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The domestic aviation sector in Sweden has seen dramatic changes in the past decade. Despite a general decline in the domestic market due to expansion of better roads and rail connections, deregulation has seen the number of air operators increase. New groupings in the form of air-travel organisers (which provide aircraft and crews to other airlines), and more low-cost carriers (LCCs) have entered the domestic market, bringing increased competition for certain destinations. SAS is still the dominant player in the Swedish air travel market. This holds for both domestic and international service, given that the company’s hub, located at Stockholm-Arlanda Airport, is where a large part of Swedish air traffic connects. The Swedish Civil Aviation Department is responsible for regulatory oversight, while Swedavia manages the country’s major airports. LFV is the state-run air navigation services provider.
Sweden is dependent upon efficient air travel connections both on the domestic front and to important European and global markets. Through a combination of increased competition, attractive prices and a wide variety of destinations, the Swedish air travel market is likely to grow over the coming years.
Airports in Sweden
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Ryanair has again achieved double digit growth in net profits in 2QFY2015. This was the result of revenue per seat growth outpacing cost per seat growth. After Ryanair's dip in profits in FY2014, it has now reported two quarters of earnings growth and reconfirmed its position as Europe's most profitable airline. It has again raised its FY2015 net profit guidance and expects a result that is around 45% higher than last year.
With a slight fall in average sector length in 2Q, the increased revenue per seat was the result of network and product/service improvements and greater overlap with higher fare competitors. It seems that Ryanair has made good progress with its 'Always Getting Better' programme and this is feeding through to the numbers.
Remarkably for Ryanair, it is even starting to make positive progress in brand rating surveys. As CEO Michael O'Leary said to analysts at the 2Q results presentation, "It's not cheap and nasty any more," he said, "it's cheap and very good."
SAS Scandinavian Airlines: 3Q profits down as yield weakness continues at Europe's high cost airline
Another quarter, another fall in yield for Scandinavian Airlines, SAS. The Nordic region's largest airline reported a year on year decline in profits in 3QFY2014 and a fall into loss for 9M. It has made good progress with its cost reduction programme, but costs are not falling fast enough to offset tumbling yields and SAS remains one of Europe's highest cost airlines.
Healthy load factor gains demonstrate that SAS has some appeal to the Scandinavian frequent flyers that it desires, but price discounting remains a key feature of this appeal. Overcapacity in its markets has contributed to yield weakness, but its many LCC competitors are better positioned to provide the lower fares demanded by the market. In spite of some easing of the supply/demand imbalance, SAS expects continued yield pressure.
SAS' number one priority is an additional cost reduction programme, full details of which will be announced by the end of 2014.
Europe's airlines: 1H2014 results season shows improving trend, but cost reduction is the key driver
Europe's airlines appear to be following a course to improved profitability, based on the 1H2014 results of the largest publicly quoted airline groups. Profits remain slender in most cases, but margins are improving in aggregate. Individually, financial performance varied widely, with LCCs both leading (Ryanair) and lagging (Norwegian) the operating profit margin rankings in 1H2014.
The European market offers volume growth, but is characterised by price pressure, with RASK falling for the majority of the larger airline groups and this points to the need for additional caution in capacity growth. The LCCs collectively enjoyed higher growth than the FSCs in 1H2014 and also achieved a more stable RASK performance (although not in all cases).
Profit improvement is largely being achieved through cost savings and CASK reduction. Although fuel prices are high on a longer term historic perspective, they are enjoying a period of relative stability and this has helped the cost picture. Although Europe's airline sector remains only thinly profitable, these 1H results hold out the prospect of better full year results in 2014 versus 2013.
The European Commission (EC) has released a report on Member States' application of the European Union (EU) rules on airport charges — the fees airlines pay to airports for the use of runways and terminals — which are sometimes estimated to account for up to 10% of airlines' operating costs. The Directive currently applies to around 75 airports in the European Economic Area, which comprises the 27 member states of the EU together with three of four states that are members of the European Free Trade Association; namely Iceland, Liechtenstein and Norway. (Croatia has applicant status to the EU).
The report shows that since the introduction of the rules in 2011 following a 2009 Directive, larger European airports have become more transparent when taking decisions about these charges. In general, consultations between airports and airlines, as required by the Directive, are now being carried out and Member States' independent supervisory authorities have been set up.
SAS yield decline outweighs cost cuts to give wider losses in 2Q. Market share versus profitability?
SAS posted another pre-tax loss in 2QFY2014 after a weak 1Q result. For 1HFY2014, its pre-tax loss before non-recurring items was more than three times that of the same period a year earlier. It continued to make good progress with its 4XNG cost reduction programme, achieved further load factor gains and improvements in labour productivity and aircraft utilisation. However, the positive effect of these factors was wiped out by plummeting yields, attributed by SAS to overcapacity in Scandinavian markets.
In response to the weakening revenue and profitability environment, SAS has announced a new cost savings target and is taking action to "win the battle for Scandinavia's frequent travellers" through improvements to its product offering. Its recent re-capitalisation gives it more time to attempt to build a sustainably profitable business, or at least one that may become part of the next phase of European consolidation (whenever that might be).
IATA's latest airline industry financial forecasts highlight the different performance of the different regions of the world. North America is the most profitable region, measured by its net margin (net profit as a percentage of revenues) and Africa the least profitable. Europe has the second lowest margin, but has gained a little on fourth ranked Asia Pacific. Latin America has improved the most since 2012 to rank second, just ahead of the Middle East.
North America has had a relatively good recovery, while Asia Pacific's margins have fallen from their 2010 peak. Even North America's net profit is only 4.3% of revenues, its best since the late 1990s, but still a very thin margin.
Analysis of the relationship between net profit margins and various explanatory factors appears to confirm that market concentration is a key one. Europe's perennial underperformance in airline margin terms – in spite of the region's wealth, high propensity for air travel and high load factors – owes much to the fragmented nature of the market. Nevertheless, a European deal that is truly transformational in terms of its market structure remains unlikely for now.