Scandinavian Airlines: Can joining SkyTeam help it get out of its operational difficulties?
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On April 29, 2024, Scandinavian Airlines and SkyTeam officially signed an "Alliance Compliance Agreement", and Scandinavian Airlines took an important step towards joining SkyTeam. According to the agreement. From September 1 this year, Scandinavian Airlines officially became a member of SkyTeam, and SkyTeam's network will extend and expand to the Scandinavian Peninsula in Northern Europe. Scandinavian Airlines passengers can use SkyTeam's transportation network to travel to more than 1,060 destinations around the world, including Africa, Latin America and the Caribbean.
After joining SkyTeam, Scandinavian Airlines' silver card members will be regarded as SkyTeam elite members, and gold and diamond card members will be regarded as SkyTeam's elite + members. Scandinavian Airlines' elite members can enter more than 750 airport lounges around the world and enjoy SkyTeam priority services such as priority check-in, priority boarding and priority baggage handling at 8 airports. As a founding member of Star Alliance, why did Scandinavian Airlines join SkyTeam?
The epidemic has made matters worse.
Founded in August 1946, Scandinavian Airlines is an aviation entity jointly established by the governments of Denmark, Norway and Sweden in Scandinavia. It is also the leading airline in the region.
In history, Scandinavian Airlines has experienced reorganizations with KLM, Austrian Airlines and Swiss Airlines, but ultimately went bankrupt due to high-level reasons. With the rise of Europe's low-cost airlines and the competitive pressure from traditional airlines, Scandinavian Airlines is facing a development crisis and has suffered serious operating losses many times. In fiscal 2019, Scandinavian Airlines achieved a profit of 800 million Swedish kronor (about 95 million US dollars). But in fiscal 2020, the company lost 10.2 billion Swedish kronor (about 1.2 billion US dollars) before tax.
In the second quarter of 2021, Scandinavian Airlines continued to experience a serious shortage of passenger transport, resulting in a direct loss of 2.4 billion Swedish kronor (about 280 million US dollars) in the quarter, an increase of 1.1 billion Swedish kronor (about 128 million US dollars) over the second quarter of 2020. In order to help Scandinavian Airlines overcome its financial crisis and solve its operating cost problems, the European Commission approved financial aid of about 300 million euros to Sweden and Denmark. The aid was issued to the Swedish and Danish governments in the form of loans and subsidized interest rates for 150 million euros respectively, with a loan period of 5 years.
The Danish government holds a 21% stake in Scandinavian Airlines, and Scandinavian Airlines' predicament has made the Danish government in a dilemma. Previously, the Swedish and Norwegian governments had successively issued statements that they would convert the existing debts held by Scandinavian Airlines into the company's equity capital, but would no longer inject new capital into Scandinavian Airlines. In June 2022, the Danish government reached an agreement with opposition parties to inject capital into the troubled Scandinavian Airlines, but the prerequisite was that the Danish government needed one or more new major shareholders to ensure that its shares remained in the minority.
In this case, it means that among the three government stakeholders related to Scandinavian Airlines, only the Danish government agreed to inject new funds into Scandinavian Airlines. The Danish government took this measure mainly because the country still hopes to take responsibility for revitalizing Scandinavian Airlines and, as one of the long-term owners of Scandinavian Airlines, promote Denmark's international tourism, foreign trade exports and business exchanges.
After unremitting efforts, Scandinavian Airlines' passenger traffic in the third quarter of 2022 increased by 30% compared with the second quarter, and the passenger load factor increased by 11 percentage points from the second quarter to 78%. This is also the season with the highest passenger traffic for Scandinavian Airlines since the outbreak of the epidemic. However, due to the 15-day strike by pilots, 4,000 flights were reduced in the summer, and Scandinavian Airlines suffered a pre-tax loss of 1.99 billion Swedish kronor (about 188 million US dollars) in the third quarter of that year, higher than the loss of 1.33 billion Swedish kronor (about 125 million US dollars) in the same period of 2021. The pilot strike has had a relatively serious impact on Scandinavian Airlines in the summer season when travel demand is strong.
