Finnair in Norwegian Air Talks on Pact to Squeeze SAS (Update3)

March 12 (Bloomberg) -- Finnair Oyj is seeking an agreement with Norwegian Air Shuttle ASA that would funnel more passengers onto the Helsinki-based carrier’s long-haul flights, helping win market share from unprofitable rival SAS Group AB.

The pact would allow Norwegian Air, which has no inter- continental routes of its own, to boost occupancy on Finnair services to nine destinations in Asia.

“We are discussing different forms of cooperation with Norwegian, including the possibility to feed into our Asian traffic,” Finnair Chief Executive Officer Mika Vehvilaeinen said in an interview yesterday. “It sometimes makes sense for other people to fly into our ‘waves’ into Asia.”

SAS, Finnair’s biggest Nordic rival, has reduced its global network after racking up 9.25 billion kronor ($1.3 billion) in net losses over the past two years. The tri-national carrier no longer provides long-haul services from Oslo, Norwegian Air’s main hub, and offers Asian flights only from Copenhagen.

“This could turn out to be a trigger for SAS to stop its Asian flights,” said Jacob Pedersen, an analyst at Sydbank A/S in Aabenraa, Denmark. “SAS’s intercontinental business does not have the volume that it should have. Something has to give.”

Finnair rose the most since Feb. 12, advancing 2.6 percent to 3.99 euros in Helsinki, the highest price since Oct. 23. The stock has gained 6.4 percent this year.

Norwegian Air, Europe’s fourth-largest low-cost carrier, is an attractive ally for Finnair after announcing last month that it will begin services to Helsinki from Oslo and Stockholm in April. Founded in 1993, the company has focused on Europe since adopting a discount model in 2001.

‘Solid Hub’

“We have an interest in strategic cooperation,” Norwegian Air Chief Commercial Officer Daniel Skjeldam said in an interview yesterday. “Finnair has been very good at developing a solid long-haul hub in Helsinki and that, combined with our inter-Scandinavian network, could be an interesting set up.”

Finnair, established in 1923, has revised its long-haul network in the past decade to exploit Helsinki’s location on flight paths from western Europe to Asia by expanding weekly services there to 60 from nine.

The carrier operates to Beijing, Shanghai and Hong Kong in China and Tokyo, Nagoya and Osaka in Japan, together with Bangkok, Delhi and Seoul. Its only non-Asian long-haul route is to New York. SAS serves three U.S. cities but only Bangkok, Beijing and Tokyo in Asia.

Stake Ties

Finnair is Norwegian Air’s third-largest shareholder with a 4.8 percent stake and the two are the region’s largest carriers after SAS, flying 19.2 million passengers last year compared with 24.9 million at their competitor.

SAS, created in 1946 when the three national airlines of Sweden, Denmark and Norway merged, is hampered by continued state ownership, high labor costs and negotiations with 39 different unions.

The airline, which last month announced plans to widen a cost-reduction effort by 2 billion kronor to 7.3 billion kronor and expand job cuts, received a boost today after unions representing pilots and cabin crew reached an agreement on cutting annual costs by 500 million kronor.

SAS’s government investors had made the deal a condition for backing a 5 billion-krona share sale the company needs to raise funds. The stock closed up 5.6 percent at 2.83 kronor, paring declines this year to 30 percent.

Finnair’s biggest goal for 2010 is to secure greater profitability from European “feeder traffic,” said Vehvilaeinen. The carrier, based in the Helsinki suburb of Vantaa, may also add North American flights to persuade more Asian customers to travel via the Finnish capital.

Profit Target

The company is targeting a return to profit within a year following a 102 million-euro ($141 million) loss in 2009 and has achieved about 150 million euros in savings out of the 200 million euros that it’s seeking, he said.

“I certainly hope that we will be profitable again by then,” said Vehvilaeinen, who took over as CEO last month. Finnair, which is 55.8 percent government-owned, is regarded as a strategic asset by Finland and won’t be sold, he said.

Norwegian Air Shuttle will increase capacity 30 percent this year, mainly on routes between Norway, Denmark, and Sweden, Skjeldam said. The carrier, based in Fornebu on the outskirts of Oslo, posted net income of 446 million kroner ($77 million) last year as it boosted seating 20 percent, and is planning its own long-haul operations for 2011, the commercial chief said.

Consolidation Role

“Norwegian Air will be one of the beneficiaries of consolidation in the Scandinavian market,” Skjeldam said. “We are very well positioned for the growth that can come in the Nordic region.”

Shares of the carrier, whose passenger total ranks it behind Ryanair Holdings Plc, EasyJet Plc and Air Berlin Plc in the European discount market, fell 2 percent to 145 kroner. The stock has advanced 26 percent this year.

SAS said last year that it would sell foreign units, eliminate about 9,000 jobs and cut 40 percent of routes. The Stockholm-based company has reduced the number of non-European destinations to seven from 10.

Sweden and Norway have said they’d like to eventually sell their stakes and Jansson said last week that SAS should be sold to another airline so it can “carry its weight again,” according to Swedish newspaper Dagens Nyheter.

Wolfgang Mayrhuber, CEO at Deutsche Lufthansa AG, said yesterday that the German company isn’t involved in any takeover talks with its Star Alliance partner.

To contact the reporters on this story: Chad Thomas in Helsinki at cthomas16@bloomberg.net; Josiane Kremer in Oslo at Jkremer4@bloomberg.net; Ola Kinnander in Stockholm at okinnander@bloomberg.net.

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net; Chris Kirkham at ckirkham@bloomberg.net.