Air France-KLM’s acquisition of a stake in SAS is unlikely to change anything in the short term, and even in the long term there are a number of grey areas.
Since the deal was announced, customers of both airlines have been asking a lot of questions, and have come up with scenarios ranging from the most ambitious (a major global group is being created which will dominate the airline business, especially in the case of upcoming takeover of TAP) to the most alarmist (SAS is going through the mill). And as is often the case, the truth will certainly lie somewhere in between.
- An operation awaiting approval
- Eurobonus likely to remain independent for some time
- A commercial partnership to start with
- Pending the restructuring of SAS
- Air France-KLM’s takeover of SAS not a done deal
- What does the future hold for SAS?
- Bottom line
An operation awaiting approval
First and foremost, we’re talking about an operation that’s still awaiting the green light from the relevant authorities. As stated in the Air France-KLM press release, this is subject to “certain conditions and regulatory approvals including, but not limited to, approval by the European Commission, the US court overseeing the Chapter 11 reorganization and, in respect of SAS AB, the Swedish court.“.
Can it fail at this stage? We don’t think so, but it may take some time. Today, for example, Lufthansa is still waiting for the green light from the EU for its takeover of ITA (since May 2023), and Korean Air’s takeover of Asiana is still under investigation, even though the merger project dates back to November 2020!
At the same time, the EU has announced that it will be more watchful, demanding and strict regarding future mergers and acquisitions: Air France-KLM and Lufthansa Group are clearly in the sights of the European authorities.
How long will it be before the deal is approved? 6 months? 1 year? 2 years? More? Hardly anyone can say today, but we wouldn’t be surprised if in a year’s time we’re still asking ourselves the same question.
Firstly, for the reasons given above.
Secondly, because with privatization and the subsequent takeover of TAP due in 2024, the EU may want to wait until it has a global vision of what competition will look like in Europe after that.
Finally, Air France-KLM has indicated that it intends to bring SAS into the transatlantic joint venture with Delta and Virgin Atlantic. This raises other questions in terms of competition.
And we don’t know whether the EU will take into account any hypothetical indirect consequences. In fact, international long-haul traffic from Scandinavia is quite low: SAS, Qatar Airways, Emirates, Ethiopian Airlines, Singapore Airlines, Thai…. If SAS leaves Star Alliance and stops supplying the flights of the latter two to Roissy or Amsterdam, won’t they stop serving Scandinavia to refocus on Frankfurt and be fed by Lufthansa? And if so, could it be that competition will be profoundly affected?
And what happens if the quid pro quos demanded are such that Air France-KLM no longer sees any point in the deal?
However, it’s only once these approvals have been received that the rest of the plan can unfold. Namely, SAS’s exit from Star Alliance to join Skyteam, an essential prerequisite for finally setting up the commercial partnership that is currently the only concrete and certain consequence of the acquisition of a stake.
But you don’t get into or out of an alliance by snapping your fingers. This will have a major impact on the alliances, the airlines concerned and their loyalty programs. Of course, work will begin beforehand, without waiting for EU approval, but once this has been obtained, it will still be many months before the switchover takes place, if only because of the IT consequences and the fact that passengers must be given time to turn around once they see no point in having their future flights credited with points on a program from an alliance that doesn’t interest them.
While it’s reasonable to assume that the deal will go ahead, it remains to be seen what the terms will be, and whether we’re talking about a matter of several months or several years.
Eurobonus likely to remain independent for some time
This was the major concern for SAS customers: the change of alliance and the potential switch from Eurobonus to Flying Blue.
The change of alliance is granted if the operation is approved. Bad news for a number of customers, because when it comes to business travel, Scandinavia leans more towards Germany than France, and the Lufthansa Group has a major presence at Scandinavian airports, far greater than that of Air France-KLM. Needless to say, having to transit via Paris or Amsterdam to reach Frankfurt or any other city in the Lufthansa Group network when direct flights are offered by a rival alliance will deter some. We wouldn’t say that a mass exodus of customers to Lufthansa is to be expected, but it’s clear that SAS will be losing high-contribution regular customers in the process.
