Skift Take
— Rafat Ali
Anko van der Werff has a thing for airline bankruptcies. Either they follow him or he follows them. All of the three previous airlines he has worked for and led, Aeromexico as CCO, and as CEOs of Avianca and now SAS have gone through their rites of passage after he joined or after he left. And he relishes his role as tthye sharp but genial turnaround artist.
With SAS, which he joined as CEO in July 2021 in the throes of covid challenges, 2022 was even tougher as the company dealt with pilot and labor strikes and summer travel chaos, resulting in Chapter 11 bankruptcy protection filing in the U.S. courts. Now in 2023, Anko expects to come out of bankruptcy in the second half of the year and much better year and earnings ahead.
Earlier this month as he was on a whirlwind tour of New York City to launch the new JFK to Copenhagen fight, I interviewed him about the path ahead for him and the airline he leads.
Edited Interview:
Rafat Ali: Why did you end up in bankruptcy protection?
Anko Van der Werff: There are many reasons why we ended up in Chapter 11, because my first year was Delta variants, then Omicron, then Russian airspace. Every single time we thought “Okay, now we can really start to ramp up again”, something really massive happened, and you were just with your back against the wall every single time. And Russian airspace, certainly on wide bodies, was the straw that broke the camel’s back. So that piece is now restructured. Like I said, billion Swedish kronor of annual savings.
Ali: Any plans for Asia anytime soon?
Van der Werff: Asia is really the anomaly because being so high up in northern Europe, we are far more hit by Russian AirSpace closure than anyone else in Europe is. So our one-way, elapsed time increases delta, versus overflying Russia is about two and a half hours one-way. So two and a half hours of one-way additional flying, as I was explaining because it’s not just fuel costs cost, but it’s your crew, your pilots your asset. I mean, the whole aircraft is now away from home. Your rotation is now five hours longer, so it doesn’t fit anymore. And look. When is it going to open up again? Who knows, but certainly not tomorrow. Next month? It just won’t.
Asia definitely will feature in the long-term, medium long-term plans, but we will keep the footprint and keep something open. Shanghai, at least as of this year. But to go massively back into Asia at this moment really wouldn’t make any sense.
Ali: So in terms of between now and when you come out of Chapter 11, which you mentioned being the second half of the year, you’re launching these new routes in the U.S. What more before you come out of the bankruptcy?
Van der Werff: Yeah. So we signed a Debtor-in-Possession financing, DIP financing back in September. And the first part of that DIP has been drawn. The second part of that DIP we’re now working very hard to make sure we get to the stage where we can draw on it.
Ali: To certain milestones.
Van der Werff: Exactly, exactly. We’ve had a bit of delay, but I think we’re getting closer to probably taking that decision. I would consider that hopefully… call it a month or something. And then hopefully, we’re there. Then you start the equity process. The equity process is the core of what we set out to do. I mean, we needed a billion dollars in equity. And that is the big game plan. Of course, now in Chapter 11, you can only do that as a part of your plan of reorganization. So your plan of reorg needs to include: who are we, what are we going to do, who’s our target, who’s our customer, who’s our market? Here’s where we are with a new cost structure, with a new balance sheet, and with the newfound equity. And then you can go to the judge and ask, “Okay, can we come out? Can we emerge?” Therefore, it’s all these steps. It’s from the second row of the DIP into the equity process, making sure that, indeed, there are investors willing to invest in a new SAS, and then emerge. That’s why this takes another X number of months, and therefore, the second half of the year.
Ali: When the pandemic first hit, people went “Oh, airlines are gonna go out of business and a bunch of them will file for bankruptcy.” It didn’t happen as much as you would think with the number of airlines. Were you surprised? I guess governments made a decision to bail out airlines.
Van der Werff: Certainly in Europe. I can’t really say for Asia. I think my clustering is the following U.S. airlines. Definitely government support, CARES Act and everything else. But also, they were the strongest in the world going in. I mean, they had consolidation already under their belts. They had been profitable for at least, call it a decade, 2010 to 2020. So they were in a good position.
The Latin American airlines that we discussed, the big three filed for Chapter 11 Avianca first, LATAM and then Aeromexico. And so, I think in that part of the world, it did happen. In Europe, what I think has happened, and I’ve said this before, is unfortunately, I think in many ways the European approach or European solution wasn’t needed. Every single nation went in and supported its airline. And with that came, for instance, restrictions on M&A. So the whole consolidation game in Europe has been pushed out again, by X number of years.
