SAS

Group 2 19th of december 2008

Table ofcontents

Introduction......................................................................................................................................................3

Topic:............................................................................................................................................................3

Purpose:.......................................................................................................................................................3

Problem formulation:...................................................................................................................................3

Descriptive level:......................................................................................................................................3

Identification level:...................................................................................................................................3

Solving level:.............................................................................................................................................3

Definition of the concept:.............................................................................................................................3

Viewpoint:....................................................................................................................................................4

Choice of theory, methods and empirical data:............................................................................................4

Delimitations:...............................................................................................................................................5

The structure of the written assignment:.....................................................................................................6

The development for SAS and the industry during the last decades............................................................6

SAS core competence...................................................................................................................................8

Location of Costs..........................................................................................................................................9

Costs of a typical Airline Company...........................................................................................................9

Costs: SAS versus Competitors...............................................................................................................10

Diversified fleets.................................................................................................................................10

Fuel-efficiency.....................................................................................................................................11

Lease of Aircraft..................................................................................................................................11

Load factor..........................................................................................................................................12

Efficiency of employees......................................................................................................................12

Usage of E-tickets and self-service......................................................................................................13

E-tickets..........................................................................................................................................13

Self-Service.....................................................................................................................................13

Conclusion..............................................................................................................................................14

Incentive problems.........................................................................................................................................14

The three legged stool....................................................................................................................................16

Rewards..................................................................................................................................................16

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Decision rights assignment.....................................................................................................................16

Performance evaluation.........................................................................................................................17

Conclusion for the three legged stool.........................................................................................................17

Incentive compensation.................................................................................................................................17

Stock options..............................................................................................................................................18

Competitive advantages.................................................................................................................................18

Competitive strategy......................................................................................................................................19

Company profile and organizational architecture..........................................................................................20

Why is SAS-Scandinavian experiencing these problems?...............................................................................21

Capture and create value in the future..........................................................................................................22

Reference list..................................................................................................................................................24

Books:.........................................................................................................................................................24

Homepages:................................................................................................................................................24

Enclosure 1.....................................................................................................................................................25

Enclosure 2.....................................................................................................................................................25

Enclosure 3 – Spulber strategic analysis.........................................................................................................26

Enclosure 4.....................................................................................................................................................37

Enclosure 5.....................................................................................................................................................37

Enclosure 6.....................................................................................................................................................38

Enclosure 7.....................................................................................................................................................38

Enclosure 8.....................................................................................................................................................39

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Introduction

Topic:SAS has experienced a lot of problems the latest year with decreasing efficiency, increasing costs

and bad reputation because of a lot of emergency landings and lower service. Therefore the main

topic in this project is how SAS can create and capture value and by that get back to business.

Purpose:The purpose is to see if SAS in the long-run are able to capture and create value by several exami-

nations and analysis. After these examinations and analysis the purpose is to find possible solutions.

Problem formulation:

Descriptive level:

1. Which development has SAS and the airline industry experienced during the last decades?

2. Where does SAS have their core competences?

3. Where are the main costs located and what are the costs compared with their competitors?

4. Which incentive problems exist within SAS?

5. Which form of organizational architecture is SAS based on?

Identification level:

6. Why is SAS experiencing these problems?

Solving level:

7. How can SAS overcome these problems and capture and create value in the long run?

Definition of the concept:EB – EuroBonus

TPC – Travel Pass Corporate

We assume that SAS group and SAS AB are the same

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The Spulber model refers to “The manager’s 5 step process of strategic analysis” from the book

“Management strategy” by Daniel F. Spulber.

Viewpoint:We are students from the Institute of Business and Technology in Herning. We are making an as-

signment where we are suppose to find out if SAS in the long run are able to create and capture

value by using relevant theory and methods.

Choice of theory, methods and empirical data:We are going to use different methods and models to analyse this problem. We are going to explain

the questions in the problem formulation one by one what method or model we are going to use to

be able to answer the question.

1. Which development has SAS and the airline industry experienced during the last decades?

We will look at relevant homepages which can provide us with information on the development

both in the industry and for SAS. We will primarily use SAS’s homepage to find the information

about the development that SAS has experienced.

2. Where does SAS have their core competences?

To determine where the core competences are located we will primarily look at SAS’ homepage but

also look at some relevant articles and by reading the annual report of SAS. Later in the analyzing

part we will look at the theory of competitive advantages and by that see if SAS is doing what they

are best at.

3. Where are the main costs located and what are the costs compared with their competitors?

We will again mainly use the internet with specially focus on the annual reports of SAS Scandina-

vian Airlines and also different articles. In the analyzing part we will look at the costs more closely

by using the theory.

4. Which incentive problems exist within SAS?

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To find the answer to this question we will look at different articles and other homepages which

includes elements which refers to the theory of incentives problems.

5. Which form of organizational architecture is SAS based on?

To find the answer to this question we will first of all look at SAS own homepage to find these in -

formation. Afterwards in the analyzing and solution part we will use the Spulber model like de-

scribed underneath.

6. Why is SAS experiencing these problems?

We will use different models to find to answer to this question. As a start we are going to use the

Spulber model to make a strategic analyse and thereby find SAS’ competitive advantages and after -

wards find the competitive strategy which SAS should use. By looking at this we are able to draw a

sketch of how we think SAS organizational structure should or could look and see which. To ad-

dress the issue regarding efficiency we will use the three legged stool. We will use relevant theory

to evaluate on the incentive conflicts in SAS and look at the possibility for incentive compensations.

The big question for SAS is how they can reduce costs and we will try to suggest different solutions

to reduce costs. We will also try to see if we can optimize the organizational architecture by using

relevant theory.

7. How can SAS overcome these problems and capture and create value in the long run?

To answer this question we have to look at what we found out in the previous question. The answer

for question number 6 will gives us the foundation to answer this question. So we have to combine

the results from the different models so we are able to answer this question.

Delimitations:The delimitations in this project are that we are working inside the SAS Scandinavian division with

four subunits – SAS Denmark, SAS Norway, SAS Sweden and SAS International.

Some of the models are from a previous school. While the most of the theory and models are from

the book “Managerial Economics & Organizational Architecture” written by Brickley, Smith and

Zimmerman. Furthermore we have look in another book “Managemnet Strategy” written by Daniel

F. Spulber.

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The structure of the written assignment:The assignment starts with an introduction which is a guide line for the entire case. The case is go-

ing to be divided in to tree main sections.

The problem descriptive level is the descriptive part where the questions will be answer as precisely

as possible to get a strong foundation by using different relevant information. On this level we are

only going to describe the situation for SAS.

The problem identification level is where we will use the above mentioned methods and theory.

Before using these it will be a good idea to look at what we found out in the descriptive level.

In the problem solving level we have to look back at the results in the previous level. The answer

we found and the methods we used are going to be the foundation to answer the question asked on

this level.

As an ending we are going to make a short conclusion on the report. The purpose of this conclusion

is to summarize all the main points in the report and to show how we can up with the solution.

The development for SAS and the industry during the last decadesWithin the last decade the airline industry has developed rapidly. The reason for such rapid devel-

opment has been global economic growth. Banks have been lending out money easily and the pas-

senger volume has grown substantially. A lot of new airlines have entered the market which has

made the price variation rather big. SAS Airlines biggest rivals are low-fare airlines, since people

are more and more looking for the cheapest price and leaving the service quality behind. SAS has

had big problems meeting the costs of the cheap airlines. The company has reduced costs and ad-

justed capacity. It also sold SAS Flight Academy and fired the entire staff training unit in February

2008.1 Earlier SAS tried to cut the salaries of the staff but since the company is related to more than

39 unions it was very hard to negotiate with the unions. The leader of workers union organization

said that the negotiations with SAS were the hardest in history. At one point SAS threatened to

ground all the planes if the workers do not agree with the cuts.2 In the past years as a result of in-

1 http://www.iht.com/articles/2007/06/13/bloomberg/bxair.php2 http://otsustaja.postimees.ee/?id=39083

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http://www.iht.com/articles/2007/06/13/bloomberg/bxair.php


creasing fuel price and global financial crisis more and more companies have been suspended or

merged, since now the number is up to 30 companies and around 20 is under critical watch list .