As for the loyalty program, it seems that the solution that will be chosen will be to keep Eurobonus for SAS, as IAG has done. This is excellent news for the Scandinavian airline’s customers, who would have suffered if they had realized how much more complicated it is to obtain status on Flying Blue than on their program (and who would have suffered even more if Lufthansa had taken over, which would automatically have meant the adoption of Miles&More).
This is in line with the announced spin-off of Flying Blue: each airline manages its status miles and statutes as it sees fit, but award miles are a single shared currency. Flying Blue will simply be selling miles to Eurobonus, and that’s essential, since that’s where the sinews of war lie.
On the other hand, when our Scandinavian friends find out about the price of award flights in dynamic pricing, they’ll have a heart attack, but that’s another story.
That said, an increasingly serious rumour is that the documents accompanying the operation specify thatloyalty programs could be merged, on the initiative of Air France-KLM, but only once full control of SAS has been acquiredwhich is at least two years away. And as you’ll see, if this is how things should logically end, there are plenty of pitfalls that could delay or make it impossible.
This would be really bad news for Eurobonus members.
A commercial partnership to start with
Once these approvals have been obtained and SAS has joined Skyteam, the commercial partnership between the two airlines can begin. A year from now? In 3 years? We’ll see.
“In parallel to the transaction, and subject to the satisfaction of certain conditions including SAS AB’s exit from Star Alliance, Air France-KLM will seek to establish a commercial cooperation between its airlines and SAS AB. In doing so Air France-KLM will strengthen its footprint in Scandinavian markets, where the SAS brand and loyalty program are well-established. Such commercial cooperation would benefit Scandinavian customers through extended connectivity and broader access to the worldwide network of Air France-KLM.”
A polite way of saying that Air France will send passengers to Scandinavia on SAS and that SAS will feed the Paris and Amsterdam hubs with Scandinavian passengers.
Isn’t this deal a little unbalanced?
We have no intention of criticizing Scandinavia as a destination, and the number of times we fly to Gothenburg, Stockholm, Copenhagen or Oslo bears witness to this, but we doubt that the appeal of this superb but still niche destination will be enough to change SAS’ fortunes. Especially since SAS doesn’t have a revenue problem so much as a cost problem.
Nor are we convinced that the French or Dutch passenger will be thrilled to fly SAS medium-haul. No business class, just a decent premium economy, and a very frugal economy class with a buy on board that makes it no different from easyjet! Air France-KLM’s medium-haul service can be criticized for its mediocre quality, but SAS is worse. It is only saved by its excellent long-haul business class, but this only concerns a tiny fraction of passengers with a tiny network.
On the other hand, given the size of the Air France-KLM network in Europe and also in long-haul, it is certain that the Paris and Amsterdam hubs will benefit greatly from this now captive clientele. And this is likely to be to the detriment of the (small) hubs of Stockholm and Oslo, with only Copenhagen likely to come out on top.
The Portuguese government is asking potential buyers of TAP for guarantees regarding Lisbon airport, while it seems that the Danish, Swedish and Norwegian governments had their backs to the wall too much to negotiate anything similar.
Let’s put it plainly: Air France-KLM is going to suck in as many Scandinavian customers as possible without giving too much back. It has enabled SAS to survive while it restructures, and that’s already a good thing.
Pending the restructuring of SAS
We read here and there that Air France-KLM is going to transform SAS, perhaps operating flights from Copenhagen to compensate for the restrictions in force at Schiphol. We don’t believe it for a second.
“Upon completion of the transaction, Air France-KLM would own up to a maximum 19.9% non-controlling stake in the share capital of the reorganized SAS AB.“
Need we remind you what a non-controlling shareholder is? They have no power of control and no way of influencing the airline’s strategy.
Air France-KLM will be a commercial partner, nothing more.
It will try to fill its flights with Scandinavian customers, send its own customers to Scandinavia and….that’s it!
The Group is putting money into SAS to enable it to survive and continue its restructuring plan, and that’s all until there’s a clearer picture of the Scandinavian airline’s future health.
A bit like poker, it “pays to see”. For $144.5 million it establishes a commercial partnership, gives the airline some breathing space (money) to continue its restructuring, blocks any desire on the part of a competitor (Lufthansa) to acquire SAS andgives itself the option of buying it later if it gets better…or not to buy it at all.
