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SAS Wins Backing of Unions for Its Plan to Shrink Airline

By Ola Kinnander
November 19, 2012 12:34 PM EST
SAS Group prepared for a possible shutdown of the Nordic region’s biggest carrier as talks with labor unions needed to secure financing dragged on.
Photographer: Erik Abel/Bloomberg
SAS Group prepared for a possible shutdown of the Nordic region’s biggest carrier as talks with labor unions needed to secure financing dragged on.

SAS Group (SAS)’s plans to eliminate jobs and shrink its business were accepted by pilot and cabin-crew unions as Scandinavia’s biggest airline fights to stay afloat.

SAS surged 29 percent after reaching accords with all eight labor groups, with one deal that covers 600 Swedish cabin crew freezing pay through 2014 and lifting the retirement age to 65, according to their union. Danish flight attendants were the last to sign up, hours after a midnight deadline for a deal expired.

Unprofitable on an annual basis since 2007, SAS is planning 6 billion kronor ($887 million) in cost cuts and disposals as it seeks an extension of credit lines needed to keep flying. The Stockholm-based company’s recovery plan will eliminate office jobs and sell assets including a ground-handling unit and Norwegian brand Wideroe to pare the payroll by more than 7,000.

“Most issues with the unions are falling into place,” said Mark Schindele, a credit analyst at Nordea Bank in Stockholm. “Employees understood that this was a very serious situation.”

A 3.5 billion-kronor revolving credit is contingent on final parliamentary approvals for the plan and the backing of one-third of the members of SAS’s Danish pilot union.

The accords put in place today will boost SAS’s competitiveness and could pave the way for external tie-ups, Chairman Fritz Schur said in a briefing in Copenhagen, adding that “a merger would be good for the company.”

Supplier Squeeze

SAS Group, which has 1,085 daily flights and serves 128 destinations, is the latest European carrier to struggle for survival. Hungary’s Malev Zrt. and Barcelona-based Spanair SA, which used to be owned by SAS, collapsed this year as Europe’s sovereign debt crisis and high oil prices weigh on airlines.

With ticket sales tumbling, suppliers might have started requesting payments upfront had the union deals not been sealed, said Kenneth Sivertsen, an analyst at Arctic Securities in Oslo. Contingency plans for a collapse in talks had seen planes beyond Scandinavia refueled and ready to return to base, while outbound crews were ordered to carry enough cash to meet expenses.

The stock rose 1.65 kronor to 7.25 kronor, the biggest jump since Aug. 17, 2011, and closed 23 percent higher at 6.90 kronor in the Swedish capital. That pares its drop so far this year to 14 percent and values SAS, which is part-owned by the Swedish, Norwegian and Danish governments, at 2.27 billion kronor.

SAS, whose main brand is Scandinavian Airlines, would have faced an uncertain future had unions rejected the restructuring, spokeswoman Elisabeth Manzi had said, while declining to specify if it would have filed for bankruptcy in the absence of a deal.

‘Very Satisfied’

Terms accepted by the Swedish cabin-crew group also include a tightening of travel and overtime payments, though there are no regular salary cuts, and the union is “very satisfied under the circumstances,” spokeswoman Jennie Zetterstroem said.

“The core problem is they have higher costs than several low-price carriers that have entered the Scandinavian market,” said Louis Landeman, a senior credit analyst at Danske Bank Markets in Stockholm, citing the example of Norwegian Air Shuttle ASA. “Also, unlike the bigger airlines in Europe, SAS has few of the longer flights where there’s more money to be made. They’re just not earning enough cash.”

About 800 administrative posts will be eliminated by focusing work at SAS’s Stockholm base under a plan to shave 3 billion kronor from costs. SAS has already scrapped 300 office jobs this year in an earlier project to cut 5 percent from spending and lift earnings by 5 billion kronor through 2013.

Disposal Talks

Talks are under way with potential buyers for the ground- handling business, which has 5,000 workers, and “all options” are being considered for Wideroe, where the workforce totals 1,400. Excluding the regional unit, which is based in Bodoe in northern Norway, SAS currently employs about 15,000 people.

Disposals by SAS will also include airport real estate and unused aircraft engines to raise a total of 3 billion kronor, Chief Executive Officer Rickard Gustafson said Nov. 12.

While banks reached a provisional agreement on increasing SAS’s credit lines to 3.5 billion kronor from 3.1 billion kronor with an extension through March 2015, they “won’t support” SAS unless the carrier shows it can make a profit, he said then.

IAG, Air France

“Intensive work” must now start on making SAS competitive, Swedish Financial Markets Minister Peter Norman said in a statement, adding that a credit facility of as much as 749 million kronor will be made available.

The cuts at SAS are part of an industrywide reorganization in Europe. International Consolidated Airlines Group SA (IAG), the parent of London-based British Airways, announced plans on Nov. 9 to eliminate 4,500 posts at its Spanish Iberia unit, or more than one-fifth of the workforce.

Air France-KLM Group (AF), Europe’s biggest airline, said Oct. 31 that it intends to cut 1,300 positions at its Dutch division in addition to 5,000 already being eliminated at the larger French business. Deutsche Lufthansa AG (LHA) is dropping 3,500 administrative jobs and as many as 1,000 catering positions.

Standard & Poor’s cut SAS’s corporate-credit rating one rung from B- to CCC+, seven levels below investment grade. The restructuring “has damaged customer and supplier confidence,” something from which it may take some time to recover, S&P said.

To contact the reporter on this story: Ola Kinnander in Stockholm at okinnander@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Tasneem Brogger at tbrogger@bloomberg.net

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