Banks have started to restrict the loans and due to that it is assumed that more companies will get to

trouble with financing the airplanes.3

During the last years SAS Airlines brand of reliability, punctuality and quality has been damaged

substantially. SAS owns 27 Bombardier airplanes which for now have been taken off the fleet.4

There were three incidents where the airplanes had to make an emergency landing. The mistake was

in the faulty landing gear system. In one of the incidents in Vilnius Airport the aircraft slide off the

runway causing a big emergency situation. Later investigations showed that the regular inspection

of the airplane had been sloppy or faulty which brought a huge amount of law suits to the com-

pany.5 In August 2008 SAS was sued by several Swedish companies for making losses from price

fixing on air freight services. The cartel agreement was discovered in 2006 and SAS got a 52 mil-

lion dollar fine for that. The company has admitted the cartel agreement6 . Spanair, an airline regu-

lating flights mainly in Italy and Spain, is owned by SAS Airlines. Years ago Spanair was thought

to be very valuable and with a lot of potential, hence airlines were lurking around Spanair biding,

but SAS thought that the price was not enough. In 2007 SAS put a sale sign on Spanair but due to

hard situation in the marked there was nobody interested. In August 2008 Spanair aircraft crashed

near Madrid. After that the company has become a huge burden for SAS with loss of 515 million

Swedish crowns in the first half of 2008.7

Due to the tough situation in the market there is a lot of uncertainty in the market. A lot of compa-

nies are in trouble and are looking for a huge investment or merging possibility. Austrian Airlines

has been negotiating with Air France-KLM for being bought. Lufthansa has had negotiations with

TUIfly but fell back from the talks saying that the market situation is too tough.8 SAS Airlines sent

a letter to the Estonian government saying that they are willing to buy the government share in the

local carrier Estonian Air. Otherwise SAS is not willing to invest the critical amount that is needed

3 http://www.reuters.com/article/ousivMolt/idUSTRE49N2N4200810244 http://www.bombardier.com/en/0_0/pressleft.jsp?group=0_0&lan=en&action=view&mode=list&year=null&id=7364&sCateg=3_05 http://en.wikipedia.org/wiki/2007_Dash_8_landing_gear_incidents#cite_note-116 http://www.reuters.com/article/rbssAirlines/idUSLM154024200808227 http://www.reuters.com/article/rbssAirlines/idUSLF526450200810158 http://www.reuters.com/article/innovationNewsIndustryMaterialsAndUtilities/idUSTRE49L4W920081022?pageNumber=1&virtualBrandChannel=0

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http://en.wikipedia.org/wiki/2007_Dash_8_landing_gear_incidents#cite_note-11

http://www.bombardier.com/en/0_0/pressleft.jsp?group=0_0&lan=en&action=view&mode=list&year=null&id=7364&sCateg=3_0

http://www.bombardier.com/en/0_0/pressleft.jsp?group=0_0&lan=en&action=view&mode=list&year=null&id=7364&sCateg=3_0


for the endurance of the company.9 In the same time rumors of SAS merging with Lufthansa rose

SAS stock price by six Swedish crowns. Both of the airlines have declined merging rumors but ad-

mitted loose talks. SAS has said that they are looking for different structural possibilities.10

SAS core competenceThe main target group for SAS is the business travelers.11 The business travelers accounted for 55-

60 percent of the passengers in the year of 2007 furthermore the leisure travelers accounted for 35-

40 percent12, leisure and business travelers have the same demands. Their core competence is also to

find within the business unit. In SAS they have done a lot of different thing to make it easier and

more comfortable to travel through different loyalty programs mainly the EB and the TPC card.

Individuals can get an EB card which is mostly for the people who travel a lot. With this card the

cardholder gets a lot of discounts on a board range of hotels, car rentals and more. As an EB card -

holder you can use the card as an electronic ticket on SAS flights13, get an SMS if your flight is de-

lay, earn points to use later on e.g. a free ticket and many other benefits.14

The companies can get a TPC card. This card also offers discounts, but they have to travel a busi -

ness class or economy extra to get the discounts on flight tickets. With the card the company can

pay for the travel when the employee has returned or check how much they have spent on travels.

Both types of cardholders can use the system SAS Fast Track15, which not are in all airports. This

means that you can get quickly through the security and have assets to the lounge where you can

relax, have something to eat and a lot of other things. 16

These programs attract a lot of business people and companies, and increase their loyalty because

they have so many benefits. In their strategy 2011 they also mentioned that they are working on

biometric solutions where you in the further can check-in with your fingerprint, this is already in

9 http://www.reuters.com/article/mnaNewsIndustryMaterialsAndUtilities/idUSLR6381672008112710 http://www.iht.com/articles/2007/06/13/bloomberg/bxair.php11 Enclosure 112 http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/2007eng.pdf, page 813 http://www.flysas.com/en/EuroBonus/membership-levels-and-benefits/Basic/14 http://www.flysas.com/en/EuroBonus/About-EuroBonus/15 http://www.sas.dk/da/virksomhedslosninger/SAS-Corporate-Program/ http://www.flysas.com/en/EuroBonus/membership-levels-and-benefits/Gold/16 http://www.sas.dk/da/virksomhedslosninger/

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http://www.flysas.com/en/EuroBonus/About-EuroBonus/

http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/2007eng.pdf



some Swedish airports and they are working on getting it installed in Denmark and Norway as

well17.SAS cannot compete with companies like EasyJet and Ryanair on the prices because their

costs are too high. So the core competence is their good service specially to people how travels a

lot. Even though their core competence is about service, they are getting bad points from their cus-

tomers as to want concern the service.

Location of CostsAll companies is referred to as possessing three types of assets, namely: Software, Hardware and

Wetware. All company’s resources need maintenance: such as machinery needs to be maintained by

electricity in order to produce any output18, employees need to be paid compensations19 in order to

make any actions to increase the company’s value or convert their wetware into software. In con-

trast to the hardware, the two other assets are not taken into account when calculating book value of

a company, but nevertheless these types of resources are vitally important when creating and cap-

turing value20.

Costs of a typical Airline Company

A typical Airline Company have the costs of internal operating and external costs, which are repre-

sented as charging from suppliers and distributors21. Typical hardware of an Airline Company is

aircrafts, which represents the main production factor. Aircraft maintenance mainly consists of:

supplying fuel, checking technical condition and repairing (most frequently companies have long-

term contracts with technical maintenance companies). Obviously they need to be operated by pilots

while flying and a crew of flight attendants also have to be onboard to provide services for passen-

gers (these are most frequently companies’ employees). Sometimes companies are leasing aircrafts,

it can mainly happen if there is a sudden possibility to capture a bigger market share, but it is only

by enlarging the fleet, and the only long-term way to do this is by purchasing the ariplanes. Airline

companies are paying taxes to airports when an aircraft is staying at the airports (between flights) at

17 http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/2007eng.pdf, page 918 Often these kinds of costs are called fixed costs, because the payment for electricity, repairing etc. varies very little from time to time. 19 Salaries of the employees` are often referred as variable costs, because employers most frequently are able to alter the production intensity. 20 Managerial economics, Brickley Smith Zimmerman; Converting organizational knowledge into value. (p.198)21 Enclosure 4

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the same time aircraft always needs to be insured (contracts with suppliers). Airline companies also

have a quite significant fraction of their costs concentrated in controlling service provided, i.e. sales,

customer service headquarters, routes controlling, administrative support, center of preparing flight

personnel, leasing centers etc. Airline companies are often arranging contracts with distributors,

which core competence is distributing tickets.

Costs: SAS versus Competitors

Throughout the last years there have been claims that SAS Scandinavian Airlines has too high costs,

to stay in business, compared to their competitors. SAS Scandinavian Airlines main competitors are

Finnair, Ryanair and Norwegian.

Diversified fleetsScandinavian Airlines Company has a quite big fleet consisting of 12 different models totaling 140

planes: Airbus A340-300, Airbus A330-300, Airbus A321-200, Boeing 737-600/700/800, MD-

81/82/87, Boeing 737-300/500/70022. Having such a diversified fleet has its own costs and benefits.

