Rickard Gustafson, President and CEO commented, "The third quarter was characterized by a strong operational performance together with successful seasonal adaptation, resulting in record passenger numbers and increased revenue in the peak season. Although the revenue increase is encouraging, the prevailing macroeconomic headwinds require improved efficiency to secure competitiveness and long-term profitability.
Total revenue ended at MSEK 13,552, representing an increase of over 3% compared with the same quarter last year. The decline in capacity caused by the pilot strike was compensated by increased passenger revenue. Moreover, SAS posted a continued positive trend in the sale of EuroBonus points and ancillary revenue.
Earnings before tax and items affecting comparability, came in at MSEK 1,495, a disappointing decrease of MSEK 513 year-on-year. The decline was mainly attributable to increased fuel costs, the Swedish krona’s continued weakness against the US dollar, as well as the pilot strike at the beginning of the quarter. However, it is encouraging to note that our successful adaptation to seasonal demand and improved operational quality led to a strong customer uptake and an increased yield, thereby mitigating parts of the additional costs incurred during the quarter.
Notably, the headwind stemming from a weak SEK and signs of a slowdown in the European economy, accentuate the need for SAS to adapt operations to current market conditions and accelerate the transformation agenda to secure long-term profitability beyond 2020.
Improved operational efficiency and seasonal adaptation
SAS has its peak season during the third quarter, with strong demand from both leisure and business passengers. In recent years, we have adapted our offering to meet customer demand by shifting summer capacity toward leisure-oriented routes. This year we launched 25 new routes in our summer program, whereof five brand new destinations: Florence, Marseille, Szczecin, Cornwall and Oulu. The capacity shift has proven to be successful and we were able to report new records for passenger numbers in both June and July.
SAS has its peak season during the third quarter, with strong demand from both leisure and business passengers. In recent years, we have adapted our offering to meet customer demand by shifting summer capacity toward leisure-oriented routes. This year we launched 25 new routes in our summer program, whereof five brand new destinations: Florence, Marseille, Szczecin, Cornwall and Oulu. The capacity shift has proven to be successful and we were able to report new records for passenger numbers in both June and July.
Demand for domestic flights in Norway and Denmark remains strong and we continue to post healthy growth compared to last year. Even in the declining market for domestic flights in Sweden, the number of passengers that chose to travel with SAS remained at the same levels as last year. We view this as proof of an attractive customer offering.
Looking ahead, forecasts for the remainder of the year indicate a market capacity growth of approximately 1% for the full year 2019 and early indications point to moderate growth in 2020 as well. This is a trend shift from recent years, where annual capacity growth has been 3-4% per annum. In the near term, this moderate growth outlook is encouraging and should help improve the supply/demand balance, which should be beneficial for the Scandinavian market. However, in the longer term, the significant order book of new aircraft to be delivered until 2024 carries a risk of structural overcapacity in the European airspace.
In terms of operational quality, we recorded a strong improvement compared to the same period last year when we faced a number of operational challenges. Since then, we have taken several actions to improve stability and avoid traffic disruption. We have recruited and trained more seasonal staff in ground handling and technical maintenance. Moreover, we have added two spare aircraft, implemented a new disruption module, and selectively adjusted the network to optimize the reallocation of buffers and stand-by capacity. As a result, we have throughout the summer delivered operational regularity well above 99%. What makes me particularly proud is that we were able to deliver the same operational robustness across all production platforms, thereby resulting in generally improved customer satisfaction.
Roadmap towards further efficiency improvements
Our current efficiency improvement program targets SEK 3 billion in efficiency improvements by 2020 to strengthen competitiveness and mitigate some of the annual cost inflation. In the third quarter, our efficiency program delivered over MSEK 230 and in the year to date we have realized MSEK 626 in savings. Since 2017 the program has realized SEK 2.1 billion out of the targeted SEK 3 billion.
Our current efficiency improvement program targets SEK 3 billion in efficiency improvements by 2020 to strengthen competitiveness and mitigate some of the annual cost inflation. In the third quarter, our efficiency program delivered over MSEK 230 and in the year to date we have realized MSEK 626 in savings. Since 2017 the program has realized SEK 2.1 billion out of the targeted SEK 3 billion.
