Scandinavian Airlines Systems: Company Analysis

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Introduction

Scandinavian Airlines Systems (SAS) is the largest airline in Scandinavia with bases in Denmark, Stockholm and Oslo. The airline serves more than 23 million passengers every year on all its routes. This airline system forms part of the larger SAS group that owns hotels, other small airlines, and also, airline support services. At one time, the Scandinavian Airline system was declared the leading airline system. This paper will strategically analyze the Scandinavian Airline System as it was in 1988.

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External Environment and Internal Strategic Capabilities

As an airline system, SAS offers very competitive flight connections in each of the Scandinavian countries through flights that are arranged either with selected partners or under its own patronage. One of the strengths that enabled the success of the airline in 1988 was its emphasis and priority on passenger safety, maintaining maximum punctuality always, and offering exemplary personal services. The airline ensured that it designed products and services that met the general requirements of the market and the specific wishes of individual customers by ensuring that there was freedom of choice. The airline was also preferred by many because of its commitment to limiting the harmful effects of aviation on the environment (Burton and Obel, 2004).

The issue of high fixed costs was a weakness to this airline, and because of this, the airline was at a disadvantage when it came to price competition with other airlines. The neutrality of many of the Scandinavian countries offered SAS an opportunity to form alliances with the other airlines that showed an interest in cooperating with it. However, the deregulation of the airline system presented a threat to SAS because many deregulated airlines and low-cost operators came in and increased competition.

The European Common Market allowed unrestricted access to European airlines into the European markets. This created competition with big European airlines like Lufthansa, British Airways, and air France. Competition also came from American carriers that had large networks and costs of productions that were lower when compared to the European carriers. Entrenched management at the company increased the scope of authority and therefore centralizing bureaucracy, this did not create a good working environment for the airline’s employees (Burton and Obel, 2004).

Strategy Chosen

The increasing competition that faced Scandinavian Airlines System forced the airline company to initiate strategic alliance strategies with other companies. Alliances are basically co-operations between groups with the aim of achieving better results. Strategic alliances involve partnerships between companies in which capabilities, resources, and core competencies are put together to achieve common interests. To achieve this, SAS based its efforts on broadening its passenger base by co-operating with other airlines in Europe and by establishing new air routes in other continents. This enabled the airline to extend its fully integrated system to its passengers in their travels.

According to Youssef (1993), there are two theories that explain why airline companies go into alliances. The first theory relates to technical efficiency. It states that larger airlines tend to have lower production costs and services that are better when compared to smaller airlines. This means that for smaller airlines to achieve similar advantages, they have to go into alliances. This involves several measures such as consolidating facilities, extending effective networks to those of others. This increases the quantity and quality of connecting services and also enables customers to use flier benefits to make frequent travels.

This allows the airline to attract more traffic without necessarily extending its route system thereby lowering costs of production because of the economies of network density. Technical efficiency also brings about a marketing advantage because many travelers with little information on travels tend to contact airlines with large networks first to arrange for travels because such airlines are better placed to offer the needed services. Consolidation of services can also bring about benefits emanating from the economies of horizontal integration. This is the expansion of a company or firm to include enterprises in the same sector that were previously competitive (Youssef, 1993).

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The other theory looks at market power and sees alliances as a way that limits competition with other airlines. Government regulations in aviation markets both domestically and internationally bring about restrictions on route and entry into markets, capacity and the level of fares and the operations of airlines. This creates economic rents that are threatened by the liberalization measures taken by the US and the EC. This drives some carriers to enter into strategic associations so as to reduce competition. Alliances on the other hand may bring about virtual monopolies in those markets that are between the hubs of the partners in the alliance (Youssef, 1993).

Basing on these theories, SAS embarked on forming alliances in an effort to expand abroad. Under the leadership of its visionary CEO, Carlzon, SAS used its acquired reserves to invest in alliances abroad. The airline did not only invest in other airlines but also in hotels, catering and in other subsidiaries and also in the Amadeus computer reservation system. In a bid to check competition from BA, SAS tried to buy its rival, the British Caledonian.

However, the bid collapsed forcing SAS to acquire some shares in the Airlines of the Britain group that controlled the British Midland Airways. An alliance was also formed between SAS and Sabena, which later ended in a virtual merger. This merger together with the British Midland alliance gave SAS a hub right in the center of the airline market in the region. It later formed what was called an alliance of alliances with Swissair (Staniland, n.d.).

