Nordic Airlines Buckle Up for a Turbulent Ride

By CHRISTINA ZANDER
The Wall Street Journal

High fuel prices, a slowing European economy and fierce competition from low-cost rivals are pressuring Nordic flagship carriers like Nordic SAS AB, SAS.SK -0.60% and Finnair Oyj, FIA1S.HE -0.43% two money-losing airlines that are stepping up efforts to cut costs.

By contrast, the region's main low-cost competitor, Norwegian Air Shuttle NAS.OS +3.70% ASA, continues to expand. The 10-year-old airline, now No. 2 in Scandinavia, surprised competitors in January with an order for 222 new Boeing and Airbus aircraft to expand its routes, including to Asia, and have more fuel-efficient planes.

Some traditional airlines haven't been able to cut their way out of their problems. SAS, Scandinavia's largest airline by fleet size, this year reported its fifth consecutive net loss. The airline, which is 50% owned by the Swedish, Danish and Norwegian governments has cut its staff by about 4,000 to just over 15,000 since February 2009 and has sold or reduced stakes in airlines. In 2009, it reduced the 94% stake it held of Spanair to 11%. This came after it had sold its 47.2% stake in Airbaltic in 2008. In addition, it raised about 11 billion Swedish kronor from shareholders in two separate rights issues in 2009 and 2010.

Even as it has sped up its savings program further, investors haven't been impressed. Its share price has plunged 63% in the past 12 months.

Analysts say SAS could become a takeover target in the long term, but only if it starts to make money again. The firm did make a small profit before tax and nonrecurring items in 2011 but warned 2012 would be challenging due to high fuel prices, economic climate and additional capacity in the market.

"We believe that SAS, in a longer perspective, will be bought up by either Lufthansa, LHA.XE -0.24% Air France-KLM AF.FR -1.17% or by British Airways IAG.LN +2.85% [now part of International Consolidated Airlines Group]," said Hans Erik Jacobsen, an analyst at First Securities.

SAS said it had no comment on the possibility that it could become a takeover target.

Jacob Petersen, an analyst at Sydbank, said the immediate future doesn't look good for the airline. "The competitive situation in the Nordic skies continues to be harsh and Norwegian [Air]'s record order…stresses our assessment that the situation is not about to ease up and we expect tough earnings conditions for SAS going forward," he said.

Analysts at Australian-based Centre for Aviation, or CAPA, also said Norwegian Air's order for the new planes is adding to the pressure on SAS.

"Norwegian [Air]'s action will certainly make any prospective buyer think that much harder about acquiring a position in the Scandinavian flag carrier, which would in turn also influence SAS' planning—and funding—options," they said.

Shares in Norwegian Air have more than doubled so far this year, underscoring the airline's popularity with investors as well as passengers, recovering from the fall it and many other airlines experienced when worries about the euro zone peaked in the second half of 2011. Shares are up about 6% over 12 months. Unlike SAS. the airline is profitable; it reported a net profit of 122 million Norwegian kroner ($21.4 million) for 2011.

Per Kristian Reppe, an analyst at Pareto Securities, said the European airline industry needs to raise ticket prices in 2012 to compensate for rising oil prices. The front-month Brent contract has rocketed 17% so far this year on the IntercontinentalExchange, ading 2.1% Monday to settle at $125.43. But Norwegian Air could be better able to cope with higher oil prices because its fleet, which includes the Boeing 737-800 and 737-300 aircrafts, is more fuel-efficient than those of rivals.

The region's second flagship carrier, Finnair, is also under pressure to cut costs and is looking into creating its own low-cost airline with a partner for its loss-making European business. The company reported a full-year net loss of €87.5 million ($116.8 million) in 2011 and has warned that it will lose money in the first half of this year.

Shares in the company have lost about 40% of their value in the past 12 months.

It is unclear whether Finnair will find a partner or how the new airline would operate.

However, any outsourcing of European routes would make Finnair much smaller, said Pasi Vaisanen, an analyst at Nordea. "After outsourcing, Finnair is really small and there still is a fierce competition on Asian routes," he said.

Source:  http://online.wsj.com