Ali: But you want to be part of that game.
Van der Werff: I want to be part of the game. But it’s not like we can. Certainly not right now. We’re not in a position to drive it. We have to, of course, go through it first. But what needs to happen in Europe is consolidation. It still needs to happen. When you look at how healthy the United States’ airline sector was, the difference between the 2000s to 2010 and then 2010 to 2020, it provides a clear, I think, policy footprint or template for what the airline industry should look like. So the unfortunate thing once again, was that Europe almost had a chance in 2020. But they, in my view, chose wrongly. So it’s a long-winded answer to your question. Why weren’t there more bankruptcies in the end? And why was there more restructuring? Well, because indeed, in many cases, the various states helped.
Ali: My next question was going to be M&A. But looks like you’ve answered that.
Van der Werff: I mean, we’re not planning on it. We are focused on ourselves. We have to get out of this first, of course. But I am a believer that Europe still needs to consolidate overall.
Ali: In terms of all the restructuring around planes, is that part done?
Van der Werff: Yeah, it’s done. This is one of the benefits of Chapter 11. You can restructure that part and renegotiate while you keep on operating, which is the biggest part. And so those two things combined make Chapter 11 for airlines, truly a tool or a mechanism that is very powerful to use.
Ali: And so as these new routes you’re starting, seem point to point, versus the hub model that, for instance, other European competitors have. How are you thinking about the competitive disadvantage or not?
Van der Werff: So the interesting thing about that Airbus A321 LR is that it flips that premise on its head because indeed, London has a hub. London as a catchment area is very strong. 9 million people, lots of businesses, and that’s something Scandinavia doesn’t have. There is no capital with 9 million people, or Paris or Frankfurt or something like that. What Scandinavia has is a strength that is potentially more balanced in a way: secondary cities. For those secondary cities, what is very difficult is to build a hub because they’re secondary for a reason. But with the A321 LR, at least what you can try and do, is tap into, for instance, the U.S. market by a direct flight via New York. So direct flight to New York, and then connect onto your partners here.
So New York with United, and that gives the business community of, for instance, Gothenberg or Aalborg. It gives them something that we haven’t had for decades, really. I mean, the last time Gothenberg, as the second city in Sweden, had a direct flight to New York was in the 1980s. So that’s pretty cool. Actually, it’s pretty awesome. We can do that, so I’m really looking forward to those flights.
Ali: In terms of the shitshow that last summer was, how do you avoid it this summer?
Van der Werff: We certainly weren’t the worst in class, but we had a few rough months. And we had the strike in July. So definitely it wasn’t, from a customer perspective, anything to be proud of at all. Your follow-up question is going to be this summer. Well, I think, far better, far more solid. Everyone’s learned from last summer’s mishaps. But I don’t think it’s over. And it’s just broken down into very tangible elements, which is, number one, both Boeing and Airbus. In our case, Airbus still doesn’t have its production fully in place, so every single aircraft that we still have on order is delayed. All the aircraft deliveries that were supposed to happen this year, are again, delayed, and that’s already for the third, fourth time. So that keeps on being very complicated, you plan for something and then it doesn’t happen.
Secondly, you see supply chains still being disrupted. That keeps on being an issue. And then training and retraining of pilots, but also rehiring of, for instance, baggage loaders. Certainly not all airports and airlines. We’re not going to be back to a full 100 percent. It’s because, in the case of SAS, we have phased out the program over 737s that we had, and we’re going to Airbus 320. So you already have a training program for that. We also have a training program for what we call “mixed fleet flying”, so between 320 and 350. That’s something where you dedicate your resources to. Now you have to reschedule for those aircraft delivery delays. We were planning on ramping up a regional platform that we have, SAS Link, by having Embraer aircraft, but in even those are delayed. So all of that combined, again, puts quite a strain on the organization. We’re going to be in much better shape than we were last summer.
Ali: In terms of the cost disadvantage of labor for you, versus Norwegian and others who moved to Spain, for instance. Is that something you can do feasibly?