Scandinavians shouldn’t expect miracles or any help other than from codeshare until they’ve proven their ability to be profitable. It’s sad, but that’s life, and that’s business anyway.
Air France-KLM’s takeover of SAS not a done deal
And now we come to the most important point of all: the takeover of SAS by Air France-KLM. It’s the logical continuation and ending of the story, so much so that everyone takes it for granted. Well, we won’t go that far.
“Definitive agreements between the members of the Consortium would include specific provisions whereby Air France-KLM’s stake may be increased such that Air France-KLM may become a controlling shareholder, after a minimum of two years, subject to among other things, certain regulatory conditions and financial performance..“
It’s there in black and white.
– Air France-KLM will be able to take control of SAS after two years.
– Naturally, subject to regulatory conditions.
– And subject to financial performance
Firstly, everything depends on Air France-KLM’s will. But why would the Franco-Dutch group refuse to take control of SAS?
First, a sudden change of strategy. We don’t believe it, Ben Smith is a wise executive who knows what he’s doing. But he still has to be there at the time. But the economic context may change, a new crisis may arise…
Then there are competition issues. What happens if Air France-KLM is chosen to take over TAP? If the competition authorities say “oh no, that’s a lot, it’s TAP or SAS, but not both”, or under unacceptable conditions. We’re betting that Air France-KLM will give up on SAS.
We even think that the group’s priority is TAP, and that they just put an option on SAS while waiting to see how their Portuguese adventures would go. If they take over TAP, they’ll have to wait and see what they do with SAS, which may just be an adjustment variable in negotiations with the EU. If they miss TAP then SAS will once again become a potential priority.
But let’s make no mistake: SAS is an opportunity that has been seized, a second choice. In our opinion, the privatization of TAP will decide a lot of things.
Finally, as the press release states, financial performance issues. If SAS fails to return to profitability and complete its SAS Forward program in the meantime, Air France-KLM could effectively say “we’re not going any further, you’re on your own“, even if it means losing its money, being diluted by new investors or even selling its shares. After all, that’s what happened with Alitalia.
Air France-KLM reports record profits. Either way. We’re waiting for 2023 figures, but if we take 2022 the Group’s “record profits” would have been practically wiped out by SAS losses. If this were to continue, we don’t see them taking over an airline that has been systematically losing money for many years and has never managed to restructure.
Better to lose $145 million once than $700 million a year for years.
Once again, the message is clear: SAS must successfully restructure and return to profitability, or Air France-KLM will close the case, especially in the event of a TAP takeover.
While Lufthansa Groupe takes the risk of assuming ITA’s losses by making it competitive, having paid 325M euros for 40% of the capital, Air France-KLM drops 145 million for 20%, leaves Scandinavians to deal with their transformation without having to assume much and will see much later what they do. Rather finely done.
What does the future hold for SAS?
As we said in the preamble, between the worst-case scenario and the best-case scenario, there’s a whole grey area in which the truth will undoubtedly lie.
At best, SAS is part of a group comprising Air France, KLM, Transavia, TAP and itself. The airline is profitable again, the power of the Group is helping it to grow, and it is regaining its former lustre of the 80s, when it was one of the world’s best airlines.
In the worst-case scenario, Air France-KLM uses it to supply its hubs and, in the end, either uses it as a negotiating tool with the competition authorities and refuses to take control, or abandons it to its fate because its restructuring has failed. It will then fall into the hands of an investment fund, an airline bold enough to try to turn it around, or disappear.
Remember Alitalia. Although a shareholder, Air France-KLM did not take control of the airline due to political interference at times, but also at other times because it doubted its reliability, and saw its shareholding gradually diluted until it was taken over by Etihad, which eventually abandoned the airline until it disappeared.
Bottom line
SAS’ fate is far from sealed, either way. The arrival of Air France-KLM in its capital and the commercial partnership that will follow should enable it to restructure and become profitable again before joining the Franco-Dutch group.
Optimists will see AFKL as SAS’ saviour, pessimists as its gravedigger. The good news is that SAS has its future in its own hands: all it has to do is return to profitability, and a perhaps bright future awaits. Otherwise, an Alitalia-style outcome cannot be excluded.
Image : A320 SAS by Photofex_AUT via Shutterstock
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