Bankruptcy protection application
In order to achieve the company's asset restructuring and reduce costs to continue to operate, Scandinavian Airlines filed for bankruptcy protection in the United States in June 2022. Scandinavian Airlines hopes to restructure its debts, re-plan its fleet and achieve new capital injection through bankruptcy protection. After receiving Scandinavian Airlines' application for bankruptcy protection, the U.S. District Court for the Southern District of New York approved Scandinavian Airlines' application for bankruptcy protection on July 7, 2022, and replied that Scandinavian Airlines can continue to operate in a normal manner, including paying employee salaries and providing services and products to suppliers and sellers.
Through this bankruptcy protection action, Scandinavian Airlines can obtain an additional $700 million in debt financing to support its restructuring business. At the same time, as cost cuts affected pilots' salary cuts of 30%, this caused strong dissatisfaction among Scandinavian Airlines' pilot unions in Sweden, Denmark and Norway, and they held continuous strikes, resulting in a serious shortage of Scandinavian Airlines' summer capacity in 2022.
On July 19, 2022, Scandinavian Airlines reached a 5.5-year collective bargaining agreement with pilots, ending a 15-day strike. Both parties agreed that pilots would take on more work to reduce the unit cost of pilots, and Scandinavian Airlines also promised to re-employ 450 full-time pilots. The two sides also reached an agreement to withdraw the legal action taken by some pilots against Scandinavian Airlines. The pilot strike resulted in the cancellation of 4,000 flights, affecting the travel of 380,000 passengers and causing the company to lose more than 1.5 billion Swedish kronor (US$145 million).
Since declaring bankruptcy protection, Scandinavian Airlines has been actively pursuing a cost-cutting strategy to improve the company's financial situation by simplifying business operations. In November 2023, Scandinavian Airlines received a cash loan of US$1.21 billion from major shareholders including Castlelake. The loan actually replaced the debtor-in-possession financing arrangement provided by Apollo Global Management in 2022.
The consortium that agreed to the cash injection also includes France-KLM Aviation Group, Denmark's Linde Investment Group and the Danish government. At the same time, the Danish government also agreed to increase its investment in the airline by another US$25.26 million. The investors negotiated with Scandinavian Airlines and evaluated whether the investment could complete the turnaround and accelerate the restructuring process. Because only when Scandinavian Airlines completes the restructuring and achieves profitability can it no longer be regulated by the court.
After continuous efforts, in the third quarter of fiscal year 2023, Scandinavian Airlines achieved profitability for the first time since the outbreak of the COVID-19 pandemic. Passenger traffic increased by 36.8% compared with the third quarter of fiscal year 2022, revenue per passenger kilometer increased by 42.5%, capacity increased by 35.9%, and passenger load factor increased by 3.7 percentage points to 81.5%, achieving revenue of SEK 13.17 billion and net profit of SEK 461 million. However, for the fiscal year 2023 as a whole, Scandinavian Airlines' passenger traffic exceeded 23.7 million, an increase of 33% over the previous fiscal year, total revenue of SEK 42 billion, operating expenses increased by 27.3% over the previous fiscal year, but the loss for the fiscal year was SEK 5.7 billion.
Fleet planning reduces costs
One of the contents of the company restructuring plan that Scandinavian Airlines will implement in 2022 is to cut costs by 7.5 billion Swedish kronor (about 754 million US dollars) by 2026, convert 20 billion Swedish kronor (about 2 billion US dollars) of debt into equity, and raise at least 9.5 billion Swedish kronor (about 953 million US dollars) of new funds.
Scandinavian Airlines will also re-plan its fleet, and the next step is to reach an agreement with aircraft leasing companies on measures to streamline the fleet and implement cost reductions. However, this fleet restructuring plan did not make substantial progress at the beginning. Scandinavian Airlines only emphasized that due to the sluggish long-distance route market, it is necessary to reduce the number of Airbus A330 and A350 aircraft in the fleet.
After voluntarily filing for bankruptcy protection in the United States in July 2022, Scandinavian Airlines has been seeking to make progress in restructuring plans and cost reductions. The more difficult part is how to negotiate with aircraft leasing companies and modify aircraft leasing agreements. After unremitting efforts, Scandinavian Airlines finally made some progress in the negotiations.
