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November 22, 2012 6:23 pm
Chapter 11 might have lent wings to SAS
By Richard Milne
SAS has long stood for what is wrong with much of Europe’s airline industry. The Scandinavian flag carrier has been pummelled by low-cost competition as its higher ticket prices and dropping of free food and drinks – save for coffee and tea – has driven passengers into the planes of rivals Norwegian Air Shuttle and Ryanair.
At fault was not only a cripplingly high cost base that led to it turning in small profits for a mere two years in the past decade, but a relationship between workers and the company that was both complex and unhealthy.
However, SAS’s decade-long struggle to restructure itself back to health highlights a broader issue for much of European industry, such as its troubled carmakers: could it have benefited from a Chapter 11-style bankruptcy used in the US? It is no idle question. Rickard Gustafson, SAS’s chief executive, pointedly said last week that all big US carriers had been through Chapter 11 protection, which allowed them to slash salaries and pensions while continuing in business.
SAS itself has explored several times whether it should declare itself bankrupt. Under Swedish law, there is a possibility for a court-ordered restructuring that has some similarities to the American Chapter 11. But crucially Sweden has not signed up to an international convention that prevents creditors from seizing aircraft on foreign soil; SAS worried that lenders could therefore take ownership of any plane landing in, say, London. Saab, the carmaker, also had difficulties in using the procedure when it tried and failed to avoid bankruptcy last year.
Swedish lawyers say that there is little appetite for a full Chapter 11 as there is a strong belief that companies that can no longer pay their debts are best declared insolvent, allowing their best assets to be sold off and the rest wound down.
But the power of Chapter 11 for turning around companies with big legacy costs can be seen best of all in the revival of General Motors and Chrysler in the US. The carmakers closed factories, dumped assets, cut debt and slashed labour costs after filing for bankruptcy in 2009. Both rebounded strongly afterwards, with GM refloating on the stock exchange the following year and Chrysler now propping up its new majority owner, Italy’s Fiat.
Some European countries have sought to implement regimes similar to Chapter 11. The UK has company voluntary agreements, much in demand from retailers such as JJB Sports, which has twice used them. France and Spain have changed their rules in an attempt to change the dismal statistic that about 90 per cent of insolvencies in both countries have ended in liquidation.
When SAS, which is still half-owned by the governments of Sweden, Norway and Denmark – even if the first two would desperately like to sell out – looked at outsourcing its ground handling business five years ago, it quickly halted the plans almost immediately. The reason? The company learnt that unions would strike over the critical Christmas and New Year period if the deal went ahead.
Similarly, the agreements with its main workers were mind-bogglingly complex: those for pilots ran to 200-300 pages while those for the cabin crew were more than 100 pages. If the airline wanted to change a route – to fly, say, from Stockholm to Berlin rather than Munich – pilots had to be consulted. This went beyond consensual Scandinavian labour relations; the employees were essentially running the company alongside management.
All this means that this week’s wage deal at SAS is an important breakthrough. A bruising week-long negotiation – which dragged on for almost a day after a self-imposed deadline – ended with the eight unions in three countries that represent pilots and cabin crew agreeing to new working conditions and pay cuts of up to 15 per cent. The worker agreements have shrunk to a more manageable 40 pages.
There is still reason to be sceptical: SAS remains almost entirely dependent on its short-haul operations, which are most exposed to ferocious competition and growing passenger indifference to anything other than price. The goal expressed by the managers may be to rival Ryanair and Norwegian on costs, but some analysts believe SAS’s culture as a legacy carrier hinders it from ever being as nimble.
Chapter 11 is not without its flaws – some complain that companies get off relatively easy – but it is of undoubted help in dealing with deep-rooted cost problems. Given the state of companies such as SAS and PSA Peugeot Citroën, the French carmaker trying to restructure under heavy political pressure, it is little wonder that US bankruptcy law is the envy of many European bosses.
