Industry overview

The value of air travel to, from, and within Scandinavia in 2016/2017 totaled approximately SEK 110 billion, and approximately 90 million journeys were made. Over time, the industry has been characterized by higher growth than the GDP as well as by intense competition and price pressure, which puts great demands on efficiency.

INDUSTRY OVERVIEW

The airline industry is capital and personnel-intensive, with a high proportion of fixed costs. In combination with a large share of sales occurring close to departures, this means that airlines are rapidly affected by changes in demand. Airlines are also dependent on a large number of subcontractors, which makes them vulnerable to various events.

Around 4 billion flights are made globally each year using commercial airlines. International Air Transport Association (IATA) airlines turn over some USD 700 billion per year, and just over one billion flights are made in Europe. The largest individual air travel market measured in passenger kilometers is Asia, followed by Europe and North America.

AIR TRAVEL IS EFFICIENT IN SCANDINAVIA

Revenue from the Scandinavian air travel market is estimated to amount to about SEK 110 billion annually, with approximately 90 million journeys made. This makes the Scandinavian air travel market, in relation to its population, relatively large compared with the rest of Europe. This is due to Scandinavia’s high level of economic prosperity, numerous internationally successful companies and its geographical conditions. The region is characterized by relatively long distances with relatively small towns, and difficult and highly mountainous topography where the land masses are largely surrounded by sea. This makes other forms of transport time-consuming and inefficient.

At the same time, the relatively small towns mean that there are only a limited number of routes that can be operated with several daily departures by jet aircraft with seats for 120 or more passengers. To be able to offer a broad network and high frequencies, an airline requires a flexible operating platform consisting of aircraft of various sizes, optimized for the different types of traffic flows.

GROWTH TRENDS

The air travel market is growing by approximately 5% annually, and has doubled globally roughly every 15 years, which is more than GDP growth. This is due to increased prosperity, economic growth, attractive pricing and technological development that has promoted increased efficiency. The Scandinavian market has grown around 4% per year during the 2000s, despite the occurrence of several external events that negatively impacted growth, such as ash clouds and terror attacks in the operating environment. A clear trend during the 2000s is growth in leisure travel out-pacing that of business travel. This is driven by increased prosperity as well as travel and new experiences being given priority. Another growth trend is increased demand for intercontinental routes. Growth during 2016/2017 was on a level with historical growth, and the number of passengers at Scandinavian airports increased 4.5%. The number of seats offered increased 2.3% in the same period.

GLOBAL CHALLENGES

The airline industry continues to undergo strong change, which is setting new requirements for all participants. The rise of low cost carriers (LCCs) in the early 2000s has put pressure on existing airlines. The LCCs’ share of capacity has also increased in Scandinavia, to just about 37% in 2016/2017. As the LCCs grew, this contributed to a decline in unit revenue and the willingness to pay for air travel. Airlines have compensated for this through efficiency enhancements and increased sales of ancillary services. SAS has met this yield pressure through continually enhancing the efficiency of its operations. As part of improving efficiency, an increasing number of air-lines are reallocating production to their own and newly started production companies, both within Europe and on intercontinental routes. Moreover, personnel will be increasingly hired in, with the aim of creating more flexible terms. Many network airlines are also simplifying their core offering and lowering prices even further, at the same time as customers are being offered more ancillary services. In addition, Norway introduced a national aviation tax in 2016 and a similar tax will be introduced in Sweden on April 1, 2018. According to various assessments, these aviation taxes will generate marginal environmental effects but threaten to undermine profitability, since the intense competition in the industry means the airlines will have to absorb most of the tax and will be unable to correspondingly raise ticket prices. Overall, this indicates that yield pressure will continue. A further challenge is that the air travel market is often affected by overcapacity. Aircraft are usually ordered with a lead time of several years from order to delivery. This means that the conditions existing when the order was placed may have changed by the time the aircraft is delivered. Over the next few years, many of SAS’s competitors will receive large deliveries of aircraft; a number of these aircraft will most likely be allocated to Scandinavia. This could lead to overcapacity in the market and price pressure.