with their respective business objectives. For the former, that is its Chapter 11 restructuring and achieving the tenets of the SAS Forward plan that Van der Werff first unveiled in February. SAS aims to reduce expenses by 7.5 billion Swedish kroner ($706 million) annually, convert 20 billion Swedish kroner in debt to equity, and raise at least 9.5 billion Swedish kroner in new capital.

SAS has made strides since its July bankruptcy filing towards its goals, Van der Werff said. A new deal with its pilot unions goes a long way toward meeting its cost reduction targets; debt-to-equity commitments from the governments of Denmark, Norway, and Sweden represents “more than half of the total conversion” needed; and a new 700 million Swedish kroner debtor-in-possession loan from Apollo Global Management is a beginning to the airline’s recapitalization. More needs to be done, though. Negotiations are ongoing with other labor groups, notably cabin crew, and more debt-to-equity conversion commitments are needed from creditors. Work on recapitalizing SAS will begin in earnest early in the new year, Van der Werff said.

One big issue, which was a significant driver of SAS’ Chapter 11 filing, still looms: aircraft leases. Van der Werff said talks continue with lessors but that the airline anticipates needing to reject leases on multiple planes through the bankruptcy process. To date, SAS has rejected only one aircraft lease in court: an Airbus A320 leased from IC Airlease One.

“It’s very clear that we have too many aircraft — that we have too many widebody aircraft — and that the pricing for our aircraft is also still something that we need to work on,” he said. SAS operated 135 aircraft at the end of July, including 14 Airbus A330s and A350s. It has two A350s on order.

With its restructuring behind it, Norwegian Air’s focus is on matching its size — both fleet and staff — to its operations in order to achieve its sub-0.4 Norwegian kroner unit costs excluding fuel target. Karlsen said that they anticipate hitting this in 2023 after posting unit costs excluding fuel of 0.43 Norwegian kroner in the quarter ending in July.

Norwegian Air is also preparing for the arrival — or return rather — of the Boeing 737 Max next year. The airline will take delivery of 15 737-8s, all leased, in 2023 and bringing its fleet to 85 aircraft. It has orders for 50 more 737-8s, plus 30 options, that will arrive from 2025 through 2028. Karlsen said the airline benefits from lower capital costs of the Maxes compared to what it paid for the Maxes it flew prior to its restructuring, and that it is looking forward to 16-17 percent lower fuel burn compared to its 737-800s.

The carrier is also considering converting some of its 737-8 orders to the larger -10, said Karlsen. The “Max 10 is more or less the same aircraft, but with additional 30 seats,” he said.

For the July quarter, both SAS and Norwegian Air saw a strong increase in demand — “abnormally strong” as Van der Werff put it — but corresponding operational issues. Both airlines dealt with labor actions, though SAS’ 15-day pilot strike was the more severe, and both were subject to much of the same operational chaos that affected airports across Europe this summer.

SAS reported an operating loss of 1.1 billion Swedish kroner during the July quarter. Revenues were down 36 percent compared to 2019 to 8.6 billion Swedish kroner; though revenues more than doubled year-over-year. Unit revenues increased 14 percent year-over-three-years.

Norwegian Air reported an operating profit of nearly 1.4 billion Norwegian kroner in the June quarter. However, that was entirely driven by the one-time reinstatement of 2.1 billion in pre-delivery payments with Boeing following the airline’s new 737 Max order. Revenues jumped more than 1,300 percent year-over-year to 4.9 billion Norwegian kroner. Unit revenues increased 9 percent compared to 2021 and unit costs excluding fuel decreased 85 percent.

Edward Russell
August 26th, 2022 at 1:07 PM EDT

Photo credit:  Flickr / Alan Wilson

Up Next

1
Asia-Pacific

Why is Korean Air so Profitable? 

In part one, Gordon Smith and Jay Shabat discuss the factors delivering consistently strong results for Korean Air. In part two, we reveal the global airlines that were the most…
2
North America

What’s Going on at Southwest Airlines?

In part one, Gordon Smith and Jay Shabat discuss a fascinating week at Southwest, as the low-cost carrier navigates the challenges of a very vocal new activist investor. In part…
3
Interviews

Captain Theresa Claiborne Interview

Captain Theresa Claiborne was the first black female pilot in the United States Air Force and joined United Airlines as its second-ever black female pilot. Last month, she retired from…
4

American Airlines and Southeast Asia

In part one of this week's specially extended episode, Gordon Smith and Jay Shabat discuss a dramatic few days at American Airlines. In part two, attention turns to Southeast Asia…
5
Low-Cost Airlines

Ryanair and U.S. Summer Trends

In part one of this Airline Weekly Lounge podcast, Gordon Smith and Jay Shabat discuss the latest earnings from low-cost giant Ryanair. In part two, our focus turns to the…

Special Offer: Choose From Quarterly or Annual Subscription Plans

2 of 3 free stories left to read

Already a subscriber? Login