Richard Milne is the Financial Times’ Nordic correspondent
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November 22, 2012 6:23 pm
Chapter 11 might have lent wings to SAS
By Richard Milne
SAS has long stood for what is wrong with much of Europe’s airline industry. The Scandinavian flag carrier has been pummelled by low-cost competition as its higher ticket prices and dropping of free food and drinks – save for coffee and tea – has driven passengers into the planes of rivals Norwegian Air Shuttle and Ryanair.
At fault was not only a cripplingly high cost base that led to it turning in small profits for a mere two years in the past decade, but a relationship between workers and the company that was both complex and unhealthy.
However, SAS’s decade-long struggle to restructure itself back to health highlights a broader issue for much of European industry, such as its troubled carmakers: could it have benefited from a Chapter 11-style bankruptcy used in the US? It is no idle question. Rickard Gustafson, SAS’s chief executive, pointedly said last week that all big US carriers had been through Chapter 11 protection, which allowed them to slash salaries and pensions while continuing in business.
SAS itself has explored several times whether it should declare itself bankrupt. Under Swedish law, there is a possibility for a court-ordered restructuring that has some similarities to the American Chapter 11. But crucially Sweden has not signed up to an international convention that prevents creditors from seizing aircraft on foreign soil; SAS worried that lenders could therefore take ownership of any plane landing in, say, London. Saab, the carmaker, also had difficulties in using the procedure when it tried and failed to avoid bankruptcy last year.
Swedish lawyers say that there is little appetite for a full Chapter 11 as there is a strong belief that companies that can no longer pay their debts are best declared insolvent, allowing their best assets to be sold off and the rest wound down.
But the power of Chapter 11 for turning around companies with big legacy costs can be seen best of all in the revival of General Motors and Chrysler in the US. The carmakers closed factories, dumped assets, cut debt and slashed labour costs after filing for bankruptcy in 2009. Both rebounded strongly afterwards, with GM refloating on the stock exchange the following year and Chrysler now propping up its new majority owner, Italy’s Fiat.
Some European countries have sought to implement regimes similar to Chapter 11. The UK has company voluntary agreements, much in demand from retailers such as JJB Sports, which has twice used them. France and Spain have changed their rules in an attempt to change the dismal statistic that about 90 per cent of insolvencies in both countries have ended in liquidation.
When SAS, which is still half-owned by the governments of Sweden, Norway and Denmark – even if the first two would desperately like to sell out – looked at outsourcing its ground handling business five years ago, it quickly halted the plans almost immediately. The reason? The company learnt that unions would strike over the critical Christmas and New Year period if the deal went ahead.
Similarly, the agreements with its main workers were mind-bogglingly complex: those for pilots ran to 200-300 pages while those for the cabin crew were more than 100 pages. If the airline wanted to change a route – to fly, say, from Stockholm to Berlin rather than Munich – pilots had to be consulted. This went beyond consensual Scandinavian labour relations; the employees were essentially running the company alongside management.
All this means that this week’s wage deal at SAS is an important breakthrough. A bruising week-long negotiation – which dragged on for almost a day after a self-imposed deadline – ended with the eight unions in three countries that represent pilots and cabin crew agreeing to new working conditions and pay cuts of up to 15 per cent. The worker agreements have shrunk to a more manageable 40 pages.
There is still reason to be sceptical: SAS remains almost entirely dependent on its short-haul operations, which are most exposed to ferocious competition and growing passenger indifference to anything other than price. The goal expressed by the managers may be to rival Ryanair and Norwegian on costs, but some analysts believe SAS’s culture as a legacy carrier hinders it from ever being as nimble.
Chapter 11 is not without its flaws – some complain that companies get off relatively easy – but it is of undoubted help in dealing with deep-rooted cost problems. Given the state of companies such as SAS and PSA Peugeot Citroën, the French carmaker trying to restructure under heavy political pressure, it is little wonder that US bankruptcy law is the envy of many European bosses.
Richard Milne is the Financial Times’ Nordic correspondent