Although we stay firm on our target of delivering MSEK 900 in savings for the fiscal year 2019, our unit cost, after adjustment for strike effects, is not decreasing to the extent we wish. This means that we need to look at additional initiatives beyond 2020.
The renewal of our fleet is one important component since it moves SAS to a single-type fleet which decreases complexity in the organization and thereby costs. Another component is to further optimize our operating model based on three production platforms to further boost flexibility and efficiency.
Another area of importance is our continued digitalization efforts to further support revenue growth, decrease costs and at the same time add value for our customers. These include utilizing digital tools to improve planning, both for assets and for the crew. This will ensure continued stable production as well as optimize organizational efficiency. Other efforts include the introduction of predictive maintenance for our aircraft and other automation to increase efficiency. Personalized customer offerings, onboard high-speed WiFi and improved self-service possibilities, are other areas that are aimed directly at our customers to safeguard our strong value proposition and attractiveness.
To accelerate our efficiency efforts and drive accountability, a new Group Management organizational structure will be implemented as of 1 October 2019. Our current Operations unit will be divided into Airline Operations, with responsibility for airline operations across all production platforms, and Airline Services, with responsibility for Ground Handling, Technical Maintenance and Cargo. Furthermore, all sales, marketing and commercial units will be consolidated under one Commercial entity. With the new Group Management team in place, we are committed to delivering on our accelerated transformation agenda as well as the additional initiatives needed to increase efficiency across the organization.
Continued progress in decreasing climate impact
At SAS, we are currently working on several activities to reduce our negative climate footprint. The delivery of new and more fuel-efficient aircraft is a cornerstone in our endeavor to reduce carbon emissions. With new aircraft from Airbus, our emissions will be reduced with up to 18% on short-haul and up to 30% on long-haul flights. We have also replaced the interiors in our existing aircraft and decided to remove tax-free sales onboard to reduce weight and fuel consumption. Moreover, we continuously strive to reduce plastic consumables and food waste onboard.
At SAS, we are currently working on several activities to reduce our negative climate footprint. The delivery of new and more fuel-efficient aircraft is a cornerstone in our endeavor to reduce carbon emissions. With new aircraft from Airbus, our emissions will be reduced with up to 18% on short-haul and up to 30% on long-haul flights. We have also replaced the interiors in our existing aircraft and decided to remove tax-free sales onboard to reduce weight and fuel consumption. Moreover, we continuously strive to reduce plastic consumables and food waste onboard.
SAS is also engaged in a joint research project together with Airbus related to the electrification of aircraft for large-scale commercial usage in the future. In order to bridge the gap to zero emission aircraft, we believe that an important step is to increase the usage of renewable fuels to reduce emissions more rapidly. SAS is pushing for large-scale production of advanced renewable fuel in Scandinavia. The volumes being produced today are simply not enough and the price is 3-4 times higher than for conventional jet fuel. During the quarter, we added the possibility for our customers to purchase biofuel (at cost), in addition to the amount of biofuel SAS is already using. We believe that this provides an opportunity for customers to contribute and creates transparency around the additional costs for biofuel.
In the meantime, we are also addressing the CO2 emissions that we cannot eliminate with today’s technology. During the quarter we had compensated for over 3.5 million journeys with SAS, representing 38% of the total passenger-related CO2 emissions in the third quarter.
Outlook
Even though the capacity outlook and recent decline in jet fuel price are positives, several challenges remain unchanged since our Q2 report. This includes the continued weakness of the Swedish krona against the US dollar and the Euro, as well as an emerging slowdown in the European and global economies.
Even though the capacity outlook and recent decline in jet fuel price are positives, several challenges remain unchanged since our Q2 report. This includes the continued weakness of the Swedish krona against the US dollar and the Euro, as well as an emerging slowdown in the European and global economies.
Although we are in the process of adapting to current market conditions, the journey towards an even more efficient and effective SAS will require additional time and effort. Therefore, we reiterate our full year outlook that it will be challenging to reach a positive result before tax and items affecting comparability for FY2019."
Tags: SAS, Rickard Gustafson