The advantages of having so many different types of planes are that the company becomes more

flexible, enabling itself to adjust to the fluctuations of traffic volumes. But at the same time the

company faces larger operating and repairing costs – maintaining specific aircrafts needs specific

information, when there is a lot of different types of planes in the fleet, the amount of specific infor-

mation needed become especially costly for company. This is demonstrated, by the fact that for

Scandinavian region low-fare airlines such as Norwegian and Ryanair are utilizing only one type of

airplanes (Boeing 737-300 and Boeing 737-800 respectively23). Obviously by this structure they are

obtaining comparative cost advantages compared to a more diversified fleets owned by Scandina-

vian Airlines Company and Finnair.

22 http://www.flysas.com/en/About-SAS/SAS-fleet2/ 23 http://www.norwegian.no/sw7190.asp fleet of Norwegian http://www.ryanair.com/site/EN/about.php?page=About&sec=fleet fleet of Ryanair

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http://www.ryanair.com/site/EN/about.php?page=About&sec=fleet

http://www.ryanair.com/site/EN/about.php?page=About&sec=fleet

http://www.norwegian.no/sw7190.asp%20%20

http://www.flysas.com/en/About-SAS/SAS-fleet2/


Fuel-efficiencyIf in the past an ordinary airline company was spending about 13% of their expenditures on fuels,

then now this figure rose up to 35%24. This is the consequence of the price of oil, which skyrocketed

during the first half of year 200825. During this period of time a lot of airline companies went bank-

rupt or suffered significant losses, because they had too little time to adjust for these market condi-

tions. However, in the long-run it was quite good incentive for companies to switch to more fuel-ef-

ficient aircrafts. While analyzing the fuel-efficiency of the SAS fleet reveals, that there is significant

part of planes which are quite old, for instance models’ MD-81/82/87 and Fokker 50, their fuel con-

sumption is ~30% higher than the fuel consumption of Ryanair`s and Norwegian aircraft.26 That is,

companies with more fuel-efficient planes are gaining superior production factor, which enables

them to catch bigger value.27 Although these superior production factors are available for purchase,

but eventually the price of these production factors will be bid up, so that differences of the price

will eliminate the possibility to earn over normal profits. Besides actual expenditures on fuels

nowadays it becomes even more expensive to utilize non-fuel-efficient planes due to environmental

policies. A recently introduced idea of purchasing the credits for emissions (Kyoto Protocol)28 is

supposed to cut emissions, but at the same time it means, that it will introduce additional costs for

Airline companies, this complicates the situation for companies, which are using less fuel-efficient

aircraft.

Lease of AircraftAirline Companies are facing tradeoff between owning and leasing aircrafts. According to eco-

nomic theory29 it is always better to own assets, that way profit margin will always be higher, how-

ever the fact, that airline industry is very capital-intensive, i.e. the fact that purchasing aircrafts is

very expensive and only possible in the long-run, forces companies, to choose some intermediate

position between, totally owned and leased fleet. Also during the time of severe competition, when

companies are trying to capture as big share of the market as possible, it becomes vital to enlarge

the fleet in the short-run. But the fact is, that in the long-run leasing aircraft companies are overpay -

ing – allocating resources not in the most efficient way. SAS is leasing approximately 71% of its

24 http://palm.newsru.com/finance/10jul2008/toplivo.html25 Enclosure 526 http://www.oralar.az/view.php?lang=ru&menu=31&status=327 Managerial economics, Brickley Smith Zimmerman; Producer Surplus captured by superior factor (p.205)28 http://unfccc.int/resource/docs/convkp/kpeng.pdf 29 Managerial economics, Brickley Smith Zimmerman; Specific Assets and Vertical Integration (p.529)

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http://unfccc.int/resource/docs/convkp/kpeng.pdf

http://www.oralar.az/view.php?lang=ru&menu=31&status=3


fleet30, whereas Ryanair, Finnair are leasing 19%, 50%31 (Norwegian’s fleet is also mainly leased,

but they have recently ordered 42 new, fuel-efficient Boeings, which will make the fleet contrary

mainly owned32). This demonstrates that in the long-run it is more difficult for SAS to capture value

compared to its competitors.

Load factorOne of the most costs heavy factors is flight load factor. Load factor is the percentage of bought

seats in the plane during the flight. It is very useful tool for estimating efficiency of service pro-

vided. In this area SAS Scandinavian Airlines are also behind their main competitors - Ryanair and

Finnair: load factor in year 2007 in SAS was approximately 72.5%, whereas Ryanair and Finnair

claimed that during the same period of time their load factors were 82% and 75.5% respectively33. It

demonstrates that SAS does not allocate its resources in the most efficient way, and in order to be

able to capture value in the long-run this estimator needs to be at least the same level as their com-

petitors’. A possible solution of this problem is improving last-minute purchasing system. This step

is supported by the fact that in Airline industry costs are mainly fixed, that means there are very few

marginal costs when the amount of passengers is increasing. Due to the fact that SAS is not capable

to compete on general fares, consequently they could attract some customers by improved last-

minute purchasing system; properly implemented this reform would not affect main income from

selling tickets, since significant discounts would be introduced only for flights when up to the last

“minutes” there would still be significant amount of free seats.

Efficiency of employeesOne of the most cost influencing factors is the employee efficiency. One of the indicators of em-

ployee efficiency is the average amount of passengers per one employee. These indicator of effi-

ciency is about 3500 passenger per employee annually, whereas at low-fare airlines such as Ryanair

and Norwegian in year 2007 this indicator was 10000 and 5300 respectively, Finnair claimed that

this indicator for SAS were (2000 passengers per employee)34. Also SAS is said to be less efficient

30 Enclosure 631 Ryanair annual report and Finnair’s fleet: http://www.finnairgroup.com/group/group_9_9.html32http://www.norwegian.no/graphics/engelsk_site/press2007/20070830_Norwegian_to_purchase_42new_Boeing737-800.pdf33 Annual reports of Finnair, Ryanair and SAS Scandinavian Airlines (year 2007)34 Information from annual report of SAS, Ryanair, Norwegian and Finnair (year 2007)

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http://www.norwegian.no/graphics/engelsk_site/press2007/20070830_Norwegian_to_purchase_42new_Boeing737-800.pdf

http://www.norwegian.no/graphics/engelsk_site/press2007/20070830_Norwegian_to_purchase_42new_Boeing737-800.pdf

http://www.finnairgroup.com/group/group_9_9.html


than the majority of airline companies due to the fact, that its personnel is higher paid than other

companies’35. SAS is realizing that its flight attendants are overpaid compared to its competitors.

SAS tried to outsource36 service of international flights to Chinese local companies37. The idea was

that SAS would use the cheaper service of Chinese flight attendants’, but it turned out to be a bad

step: first, there were numerous complaints about the poor service, because of the language barriers

and it also turned out to be illegal, because the Chinese attendants did not have working permits in

Denmark.

Usage of E-tickets and self-serviceCreating value is possible by lowering producer’s or consumer’s transaction costs38. Recent trends

in reducing transaction costs in Airlines industry are E-tickets and Self-service.

E-ticketsIntroducing e-tickets is nothing else than lowering producer’s and consumer’s transaction

costs, i.e. consumers no more have to go to the airport or other tickets distribution centers to pur-

chase tickets. That way they are saving time and at the same time producer transaction costs are

reduced along the way. They no more have to maintain their distribution centers or pay fees to their

actual distributors.

Self-ServiceSelf-service in the airports was introduced due to the same reasons: passengers are saving a lot of

time avoiding huge queues and airlines need less operating personnel to service passengers.

This kind of improvements needs quite a lot of investment to develop this innovative service and

then implementing them. In this sphere SAS is successfully keeping their leading position: SAS is

planning to introduce such innovative improvements as check-ins by cell-phone and biometrics

passports39.

