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Based in Stockholm, Scandinavian Airline System (SAS) is the national airline of three Scandinavian States; Denmark, Norway and Sweden, operating three primary hubs at Copenhagen-Kastrup Airport, Stockholm-Arlanda Airport and Oslo Gardermoen Airport. SAS’ network consists of extensive regional services within Scandinavia and Europe as well as international services to Asia and North America. SAS is member of the Star Alliance.
Location of SAS main hub (Copenhagen Kastrup Airport)
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Numerous media reports have speculated that Lufthansa may be on the acquisition trail. Group CEO Carsten Spohr told Bloomberg that consolidation in Europe is needed and that Lufthansa wants to be a part of it (Bloomberg, 22-Apr-2016), but did not identify specific targets. Moreover, Mr Spohr said the Group was concentrating on making sure that its LCC platform Eurowings worked first.
Interestingly, however, the reports have specified three possible acquisitions, in each case suggesting that they could be used as part of the Eurowings project. The three are SAS, Brussels Airlines and Condor Flugdienst (part of the Thomas Cook Group). In all three cases, there are historical and/or cultural reasons to suggest that some form of closer cooperation, including the possibility of acquisition (or partial acquisition), could feasibly be up for discussion.
Lufthansa's partnership with SAS goes back to the time before they were both involved in setting up the Star Alliance, while Lufthansa is already a minority shareholder in Brussels Airlines and a former shareholder in Condor. Of the three, only Condor could be a realistic candidate to become part of the Eurowings operation. None of these possible Lufthansa acquisitions would significantly change European airline market structure.
Part one of this report on European airline market structure and consolidation highlighted that the top twenty airline groups in Europe hold 75% of seats. This is the same share as the top six groups in North America. This equivalence, in market share terms, between Europe's top 20 and North America's top six underlines the huge gap in consolidation progress between the two regions' airlines. It would take a large number of merger and acquisition deals to recreate North America's market structure in Europe, consolidating 20 into six.
This second part of the report is a kind of fantasy, a hypothetical. It suggests an illustrative series of combinations among Europe's top 20 that would approximately replicate the market shares, in terms of seat share, held by North America's top six.
This would require large merger and acquisition transactions involving pairings between members of Europe's smaller top six of Lufthansa Group, IAG, Ryanair, Air France-KLM, Turkish Airlines and easyJet. It would also mean several deals involving second-tier FSCs and LCCs. However, for now the larger deals in Europe remain relatively unlikely, and there are even hurdles to the smaller deals.
Airline seat growth from Europe is set to accelerate to 8% this summer, up from 6% in summer 2015, according to the latest schedules data from OAG. This will be the highest summer growth rate in six years. With summer 2016 starting in less than three weeks, the data are now fairly solid (although, of course, they are always subject to further change).
Capacity to Africa will fall and Asia Pacific will experience slowing growth from Europe, but every other region will experience an acceleration this summer. Intra-European seats will grow by 8%, with growth led by LCCs (including the low cost subsidiaries of the big legacy groups).The Middle East will continue to have the highest rate of capacity growth from Europe, but there will also be double-digit growth to Latin America and to North America.
This acceleration of capacity growth on the North Atlantic is partly due to the emergence of new competition, but also seems to be the result of incumbents switching capacity from elsewhere. This should perhaps be a source of some concern to the immunised JVs.
Three years ago, CAPA suggested in an analysis report that the Nordic region might be ripe for airline consolidation. This has not happened. The region – Finland, Sweden, Norway and Denmark – remains the only corner of Europe to be home to three significant airlines that are not owned by one of Europe's three major legacy airline groups. SAS, Finnair and Norwegian Air Shuttle have all grown over the past three years and have sharpened the differences between them.
This report analyses seat capacity growth in the Nordic region over the past 10 years. In that time, SAS has retained its capacity leadership in the region, while LCC Norwegian has usurped Finnair's second position. However, overall share of seats in the Nordic region operated by LCCs has been falling since 2013.
Ryanair, in particular, has cut Nordic capacity in recent years although it is growing once more in Denmark, and easyJet has never made a big impression on the region (although Wizz Air is enjoying strong growth in Nordic markets from a low starting point). Norwegian is growing more rapidly in markets elsewhere.
SAS has had a relatively good year by comparison with its troubled past. In the year to Oct-2015 its net result returned to profit, and its operating margin was its best for at least a decade. It also managed to reverse a multi-year trend of declining unit revenue. This was partly due to favourable currency movements, but also reflected tight capacity management and SAS' focus on enhancing its product for frequent flyers.
On a less positive note, SAS' unit cost also increased, in spite of lower fuel prices. This increase was partly currency-related, but ex fuel currency adjusted unit cost also rose. Moreover, although FY2015 produced a high margin by its standards, SAS remains less profitable than the airline industry as a whole.
Looking ahead to FY2016, SAS plans to expand its long haul network, where ASKs will grow by 25%, driving an overall ASK increase of 10%. This growth should help to lower CASK, but will also have a negative effect on RASK. The trade-off between these two variables will determine whether or not SAS can further improve its profitability in FY2016.
Although North America is Copenhagen Airport's single largest long haul market, eastwards traffic to the Middle East and Asia is collectively larger. And much Gulf carrier traffic is connecting onwards to Southeast Asia. Copenhagen will be the first destination for Emirates' 615 seat, two class A380. On the same week in Dec-2015 that Emirates begins service with the world's most densely configured A380, Qatar Airways will bring its Doha-Copenhagen service to double daily. Etihad does not serve Scandinavia, but is probably laying the groundwork via a partnership with SAS.
Copenhagen's next developments could be from Cathay Pacific, which has flagged possible service. Copenhagen discussed growth developments at CAPA's LCC Airports Congress in Bangkok, and World Routes in Durban. Asian growth may not necessarily come at the expense of incumbents. Copenhagen expects Singapore Airlines to increase flights from five times weekly to daily. Pressure may be mounting on Thai Airways, but Copenhagen is reportedly its best performing European point. Meanwhile North America capacity is growing as SAS and Norwegian add services.