As of September 2022, SAS has 117 aircraft, of which 62 are leased. As part of the cost reduction process during the bankruptcy protection reorganization, in October 2022, SAS held constructive negotiations with 10 aircraft leasing companies including Aergo Capital Ltd. and ALAFCO Aviation Leasing and Finance Company, and reached an agreement on the modification of the lease terms of 33 narrow-body aircraft and 3 wide-body aircraft. In November of the same year, it reached an agreement with Carlye and SMBC, two aircraft leasing companies, on the modification of the lease terms of 7 narrow-body aircraft and their accessories. The modification of the terms of the aircraft leasing agreement further improved SAS's cost structure.
In addition, SAS has signed two Airbus A350-900 lease agreements with Japan's Fuyo General Leasing Company, three A330-300 wide-body aircraft lease agreements with China Bank of Communications Financial Leasing Company, three Airbus A320neo lease agreements with Ireland's SMBC Aviation Leasing Company, one Airbus A321 lease agreement with Japan's Itochu Leasing Company, and one Boeing 737-700 aircraft lease agreement with Ireland's AerCap Aircraft Leasing Company. In order to further cut costs and reduce the size of the fleet, SAS negotiated with these leasing companies separately and gradually returned the 10 aircraft from September 2022.
SAS reached an agreement with the aircraft leasing company on the modification of the lease terms, which was also based on the changes in the sluggish regional tourism market and the overcapacity of long-distance routes at the time, as well as the need to accelerate cost reduction during the bankruptcy protection process. Scandinavian Airlines also plans to replace twin-aisle aircraft with single-aisle aircraft on some medium and long-distance routes in the future, and control the diversity of aircraft models, and finally achieve only three models to improve production efficiency. It is reported that through the modification of the lease agreement, Scandinavian Airlines will save at least 850 million to 1 billion Swedish kronor (about 78 million to 92 million US dollars) each year.
Joining SkyTeam is forced by the situation
As the debt restructuring process is about to end, Scandinavian Airlines' capital structure will undergo major changes. In October 2023, Scandinavian Airlines announced that Castlelake holds 32% of the company's shares, France-KLM Airlines Group holds 20%, the Danish government holds 26%, and the Danish Linde Investment Group holds 8.6%, and the remaining shares are held by other creditors. In fact, the new shareholders' total investment in Scandinavian Airlines has reached 1.16 billion US dollars. The credit agreement reached between Scandinavian Airlines and Castlelake is worth 505 million US dollars, which will be mainly used to refinance loans and increase the company's cash flow.
Bankruptcy protection and debt restructuring have brought great changes to Scandinavian Airlines. On the one hand, Scandinavian Airlines faces a complete loss of its original shareholders, which will cause significant economic losses to bondholders; on the other hand, Scandinavian Airlines will also be delisted from the public market and issue new shares and convertible bonds. In the new consortium with capital structure reorganization, Air France-KLM will have an important impact on the future development of Scandinavian Airlines.
During this capital restructuring, Air France provided $144 million, of which $109.5 million was injected in the form of equity and the rest was injected in the form of convertible bonds. This action enabled Air France-KLM Aviation Group to obtain a 20% stake in Scandinavian Airlines. The cooperation between Scandinavian Airlines and Air France-KLM has also created more opportunities for Air France-KLM's commercial operations in the Nordic region, and the strategic significance of its market position is even far greater than the expansion in the financial field.
Scandinavian Airlines joined the Star Alliance in 1997 and is a founding member of the Star Alliance. In order to complete debt restructuring and accelerate economic recovery, Scandinavian Airlines and Air France-KLM will strengthen close cooperation in October 2023 and begin to form a strategic alliance partnership. Currently, Air France-KLM has become an important shareholder of Scandinavian Airlines. In order to continue to expand the market and enhance its competitiveness in the Nordic region, under the leadership of Air France-KLM, Scandinavian Airlines will naturally withdraw from Star Alliance and join SkyTeam with Air France-KLM as the core to carry out new business cooperation.