35 http://64.233.183.132/search?q=cache:WxihXNO27_cJ:www.ks.dk/service-menu/publikationer/konkurrence-redegoerelse/2002-05-22-konkurrenceredegoerelse-2002/kapitel-4-luftfart-1/+sas+l%C3%B8nniveau&hl=da&ct=clnk&cd=1&gl=dk36 Managerial economics, Brickley Smith Zimmerman; Vertical Integration and Outsourcing (p.514)37 http://www.cphpost.dk/get/106701.html38 Managerial economics, Brickley Smith Zimmerman; Value creation; Producer and consumer transaction costs (p.190-194) Enclosure 739 Enclosure 8

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http://www.cphpost.dk/get/106701.html

http://64.233.183.132/search?q=cache:WxihXNO27_cJ:www.ks.dk/service-menu/publikationer/konkurrence-redegoerelse/2002-05-22-konkurrenceredegoerelse-2002/kapitel-4-luftfart-1/+sas+l%C3%B8nniveau&hl=da&ct=clnk&cd=1&gl=dk




Conclusion

It is have seen through the report that SAS Scandinavian Airlines has several cost disadvantages

comparing to its competitors, namely: more diversified fleet, some of the aircraft is the fuel-effi -

cient, a big part of fleet is leased, its operating personnel is not as efficient as its competitors, more-

over they are paid more than their counterparts in Ryanair, Finnair and Norwegian. However they

have comparative advantage by utilizing innovative improvements in passengers’ service, what is

increasing demand for their service as well as lowering the costs of providing service.

That shows that to survive in highly-competitive airlines industry in the long-run SAS needs to im-

plement some changes. It could be rising capital for purchasing new more fuel-efficient aircraft,

reduce diversification of their fleets to a specific degree when marginal benefits of doing that are

equal to marginal costs of reducing flexibility. Problem of employee-efficiency could be fixed by

intensive negotiations with labor-unions and probably by introducing incentive compensation for

instance part of the salaries of flight attendants would be based on Customer Satisfaction Index. To

increase load-factor SAS could implement such improvements as last-minute offering system. Al-

though SAS now is holding one of the leading positions in lowering transaction costs it is important

to monitor the market for new innovative improvements and try to capture and implement the most

promising improvements.

Incentive problemsAt the moment SAS is trying to cut their costs. They are experiencing much higher costs than their

competitors and if they want to survive as an independent company they have to decrease costs and

increase efficiency. One of the main reasons for the crisis is that the employees’ wages is much

higher than their competitors. In 1984 SAS was awarded the title “Airline of the year”40, but today it

is only seen as a mediocre Airline company41. Therefore the employees do not have the same pas-

sion and the same drive as they had when they were the best – they are just trying to increase their

own utility. This is seen in the wage bargaining which have been very intensive the last 6 months.

This is therefore the main incentive conflict in SAS, on one side the CEO is launching massive

plans which main purpose is to cut down the costs especially the costs of the employees’ wages, on

the other side the employees are not willing to get a lower salary because then they will be worse

off than before. If we go into details and for example take a look on the pilots, then we see that in

40 http://www.flysas.com/en/About-SAS/The-SAS-story/1979/41 http://finans.tv2.dk/nyheder/article.php?id=14211149&rss

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SAS a pilot is flying 559 hours per year while a Lufthansa pilot is flying 730 hours per year, and it

is not because Lufthansa is a cheap Airline company, actually they have just been awarded as the

best European airline company42. Another fact is that SAS is the only company which is using third

pilots on flights to for example New York, which is very expensive43. Calculations show that if

SAS’s “on air staff” uses as many hours in the air as their competitors’ staffs do then they will be

able to cut off 2.5 billion Swedish crowns per year and this will be enough to make them able to be

competitive again. It is easy to see that this incentive problem is very important to SAS.

If we take a look on the recent wage bargaining we will see that there are three labor unions which

are negotiating with SAS, namely CAU44, 3F45, and the pilot’s labor union. Because the situation in

SAS is very critical the labor unions have started to be ready to accept the massive decrease in wage

which SAS is proposing. 3F have just stated that they are ready to accept SAS’s plan for cut down

expenses46 and this will put pressure on the other two big labor unions. CAU have proposed their

plan for cutting the costs but it has been rejected by SAS47 even though it contained an increase in

efficiency and a decrease in wage. The pilots’ labor union is ready to meet halfway in cutting down

expenses but they will not increase efficiency48. In the following there will be several suggestions

and solutions to what SAS can do to overcome this problem with high wages and bad efficiency.

The three legged stoolThe components of organizational architecture are like three legs of a stool. It is important that all

three legs be designed so that the stool is balanced. Changing one leg without the careful considera -

tion of the other two is typically a mistake.

42 http://finans.tv2.dk/nyheder/article.php?id=14211149&rss43 http://www.business.dk/article/20081105/transport/81105175/44 The cabin staff’s labor union45 The labour union for the staff ”on the ground”46 http://epn.dk/brancher/transport/luft/article1541841.ece47 http://epn.dk/brancher/transport/luft/article1536890.ece48 http://epn.dk/brancher/transport/luft/article1541841.ece

Side 15 af 39


Rewards

SAS is known to be the company who pays the second largest wages in the world when it comes to

the aircraft companies only beaten by Japan airlines. OECD has made a report that shows that the

wage level for SAS was 43% over the mean for the 5 biggest American aircraft companies.49

One of the reasons why SAS’s employees get so much more in wages is because of the labour uni-

ons. The unions are very strong here in Scandinavian and SAS has accepted big increases in the

wage when it went very well and that is what hits them now then is do not go that well. So the em-

ployees have been use to high wages and they do not want to go down in wage. Another reason why

the employees do not want to go down in wage is because a lot of them work in daughter companies

and if they agree to go down in wage they cannot be sure that they will not be sold the next month.50

Decision rights assignment

We assume that the SAS employees do not have any more decision rights than they have in any

other companies. They might have to deliver a better service than they have to do in e.g. Ryanair,

but that cannot mean that the employees have so much more decision right than employees from

other companies. Much of the work that the employees do is routine work and therefore it is limited

how many decisions the employees have to take and on how high level the decisions are. SAS is

also the only aircraft company there still have a 3. pilot on their airplanes for New York, so each

pilot do not have the same decision right as if they were only two. That also means that they are not

as efficient as in other companies.51 That is also a thing SAS is known for that they are not so effi-

cient.

Performance evaluation

A reason why the employees are not as efficient as in other companies is maybe linked to that the

employees are not evaluated enough. If they are not evaluated it doesn’t matter if they do their job

good enough or not.

49 http://64.233.183.132/search?q=cache:WxihXNO27_cJ:www.ks.dk/service-menu/publikationer/konkurrence-redegoerelse/2002-05-22-konkurrenceredegoerelse-2002/kapitel-4-luftfart-1/+sas+l%C3%B8nniveau+japan&hl=da&ct=clnk&cd=2&gl=dk50 http://www.dr.dk/Nyheder/Penge/2008/08/13/054225.htm51 http://www.business.dk/article/20081105/transport/81105175/

Side 16 af 39


Conclusion for the three legged stoolSAS has not been able to design their stool so it is balanced, the legs evaluation and decision rights

are not equal to reward. The employees are getting much more reward than they are supposed to.

The employees do not have much decision rights and they are not being evaluated enough com-

pared to the reward they are getting, therefore SAS are paying too much for employees there are too

inefficient, this means that SAS cannot compete with the other aircraft companies, because their

cost are to high compared with the outcome.

Incentive compensationIf we look at the pilots again it is very important that SAS increase the hours that the pilots fly per

year, but as mentioned earlier the pilots are not ready to do that. Therefore we have to change their

salary from a fixed52 salary to a combined salary with incentive compensation to make them in-

crease their effort. It is clearly that the pilots need to agree in a decrease in their wage and they

ready to do that. After a wage decrease the new suggestion will be that they are paid a fix salary and

then incentive compensation depending on how many hours per month that they fly. The wage

should be put together in a way that if they fly more than 700 hours per year they will be better off

than before, and if they fly 600 hours a year they are at the same level. This will make the pilots put

a better effort in their work. Furthermore there should be a contest for all the pilots where top 3

hours a year pilots is paid a cash bonus in the end of the year.