Van der Werff: Yeah, we could, and we had. SAS has had overtime, several bases. It may or may not come up again in the future. We signed a very good collective bargaining agreement last year. So SAS laid off about 500 pilots in 2020, and we’re now in the process of bringing them back and retraining. I don’t think that is on the cards immediately and necessarily so. But let’s see for the future. If we have to, we will. We do have a base in London, and that stays. That’s a very strong base, and of course, a big market. We have a lot of slots at Heathrow. So there we have, and you may be surprised, a significantly cheaper base to operate for us because, in taxation, social security is so high in Scandinavia.
Ali: Let’s move to a few consumer questions. One of the things we’ve been exploring is the blended travel world. Are you seeing that in? Are you seeing changed consumer profiles for the types of travelers that you have?
Van der Werff: Absolutely. So for instance, leisure is still leading the rebound. But also, premium leisure is definitely a thing. Whether that’s revenge spending or whether people are just waking up to “Hey, we want to live now and do fun things with our children”.
Ali: Are the days in which the peaks and valleys happened morphing a little bit as it had happened in the U.S.?
Van der Werff: It’s morphing a bit. But at the same time, you have to be honest that school holidays are still when the school holidays are. So has that been completely flipped upside down? No. Business travel is lagging behind. It’s definitely coming back. It’s growing. But, again, leisure and premium leisure are leading the way still. So therefore, I do think that it will take probably all of 2023 for that to stabilize, and probably 2024 and 2025 you’ll see that system completely back as well. It will come back, it will grow, but certainly the growth over the last year and a half to two years has been more in leisure and premium leisure.
Ali: The high ticket pricing, is that the new normal? Because it doesn’t look like it’s going to come down from here.
Van der Werff: Yeah. So it’s interesting, because I do think that we haven’t been seeing the exact same effect. For instance, in our biggest market, you had Flyr starting up and having already a decent fleet size that put significant pressure there and with Norse as a startup. I think for us, more so than for other markets, there was an awful lot of startup activity and that may now fade away. So we’ll have to see what happens there.
We haven’t witnessed the huge strength that others may have seen. I don’t think it’s also very Scandinavian to do that. I think that this is more decent in many ways.
Ali: Since you’re in the Scandinavian world, where there is a nascent movement for flight shaming. Have you seen any effect? Are you thinking about the multimodal as you were thinking about how to go forward?
Van der Werff: Yeah, we are. Some people will, of course, say immediately that this is a marketing spin that I’m trying to put on it. Believe me, I’m not. I think the pandemic has also shown Scandinavia what the importance of connectivity is, both in domestic markets, and certainly also for business in a European and global context. I was yesterday with a group of business leaders and politicians in Denmark. Biomedical is big for them, either as a cluster, as a sector, or as an industry. The other parts of the world are important, and they need that connectivity. It’s a small country. Small population, clearly highly developed and highly skilled, but they need the rest of the world. When you look at Sweden, massive companies Ericsson, Saab, etc need to also be part of that global chain. So I think the past few years have shown people again.
Ali: There are many ways to look at connectivity.
Van der Werff: Yeah, and so I think that the good sides of aviation are coming back a bit more. It’s becoming more balanced again. Now, what is still true, and of course, what SAS has always been on the forefront is our quest for sustainability.
We already have targets for domestic markets for both Sweden and Denmark to be neutral by 2030. I can still say, objectively, it’s very much at the forefront. Now we do three things there. First of all, on sustainable aviation fuel, we have a project together with Vattenfall, big energy producer, Shell Aviation and Lanza tech, and we tried to come up with synthetic aviation fuel. We hope to be ready by 2026 or 2027. That would produce a significant portion of what we need. We just received funding from the EU Commission, so that’s really positive.
Then a bit further down the road, electrification and electrical aviation. We are working with Heart Aerospace in that. They’re well-funded and a good group. They want to have their 30-seater ready for entry into service in 2028. Further down the road, 2035 and beyond is hydrogen together with Airbus, and we’re one of the partners. So we’re really invested. I think, fair to say, no one has cracked the code yet. Everybody’s looking for the holy grail of how do we fix it. It’s not for lack of trying. It’s not for lack of effort. It’s not for lack of investments, fleet investments or time investments in these projects. But let’s find the Holy Grail together.
Photo Credit: Scandinavian Airlines CEO Anko van der Werff. Source: SAS Airlines
