SAS

Back in 1946, when Scandinavian Airlines System, to give it its full name, was founded, it must have seemed like one of those sensible Nordic decisions. With three rich, geographically large, but sparsely populated countries, it made sense to operate one airline over the whole area instead of have the three national carriers slug it out against each other. And for most of the next 50 years, SAS was successful, even though some of its internal arrangements were hardly competitive (eg operating crews in the ratio 3:2:2, Sweden:Norway:Denmark, the same as their joint 50% shareholding is divided up). Aviation during this period was a cosy collection of bilateral duopolies, anti-competitive alliances and restrictions on foreign shareholdings. My wife tells me that during the 1970's, it was cheaper to fly to London from Copenhagen via New York rather than direct, since SAS and British Airways had the point-to-point market to themselves. And I still remember the first time I flew to Scandinavia, in 1986, in a small propeller-driven plane operated by Mærsk Air from Southend to Billund; it cost £450. Today, 25 years later, I regularly fly from Billund to the U.K. in a proper jet for around kr.450, a tenth of that old price. Or even less.

And therein lies SAS' problem. The European aviation market has changed dramatically in recent years, with the liberalising of routes and the arrival of low-cost airlines such as Ryanair, EasyJet and Norwegian undermining the luxury service model that SAS has traditionally provided. The last decade has seen an endless cycle of savings plans, retrenchment, losses and capital injections. The number of employees has fallen from 32,481 in 2004 to 15,142 in 2011, even though the number of passengers has only fallen from 33.3 million to 27.2 million, the number of planes from 297 to 215, and the number of destinations from 146 to 128. SAS is hugely more efficient than it was; but it is still not efficient enough.

And so came the announcement this week of yet another cost-cutting plan. Its ground-handling subsidiary will be sold, and a further 800 jobs will go, though these measures are not the key parts of it. What is different this time is that SAS has decided to tear up the 40 or so (yes, really) agreements it has with the various unions that work for it, and replace them with a much simpler structure. Workers will be expected to take up to 15% cuts in pay (management have already agreed to do the same). And everybody has only a week to agree to the new terms, ending this Sunday.

Such un-Scandinavian business practices have sent shock waves throughout the Nordic world, particularly in Denmark, which is home to SAS' main international hub at Copenhagen. The Scandinavian labour model pits strong unions against strong management in legally binding 2-year agreements, agreements you don't (and often can't) tear up. The fact that SAS has just done so shows how precarious its financial position now is. Rumours say that without new labour agreements, it would have only weeks before it went bust.

In the medium-term the great hope for the company is to be bought by Lufthansa. However, even another state-owned leviathan would not buy a dog; unless and until SAS becomes competitive again, then nobody will buy it. Frantic negotiations are currently taking place between workers and management; most commentators believe that the employees will blink and accept the new terms. The real question thereafter is not what happens to SAS, but what happens to that famously consensual Nordic labour market. After all, there are other companies in other industries with SAS' high-cost wage model and cheaper competition. Perhaps they will be tempted to take the same route.

UPDATE 19/11: The employees did indeed blink and accept the new terms, though the deadline was missed in the case of the Danish cabin staff union. But management stayed firm to their demand that all the new agreements needed to be in place if bankruptcy was to be avoided, and the union caved. The stock market applauded the agreements, sending SAS' share price up 23% on the day. However, it's a sign of SAS' problems that it only got to Skr.6.90; back in early 2009 it was trading at close to Skr.1,500.

Walter Blotscher