If we look at the factors that favor high incentive pay53 we see that fact number 1 is fulfilled be-

cause if the pilots put an extra effort in their job and take more hours it will influence the output. It

is difficult to evaluate on risk number 2, but because it is their job and their main income it will be

reasonable to assume that they are risk-averse. Fact number 3 is also fulfilled and again is difficult

to evaluate on fact number 4 but because they will be able to earn more money they will react in a

positive way. Fact number 5 is also fulfilled. Because almost all factors are fulfilled it will be the

right thing to introduce the above mentioned incentive compensation.

52 We have not been able to find any details about the pilots’ wages. We therefore assume that they are paid fixed.53 Enclosure 2

Side 17 af 39


Stock optionsAnother thing that SAS can do is to offer their employees stock options. The advantages of this will

be that it will increase the loyalty towards the firm and the employees will get a feeling that they are

a part of the company. It can also lead to increase in the service because the employees will putter

an extra effort in their work. The disadvantage is that the existing share holders will probably not

like the idea of giving away free stocks and if SAS needs to give away many stock options to make

a difference and they also have to convince the employees that it will rise again after huge drops in

200854.

Competitive advantagesSAS competitive advantages are within differentiation advantages. They have to create more value

than their competitors through differentiation like more comfortable travel and that the customers

can get faster through the airport. SAS differentiates by offering EB and TPC cards which provides

the cardholders with a number of different benefits55 as mentioned under SAS’ core competences.

Furthermore the other companies in the industry focus on low costs whereas SAS focus on having a

good service56. Unfortunately not all passengers are satisfied with the service delivered by the em-

ployees57. So to get the competitive advantages to the customers the employees have to be more

engaged in their job so that they can deliver the best possible service to the customers.

A competitive advantages do not last forever therefore SAS has to be continuously innovative to be

ahead of their competitors. Other elements that influence the competitive advantages are technolog-

ical changes, changes in customer behavior and new partnering opportunities58. SAS is trying to be

innovative by introducing the biometrics system59 which makes it easier for the customer to through

the airport and into the plan.

Even with good competitive advantages SAS still needs to convent the advantages into the competi-

tive strategy. The competitive advantages for SAS can be very good but this does not lead directly

to success. Furthermore SAS has to be aware of that the competitive advantages not necessarily suit

54 http://epn.dk/brancher/transport/luft/article1544177.ece55 http://www.flysas.com/en/EuroBonus/About-EuroBonus/ + http://www.sas.dk/da/virksomhedslosninger/SAS-Corporate-Program/56 http://www.sas.dk/da/Om-SAS-Danmark2/Organisation/Vision-Mission-og-Vaerdier/?vst=true57 http://64.233.183.132/search?q=cache:eUJ9p0CW8roJ:www.travelpeople.dk/2008/2008092201%2520.mht+sas+l%C3%B8nniveau&hl=da&ct=clnk&cd=17&gl=dk58 Spulber page 1659 Enclosure 3 + http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/2007eng.pdf, page 9

Side 18 af 39


http://www.flysas.com/en/EuroBonus/About-EuroBonus/


all market segments. For instance many students prefer cheap tickets to easy and comfortable travel.

But on the other hand business people will be more likely to prefer the easy and comfortable travel.

So it is good that the business unit is SAS’ target group60.61

Competitive strategySAS has to find out how they should react on actions from their competitors. The competitive strat-

egy should provide SAS with the help they need when facing new initiatives from the competitors.

Because of the strong competition in the industry it is important that SAS look very closely on the

threats from the competitors. But their react pattern is not necessarily the same in all situations. If

Ryanair lower their costs even more and then reduce the price of the tickets then SAS might not

react very strongly because cost advantages not is their competitive advantages. But if Lufthansa

made it easier for business travelers to work onboard then SAS will react more strongly because this

can threat their competitive advantages. Because of the economic slowdown SAS do not have to use

a lot of resources looking for threats from new entrants because the entry barriers are quite high as

explained in the external analysis.

SAS should be very careful when they find out how they will react, because the assumptions they

are making on that the competitors might do are mostly based on asymmetric information. They

need to know the competitors as good as possible.

Another important element with the competitive strategy for SAS is to communicate it to all the

employees. There should be no doubt among the employee on hoe they shall react on actions from

the competitor. Especially in the sales and marketing department where the employees have a lot of

contact with both the customers and the competitors should the competitive strategy be perfectly

clear. A good idea for the management in SAS is to make a sample to see how many there actually

is aware of the competitive strategy.62

Company profile and organizational architectureSAS Scandinavian Airlines which consists of the wholly subsidiaries; Denmark, Norway, Sweden

and International is 100%63 owned by SAS AB. SAS-Group is registered at three different stock

60 http://www.sas.dk/da/Om-SAS-Danmark2/Organisation/Vision-Mission-og-Vaerdier/61 Enclosure 362 Enclosure 363 http://www.sas.dk/da/Om-SAS-Danmark2/Organisation/?vst=true

Side 19 af 39

http://www.sas.dk/da/Om-SAS-Danmark2/Organisation/?vst=true


exchanges; Copenhagen, Oslo and Stockholm. 50%64 of the stocks is owned by the governments of

these three countries and the rest is owned by private investors. The board of directors in the SAS-

group consists of ten65 members and six deputies. Seven of these members is elected each yeah at

the annual general meeting. The remaining three, are elected by the companies employees in the

three countries, and so are the deputies. The board of directors formulates the strategy for the entire

SAS organization. The CEO/President is appointed by the board and it is the board’s job to evaluate

the performance of the three subsidiaries in their respective countries.

As earlier stated, the SAS group consist of 3 divisions; Scandinavia, Branded Airline and Aviation

service. These companies are divided by functional lines beneath the SAS-Group66. One of these is

SAS-Scandinavia and this is the one we are focusing on. SAS-Scandinavia is a multidivisional or-

ganization which is divided by customer geographic. Even though these divisions are subsidiaries

they are still controlled by SAS-Scandinavian which is controlled by the SAS-group. So all in all, it

is still the SAS Group which controls and develops the basic strategy for the entire organization.

The individual subsidiaries are also multidivisional. They are divided by function, and further they

are base on a line/staff orginazation5.

Unfortunately we have been unable to find a reliable resource on how the decision rights are distrib-

uted, inside the firm, but we have been able to find some pretty substantial indicators. In 2001 they

got a new CEO6. When he entered the company one of his goals was to make SAS-Scandinavia into

fast reacting company. To accomplish this, he wanted to make the organization flexible. For an or-

ganization to be fast reacting and flexible, it is crucial to have the decision rights the same places as

the local knowledge, so it is reasonable to assume that they have made the architecture less top

managed. They have changed their CEO since that, but the old started a process, and because of the

huge costs associated with changing a architecture, it is reasonable to assume that it is still the same

way.

Why is SAS-Scandinavian experiencing these problems?SAS-Scandinavia is having some troubles but why, and what does their organizational structure

have to do with it? As said above the individual subsidiaries is still owned and to some degree con-

64 http://www.sas.dk/da/Om-SAS-Danmark2/Organisation/?vst=true3http://www.sasgroup.net/SASGroup/default.asp654 http://findarticles.com/p/articles/mi_m0EIN/is_2001_May_8/ai_742842225 http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/2007eng.pdf – page 2666http://findarticles.com/p/articles/mi_m0EIN/is_2001_May_8/ai_74284222

Side 20 af 39

http://findarticles.com/p/articles/mi_m0EIN/is_2001_May_8/ai_74284222

http://findarticles.com/p/articles/mi_m0EIN/is_2001_May_8/ai_74284222

http://www.sasgroup.net/SASGroup/default.asp

http://www.sas.dk/da/Om-SAS-Danmark2/Organisation/?vst=true


trolled by the SAS-group. This means that it is still the same group that the dictates the companies

strategies. This wouldn’t be a problem if all the companies benefit the SAS-group were exactly the

same, but here comes the problem. Because to us one of the four “divisions” is quiet different than

the others and that’s certainly a problem when the top-management is formulating the same strate-

gies for all of the divisions.