SAS also formed alliances with airlines outside Europe. It went into an alliance with Continental Airlines, a US carrier that later filed for bankruptcy. It also formed an alliance with LAN-Chile, an airline from Latin America. In Asia, it formed an alliance with Thai International and also reached a marketing agreement with a Japanese airline ANA. Scandinavian Airlines System also bought a stake in Saison holdings that owns Intercontinental Hotels Chain (Staniland, n.d.).

Impacts of the Strategy on the Company and its Resources

Improvement of connecting services between these airlines was the major motivation for the formation of these alliances. The alliances increased the efficiency of the processes of assembling their connecting services. There was a remarkable reduction in the minimum connecting times in all the markets and also a reduction in the minimum daily layover. There was increased input in terms of the number of flights because of the alliances. There was an increase in concentration of carriers in the markets that the members of the alliance competed formerly. SAS was able to establish its presence in markets it had never competed. It is therefore true that the alliances improved technical efficiency of the SAS by improving vertical integration of the company (Youssef, 1993).

Improvement in the services provided attracted more customers enabling SAS and its alliances to have increased traffic without necessarily expanding its network. This is because alliance carriers bring about external growth and therefore increases in traffic volume are not affected by growth in network thereby bringing about high traffic densities. The dominant position held by alliance carriers at their hubs made sure that there was no competition in the hub-to-hub markets within the alliance. It is also clear that alliances involve tradeoffs between the welfare of the consumer and the airline profit, between service quality and flight fares, between nonstop and connecting markets and between airports. SAS, just like other small airlines, was very much aware of the threats and the opportunities that were presented by a single market. They knew that standing alone in such a market would spell doom, and therefore, forming alliances was their only way out. Initially records show that SAS served only European destinations. This meant that most of the flights were of short duration. This meant that there were frequent takeoffs and landings that wore off the planes. This in turn increased maintenance costs. There was also the issue of overcapacity in its airports. All these were eliminated with the formation of alliances. The alliances saw the airline escape the consequences of going it alone in the single market. These efforts saw the airline main hub, Kastrup in Copenhagen voted as the as the airport of the year in 1988 (Youssef, 1993).

Evaluation of the Strategy used

Using strategic alliances, SAS was able to save enough which was used to make investments abroad. Records show that by 1990, the Scandinavian Airlines Systems had invested $ 721 in airlines, catering, hotels and other subsidiaries. The company had invested $300 million in the famous Amadeus computer reservation system. To cover its expansion plans, the company bought 16 new aircrafts in the period between 1988 and 1990. It had the most sophisticated air cargo business with a hub in Cologne in West Germany.

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Its pioneering of strategic alliances in the airline industry saw more than half of the US carriers set up routes to Scandinavia whereby most of the passengers were Scandinavian. SAS used this opportunity to forge links with other networks in the airline industry. The company streamlined its structure in line with its strategy in the late 1980s. Management layers were thinned and the number of employees per plane was reduced. Everything went well with this strategy until global recession and the Gulf War in the early 1990s slowed its progress (Alle, n.d.).

Conclusion

Starting off as a small country airline, SAS helped in pioneering the idea of airline alliances. Even if some airlines have ditched it in favor of other airlines, the company has maintained its ground. It was able to get a very lucrative and long term partnership with Swissair. Together with Swissair and Australian Airlines, SAS formed the European Alliance which was its backbone for a long time. Passenger safety, maximum punctuality, and high quality services have been a boost to Scandinavian Airlines Systems making it the preferred carrier by many for many years. And as it stands, strategic alliances seem to be the best way that the company and many others have to use to survive in the competitive airline industry.

References

Alle, F. (n.d). The SAS Group – Company Profile, Information, Business Description, History, Background Information on the SAS Group. Web.

Burton, Richard and Obel, Borge. (2004) Strategic organizational diagnosis and design: the dynamics of fit. New York, Springer.

Staniland, M. (n.d). Surviving the Single Market: The dilemmas and strategies of “small-country” airlines. Web.

Youssef, W. (1993). The Consequences of Strategic Alliances between International Airlines: The Case of Swissair and SAS. Web.

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