Ryanair CEO Predicts SAS, LOT Crisis on Low-Cost Squeeze
Ryanair Holdings Plc (RYA) Chief Executive Officer Michael O’Leary predicted that the incumbent carriers in Scandinavia and Poland won’t survive in their current form amid competition from domestic and foreign low-cost rivals.
SAS Group, which owns Scandinavian Airlines, can’t continue to rely on funding from Sweden, Denmark and Norway and is most likely to end up as a unit of Deutsche Lufthansa AG (LHA), while Poland’s LOT has little room to pare operations that are already much reduced, O’Leary said today in Oslo.
“The only future for SAS is to be sold, probably to private ownership,” O’Leary said in an interview in the Norwegian capital. “In five years’ time it’s more likely than not that SAS will be a subsidiary of Lufthansa. But Lufthansa doesn’t want to buy it yet until SAS has been restructured.”
The fate of SAS, which rose 16 percent, may determine the outcome of expansion plans at Norwegian Air Shuttle AS (NAS), Europe’s fourth-biggest discount carrier, O’Leary said, with Budapest- based Wizz Air Ltd., the No. 5, a likely beneficiary of the decline of LOT, as Polskie Linie Lotnicze Lot SA is known. Dublin-based Ryanair is already the biggest carrier serving Poland, the CEO says, and has identified Scandinavia as a growth target after focusing more on southern and Eastern Europe.
Europe’s sovereign debt crisis is weighing on carriers from the Balkans to the Baltic as austerity programs coincide with high fuel prices and a European Union clampdown on aid. At the same time, Air France-KLM Group (AF), Germany’s Lufthansa, and British Airways (IAG) parent IAG, the region’s three major airlines, are shying away from takeovers to focus on stemming losses.
Stockholm-based SAS, which has suffered annual net losses since 2007, said on Dec. 12 it aims to be profitable on a pretax basis in the revised fiscal year that began Nov. 1 as it pursues plans to sell units and cutting hundreds of jobs.
“We admire the management’s substantial efforts to deliver its survival to date,” Andrew Lobbenberg, an analyst at HSBC in London, said today in an investor note, upgrading SAS to “neutral” from “underweight.” SAS probably has “the most challenged starting point of any European flag carrier in terms of geography, network structure, labor and fleet,” he added.
While one of only two pan-European discount brands, Ryanair -- with EasyJet Plc (EZJ) -- is “poorly established” in the Nordic nations, where Norwegian Air has an attractive business model and is taking market share “hand over fist,” Lobbenberg said.
Norwegian, which ordered 222 single-aisle planes last January, has done a “good job” in recent times, O’Leary said, retreating from European expansion to focus on Scandinavia. The Fornebu-based carrier resembles Wizz in finding “niches” to grow in markets where there is a weakened competitor, he said.
“A lot depends for Norwegian on what happens to SAS,” O’Leary said. “If SAS falls over it becomes a lot easier for Norwegian to take all the aircraft ordered. If SAS survives, which I think they will, it may prove more challenging.”
Norwegian Air rose 2.4 percent before closing 0.6 percent higher at 162.9 kroner in Oslo.
In eastern Europe, Hungarian flag carrier Malev Zrt. folded after 66 years on Feb. 3 last year, when an EU decision compelling it to repay aid led the state to pull the plug.
Poland’s government said last week that state-owned LOT would cut 30 percent of jobs and reduce the fleet to 25 planes from more than 40 following an annual loss of 200 million zloty ($64 million). The company, which fired CEO Marcin Pirog last month, has been told to pare operations after receiving a 400 million-zloty loan and seeking 1 billion zloty of aid.
“LOT is already so small you can hardly shrink it any more,” O’Leary said today. “The challenge for SAS and LOT is that in a marketplace where people want low fares, you can’t have high costs or high fares and high fuel charges.”
SAS spokeswoman Malin Selander declined to comment on O’Leary’s remarks. LOT said it’s working on details of a restructuring following the setting of guidelines and will make an announcement after a final decision has been reached.
O’Leary said that with the fleet poised to reach 300 Boeing Co. (BA) 737-800 jets in 2013, Ryanair is in the market for about 200 new planes, and that talks with the U.S. company are ongoing.
“Boeing have plenty of availability in the order book,” the CEO said. “We are in the fairly early stages of talks to see if we can reach an agreement on price.”
O’Leary said that Ryanair is looking for deliveries in 2015, 2016 and 2017 -- the year that Boeing’s upgraded 737 Max jetliner is due to enter service. That points to an order for the current 737 or rival models.
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