The three divisions which are very similar is the “country” subsidiaries. These three all focus a lot

of their focus on the business traveler and they try to be the best combined airline in what could be

called their backyard, which is Scandinavia. This means that a lot of the strategy set by the manage -

ment will affect these subsidiaries the same way, but not all, one is different. The fourth one “Inter-

national” is quite different. This means that we have four “companies” under one roof which is op-

erating in to different markets. Market number one is mostly based upon frequent travelers whether

they are business people e.g. is not that important, but they travel light and they travel often. The

other group is the international travelers, again it is not that import whether they are business men

or not. It is here that we believe the organizational architecture fails, the architecture has resulted in

a standardized strategy for both markets, but we don’t think that the consumer in the different mar-

kets have the same preferences and whishes67.

This creates a problem for SAS, because how can they capture the value they create, when they

don’t target their specific products at the costumers that want them. SAS now stands with two prod-

ucts and two markets, but as we have seen, they are stuck with an architecture which helps create a

strategy which is inadequate if SAS wants’ to capture all of the value their different divisions cre -

ate. Furthermore, it does make it that more difficult to create new value if their architecture is not

correct. They would not be able to adapt, evolve or lead the market in the direction were they ex -

ploit their advantages and minimizes their disadvantages. In other words, they won’t be able to ben-

efit from their competitive advantages, and at the same time they are getting punished by their com-

petitors whom are capable of this. So we think this architectural malfunction, with two markets and

one strategy is a part of why they struggle to capture the firm’s value.

Capture and create value in the futureTo overcome the problems which SAS have been experiencing during the last decade there are sev-

eral solutions. First they have to get the three legged stool in balance especially with focus on the

67 Enclosure

Side 21 af 39


flight staff – they have to decrease their rewards and increase the evaluation so it fits to their deci -

sion rights. Wage bargaining have shown that the employees are ready to accept a wage decrease

but they will not increase efficiency. One of the ways to increase the evaluation is to give the pas -

sengers questionnaires about the service and comfort and this is an easy way for SAS to monitor

their employees. To increase the efficiency they can introduce incentive compensation. This will

make the employees put more effort in their work. Under the incentive compensation part there

have been given suggestions to different form of compensations. SAS has developed to a so called

green company which allows them to capture more customers; hence the ongoing trend of thinking

environmentally has put a lot of consumers to think about the aircrafts pollution. Due to the hard

situation in the market it is necessary to co-operate with partners to overcome the difficulties. SAS

Airlines is in partnership relations with some companies for sharing codes which allows a more

pleasant trip for the customer. The company should improve partnership relations and keep talks

with companies in order to overcome the difficulties together.

Furthermore BLABALBLALBA (vanges)

It is also very important that SAS still try to reduce the consumer and producer transaction costs

even more.

ECONOMIC DARWISM!!!

If SAS is able to implement these changes they will be able to reduce their cost and increase their

efficiency and this will make them able to capture and create value in the future.

Side 22 af 39


Side 23 af 39


Reference list

Books:“Managerial Economics & Organizational Architecture”; 2007 publisher McGraw-Hill International Edition; Brickley, Smith and Zimmerman

“Management Strategy”; 2003 publisher The McGraw-Hill; Spulber

Homepages:http://www.sas.dk

http://www.flysas.com

http://sasgroup.net

http://www.ks.dk

http://www.borsen.dk

http://www.business.dk

http://findarticles.com

http://www.reuters.com

http://www.epn.dk

http://www.iht.com

http://www.upsido.com

http://www.fabiom.com

http://www.amtonline.com

http://otsustaja.postimees.ee

http://www.bombardier.com

http://en.wikipedia.org

http://www.cphpost.dk

http://www.norwegian.no

http://www.finnairgroup.com

http://unfccc.int

Side 24 af 39

http://www.cphpost.dk/

http://en.wikipedia.org/


http://www.reuters.com/

http://www.business.dk/

http://www.borsen.dk/

http://www.ks.dk/

http://www.flysas.com/

http://www.sas.dk/


http://www.oralar.az

http://palm.newsru.com

http://www.ryanair.com

http://finans.tv2.dk

Side 25 af 39

http://palm.newsru.com/


Enclosure 1

SAS Scandinavian Airlines

Passenger breakdown 2007

Business travelers 55-60%

Leisure travelers 35-40%

Charter travelers 5%

http://www.sas.dk/da/Om-SAS-Danmark2/Organisation/Vision-Mission-og-Vaerdier/

Enclosure 2

Side 26 af 39

http://www.sas.dk/da/Om-SAS-Danmark2/Organisation/Vision-Mission-og-Vaerdier/


Enclosure 3 – Spulber strategic analysis

Side 27 af 39


External analysis

External analysis is a good model to examine different options and possibilities for the future taking

in consideration the influence from suppliers, competitors, customer’s needs and partners support.

This analysis is thought to be very good to position the company in the market and predict the fu-

ture market changes. The airline industry grew rapidly within the last decade and is now in a differ -

ent and uncertain change, which is why we used this model. We used this module to investigate the

future possibilities for the market and how SAS could change with the new market situations.

Suppliers

There is around twenty companies producing commercial airplanes, but the oligopolistic market is

mainly shared by Boeing and Airbus68. SAS Scandinavian Airlines uses also airplanes produced by

SAAB, but its share in the overall aircraft producers market is very small. Therefore we can say that

Airbus and Boeing are setting the price for the market. In the end of 2007 Airbus had a market share

of 50 %, which shows how big and powerful suppliers these two giant companies are69. Mostly the

price is nearly equal which is why SAS Scandinavian Airlines has both Boeing and Airbus planes,

hence the price for switching the supplier is not substantially high70. Due to the oligopolistic market

in producing airplanes the power of suppliers towards the company is substantially high which can

at some point reduce the strategic options for the organization. During the global financial crisis it

may occur that suppliers will put more pressure on airline companies by raising the prices of new

aircrafts.

Customers

An airline is working with very high fixed costs such as aircraft regular maintenance or airport

taxes. SAS Scandinavian Airlines owns mostly big airplanes which makes their maintenance very

high. It is said that maintaining airplanes may vary from 10 percent to 45 percent of the total yearly

operating expenses71. From that we can assume that the maintenance expenses for SAS Scandina-

68 http://www.fabiom.com/Produzenten.htm69 http://www.flysas.com/ee/SAS-Estonia/Pressikeskus2/Pressiteated/SAS-soetab-uue-polvkonna-lennukid-Boeing-737-800/70 http://www.airbus.com/en/airbusfor/analysts/71 http://www.amtonline.com/publication/article.jsp?pubId=1&id=1313

Side 28 af 39

http://www.amtonline.com/publication/article.jsp?pubId=1&id=1313

http://www.flysas.com/ee/SAS-Estonia/Pressikeskus2/Pressiteated/SAS-soetab-uue-polvkonna-lennukid-Boeing-737-800/

http://www.flysas.com/ee/SAS-Estonia/Pressikeskus2/Pressiteated/SAS-soetab-uue-polvkonna-lennukid-Boeing-737-800/

http://www.fabiom.com/Produzenten.htm


vian Airlines are nearly 35 to 45 percent. That puts the airline on a very fluctuating situation where

every customer is very important. Europe and especially the north of Europe have very good train

and ferry connections which makes traveling rather easy and fast. A lot of people are afraid of fly -

ing or hate waiting for hours in the crowded airports and therefore choose traveling either by train,

ferry or bus. Switching traveling by airplane to train is not related to high expenses since the price is

nearly the same. Due to the heavy competition between airlines the competitive price when choos-

ing another airline is the same, usually even the seat and the aircraft is the same. Therefore the cus -

tomers are very price sensitive and emphasize price level not quality. Although SAS is putting a lot

of effort in making flying more cleaner, in terms of CO2 release from the engines, there are still

people who care too much of the environment and choose not to fly with aircrafts. Lately SAS has

opened a CO2 calculator for their customers, so that they could see how much they will pollute dur-

ing their travel72. Since thinking environmentally-friendly has become more popular it may affect

airlines sales volume substantially.

Competitors

Rivalry between existing companies is very high in the European market. The fact that almost all

the companies have the same strategy makes it even harder for a company to stay in business. Com-

panies are trying to differentiate themselves by offering incentives to the clients such as bonus

points or easier check-in etc. In situations like this, where economic pressure is on, each company is

cutting their costs and is working on low profits just that to offer cheaper prices and win some

clients. SAS Scandinavian Airlines is known as an airline which offers innovation and top-quality

service, therefore the price paid for the ticket is higher, but that results in lower volume of cus -

tomers, because at the moment customers are looking for the cheapest ticket which is provided by

the competitors such as Easyjet. Despite the economic slowdown Easyjet has raised their passenger

volume in September by 22 percent, hence people are traveling by budget carriers73.The biggest

competitors for SAS Airlines is mainly the low-cost airlines but also companies like Lufthansa.

Partners

72 http://www.flysas.com/ee/SAS-Estonia/SASi-kohta/Kas-soovite-korvata-oma-susinikdioksiidi-emissiooni/73 http://findarticles.com/p/articles/mi_6781/is_2008_Oct_13/ai_n30914953?tag=content;col1

Side 29 af 39

http://www.flysas.com/ee/SAS-Estonia/SASi-kohta/Kas-soovite-korvata-oma-susinikdioksiidi-emissiooni/


SAS Airlines is member of Star Alliance organization. The organization uses all of its members

flight routs and by that provides the best quality rout for the customer. The customer does not have

to worry about using low-quality airlines when traveling long distances. SAS benefits through the

alliance by increasing its passenger volume and accepting new customers. The company has code

sharing agreement with all members of star alliance and other companies such as Lufthansa, Air

China and Shanghai Airlines. Code sharing is an agreement between companies that they share rout

codes so that a customer, going from point a to point c could change the carrier at point b without

changing the route number. That provides the customer a smoother and less stressful trip74. By

working together the companies can overcome the pressure from the market.

Conclusion external analysis

To conclude the results from external analysis we may say that SAS Scandinavian Airlines is not in

a good position in the market. Due to the economic slowdown people are traveling more with bud-

get carriers which is not what SAS is representing. It is very hard for SAS to stay in the marked

since the rivalry is very strong. It tends that people are rather price-sensitive and doesn’t have a

good argument why not to use an alternative way of traveling. The ongoing trend of being environ-

mentally friendly adds more pressure to the company. More and more people are thinking of ways

how to treat the environment in a better way. As it is known airplanes pollute a lot and is therefore

more often ruled out of the options of traveling. SAS Scandinavian Airlines is aware of that trend

and is dealing with the problem in order to please the customers. Recently the company was chosen

to be the national airline and the “green partner” of Copenhagen Climate Council75. SAS Scandina-

vian Airlines is dealing with a high level suppliers bargain power. Company`s planes are old and

with a high risk of defects and they need to be changed. The supplier market is oligopolistic and is

controlled by Airbus and Boeing which gives no room bargaining over the prices of new aircrafts.

The airline market is full and very unstable at the moment. Under the global economic crisis the

biggest competitors for SAS Airlines is low-fare airlines. SAS Airline is in partnership with Star

Alliance and some other companies which loosens the pressure by providing some extra customers.

Internal analysis

74 http://en.wikipedia.org/wiki/Scandinavian_Airlines_System#Partners75 http://www.flysas.com/ee/SAS-Estonia/Pressikeskus2/Pressiteated/SAS-on-rahvusvaheliste-kliimakonverentside-ametlik-lennufirma/

Side 30 af 39

http://en.wikipedia.org/wiki/Scandinavian_Airlines_System#Partners


Organizational structure

It has not been within our capabilities to provide enough information regarding the boundaries, divi-

sions, lines of authority, management practices and incentives.

But it has been able to find some information’s about the overall decision rights.

SAS is a publicly traded company on the Copenhagen, Oslo and Stockholm stocks exchange. The

corporate governance structure of SAS AB is primarily based on the Swedish Companies Act and

the Articles of Association.76 The current share structure has been in place since July 6 th when the

single SAS share, SAS AB, was listed on the stock exchange. Prior to July 2001, the SAS group

was listed via three independent companies on the three stock exchanges in Scandinavia.

The shareholder structure is as follows: the Danish state 14.3%, the Norwegian state 14.3%, the

Swedish state 21.4% and private interest 50%.77

At the shareholders meeting one share is equal to one vote.78 Decisions at the meeting are generally

made by a simple majority. However in certain matters the Companies Act or SAS AB’s Articles of

Association require a motion of a higher percentage of the shares represented and votes cast at the

meeting.79 On the annual general meeting the board of directors is chosen. As well are auditors,

members of the company’s nomination committees and decides on directors and audit fees chosen

as well as guidelines for pay and other compensation for the president and Group management.80

The board of directors consists of ten members, seven of whom are elected by the annual general

meeting for a term of one year. The three other members plus six deputies are elected by the em-

ployee organizations in Denmark, Norway and Sweden.81

The board of directors shall have to appoint a president and a CEO, who will be in charge of the

day-to-day management of the company.

Performance

76 http://www.sasgroup.net/SASGroup_IR/index.asp?sUserName=&sName=77 http://www.sasgroup.net/SASGroup_IR/index.asp?sUserName=&sName=78 http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/Bolagsstyrningsrapport_07eng.pdf79 http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/Bolagsstyrningsrapport_07eng.pdf80 http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/Bolagsstyrningsrapport_07eng.pdf81 http://www.sasgroup.net/SASGroup_IR/index.asp?sUserName=&sName=

Side 31 af 39


The reported sales of SAS increased by 3.95% to MSEK 40,155 in 200782 this is mainly powered by

an increase in the ticket sales and because of the weak dollar.83 The net profit84 was only MSEK 637

in 2007 against MSEK 4622 in 2006 this means that SAS have had much more cost in 2007 so that

the net profit is lower even though that the reported sale was higher than in 2006. This all resulted

in a decrease in earnings per share from 0.58 in 2006 to 0.36 in 2007.85

The market share is as follows: Norway 60%, Denmark 45% and Sweden 49%.

The increased cost is mainly coursed by the higher fuel prices, strikes in Denmark and Sweden

which has been affected the result negatively by MSEK 200, and because of the problems with the

Dash flights which have affected the result negatively this year by around MSEK 200.86

The increased cost is mainly coursed by the higher fuel prices, strikes in Denmark and Sweden

which has been affected the result negatively by MSEK 200, and because of the problems with the

Dash flights which have affected the result negatively this year by around MSEK 200.87

Abilities

SAS’s goal is to be the preferred company for costumers there want a simple and efficient travel. To

achieve this goal the employees are the keyword. The pilots and the cabin crew is the face out-

wardly, so it is important that they live up to the expectations the travellers have. SAS has in many

years been known for their good service and for being a simple company to travel with, but for

some time the service have been fallen and when you ask the costumers they give the cabin crew

the lowest mark.88 When SAS had their great period and they in 1984 was appointed to be the

world’s best airline company89, the employees was proud to be a part of the company and they

wanted to do a bigger effort for the company. But after it began to go down for SAS there have not

been the same will to help the company, they have not been able to stick together and get the com-

82 http://www.upsido.com/companies/84-SAS83 http://borsen.dk/invester/nyhed/114027/newsfeeds/rss/84 It have not been possible to find the net profit for Scandinavian Airlines so we have used the numbers for SAS group85 http://www.upsido.com/companies/84-SAS86 http://borsen.dk/invester/nyhed/114027/newsfeeds/rss/87 http://borsen.dk/invester/nyhed/114027/newsfeeds/rss/88 http://64.233.183.132/search?q=cache:eUJ9p0CW8roJ:www.travelpeople.dk/2008/2008092201%2520.mht+sas+l%C3%B8nniveau&hl=da&ct=clnk&cd=17&gl=dk89 http://64.233.183.132/search?q=cache:XXtmSt9SJNEJ:https://www.information.dk/165802+sas+%22g%C3%A5+galt%22&hl=da&ct=clnk&cd=7&gl=dk

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pany back on track. After it began going down there have been some strikes in both Denmark and

Sweden90 because of the wages and instead of sticking together the employees and the management

have been fighting against each other.

But a thing SAS has been good at is to make it simple to travel with them; they have introduced

SAS Fast Track which means that you get faster through the security which is at big advantage for

the business travellers, where time is money.

Resources

In 2007 SAS’s total assets decreased in 2007 from MSEK 51,164 to MSEK 48,770. The decrease in

intangible assets by MSEK 1,706 is mainly due to Spanairs goodwill and other intangible assets

totalling MSEK 1,797.91 Spanair was written down with MSEK 300.92

MSEK was deducted for divested operations and MSEK 127 was invested in systems development

during the year.93 The book value of aircraft in 2007 decreased by MSEK 564. Investment in three

Boeing 737s, two Airbus 319s and an Airbus 321 amounted to MSEK 1,310.

Long-term prepayments to suppliers of flight equipment decreased during the year by MSEK 132.

For deliveries, MSEK 434 was utilizes and prepayment of MSEK 293 were made for future deliver-

ies. The total investment in 2007 was MSEK 2,908 against MSEK 2,299 in 2006. The reason for the

big change is because of the increased investment in aircrafts, which have been necessarily because

of the acing aircraft SAS has.

Competitive advantages

The purpose with competitive advantages is for the company to create more value than its competi -

tors. The company has to create more value to its shareholders, customers and suppliers than its

competitors. The company has to distinguish from the other. The company can do that by having

either cost advantages, differentiation advantages or transaction advantages.

90 http://borsen.dk/invester/nyhed/114027/newsfeeds/rss/91 http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/2007eng.pdf92 http://www.erhvervsbladet.dk/article/20080206/news12/702060034/93 http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/2007eng.pdf

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For SAS this means that they have to create more value than their competitors like EasyJet, Ryanair

and Lufthansa. SAS has higher costs than its competitors specially the wages are much higher94.

Because of that it will not be relevant to choose cost advantages as their competitive advantages.

Ryanair is more qualified to have this advantage than SAS. There is not much information to tell

exactly if it could be possible for SAS to have transactions advantages but as it looks SAS do not

have lower transactions costs or creates innovative combinations of buyers and sellers compared

with its competitors.95 For SAS their competitive advantages lies within the differentiation advan-

tages. The advantages are mainly differentiation because they have a lot of focus on making the

travel comfortable and easy with special focus on the business unit whereas many of the competi-

tors like Ryanair have focuses on low costs.

SAS have the EB and the TPC card which both provides their customers with special benefits. In

that way they distinguish from the competitors. They are trying to offer something which is differ-

ent they are not just focusing on having as low cost as possible. They are also focusing on deliver a

good service to the customers where it is important that the employees are professional and engaged

in handling their job. Unfortunately during the last couple of years when it has started to go bad the

employees have not been so engaged in their job96 which is a bit strange because they are getting a

higher wage than employees in other companies within the industry97. This is also mentioned in

more details above in the internal analysis part “abilities”.

In order to get the competitive advantage SAS has to come up with a lot of initiatives that will make

them outperform their competitors. Not only right at the moment but also in the long-run. No com-

petitive advantages will last forever so they have to continuously be innovative to keep up with the

other competitors. Some things that also can affect the competitive advantages are technological

changes, changes in customer behavior and new partnering opportunities.

In the strategy for 2011 they show that they can be innovative. They have been product innovative

with the biometric solutions. This is a system where the customers are checking-in the luggage by

setting their fingerprint on a machine and when they are boarding they also set a fingerprint on a

94 http://www.business.dk/article/20081203/borsnyt/712030085/95 Spulber page 1296 http://64.233.183.132/search?q=cache:eUJ9p0CW8roJ:www.travelpeople.dk/2008/2008092201%2520.mht+sas+l%C3%B8nniveau&hl=da&ct=clnk&cd=17&gl=dk97 http://64.233.183.132/search?q=cache:WxihXNO27_cJ:www.ks.dk/service-menu/publikationer/konkurrence-redegoerelse/2002-05-22-konkurrenceredegoerelse-2002/kapitel-4-luftfart-1/+sas+l%C3%B8nniveau&hl=da&ct=clnk&cd=1&gl=dk

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machine. This makes it faster for the customers to get through the airport because they do not have

to spend so much time on ID checking. Furthermore SAS saves resources on crew checking ID and

so on.98 If the persons check-in the luggage but not boarding then the luggage is not coming on

board because all passengers have to travel together with their own luggage. SAS are like with this

biometric solution trying to constantly find new ways of making the customers more satisfied. Even

though they are coming up with all these new suggestions on how to make it better for the cus-

tomers they are struggling with lower net profit and higher costs which influence the shareholders

in a negative way.

It is important that SAS are able to convent their competitive advantages into a competitive strat-

egy. Because even if they have the competitive advantages it will not by itself create great success.

So it takes more than just having a good service which provide the customers with a more efficient

way of getting through the airport and benefits with the two different cards to keep SAS going also

in the long-run. The most important thing is to create more value for the customers than its com-

petitors. But SAS cannot be sure that they are creating more value by focusing on the convenience

and an efficient travel for the all customers. Maybe some customers do not care about the conve-

nience but only care about the price of the ticket and then SAS is not creating more value for the

customers. Therefore SAS has to look at the market segments where they can get the highest profit.

Because they are focusing on the service aspect their target group is also the business unit. It is

more likely that the business people would prefer service and an easy travel over low price. Regular

people especially students would in many cases look primarily on the price.

Competitive strategy

Competitive strategy can be seen as the actions of the company that are the best responses to ob-

served or expected actions of the other companies. SAS has to have a strategy which they can use as

a help when they are facing new initiatives from their competitors. It is a very important strategy

because it states how SAS will react to new initiatives from both incumbent and new entrants.

The competitors are very intelligent therefore it can be very difficult to plan a competitive strategy.

It is important to look closely on the external analysis and especially on the threats of the competi -

tors. SAS is facing a strong current competition and they have to have focus on new initiatives from

98 http://www.sasgroup.net/SASGROUP_IR/CMSForeignContent/2007eng.pdf, page 9

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the competitors’ side. Because of the economic slowdown SAS does not have to look so closely at

new entrants. As mentioned in the external analysis the amount of new entrants will be limited be-

cause the banks will not be that willing to loan big amount of money which starting an airplane

company requires.

When SAS is making the competitive strategy they have to find out how they will react to actions

from the competitor. If for instance Ryanair lower their costs even more then SAS has to figure out

how to react. In this case SAS should not react very strongly because their competitive advantages

not is cost advantages. But if Lufthansa for instance made it easier for the travelers to work onboard

the plan then SAS should react more strongly because this threats SAS’ competitive advantages.

When the companies make the competitive strategy they have to remember that the assumptions

they make about what their competitors do are found by using asymmetric information. Therefore

SAS has to be very careful about which assumptions they make. Therefore SAS need to analysis the

competitors into the smallest detail so they know the competitors very well.

It is very important that the competitive strategy is going to be communicated through the whole

organization. In that way all the employees know that the strategy is about and how they as employ-

ees should react to actions from the competitors. It is specially the sales and marketing department

that need to know how to react because they are the ones closest to the customers and the competi-

tors. But the management also has to be sure that the competitive strategy as well as the goal of

SAS are communicated well enough to the employees so there would not be any misunderstanding

of it. This leads to use of resources to control that it is well communicated.

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Enclosure 4

Enclosure 5

http://www.wtrg.com/daily/crudeoilprice.html

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http://www.wtrg.com/daily/crudeoilprice.html


Enclosure 6

Information from annual report of SAS 2007

Enclosure 7

This figure displays the supply and demand curves for an industry including producer and consumer

transaction costs (curves D and S). Consumers would demand more and producers would supply

more if these costs were lower. (curves D’ and S’) Value consists of the sum of consumer and pro-

ducer surplus. Managers can increase value by reducing transaction costs (or by increasing the de-

mand for the product – for example, by increasing the perceived quality of the product).

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Enclosure 8

Information from SAS annual report (year 2007)

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SAS

Documents

Transcript of SAS