SAS agrees to acquire Braathens

An agreement by Scandinavian airline SAS to acquire Norwegian domestic airline Braathens ASA provides a basis for growth and value creation in both companies. Jobs, route networks and the Norwegian civil aviation system will be safeguarded by this deal, which values Braathens at NOK 1 127 million.

Braathens and its principal shareholder contacted SAS and asked it to consider becoming involved as an owner in order to contribute to a long-term improvement in the airline's position.

The owners and management at Braathens believe that the company is not viable as an independent organisation in the present structure. Norway's atypical civil aviation system, with two players of virtually the same size in a limited market, and other factors mean that Braathens - despite being the domestic market leader - has suffered substantial losses over several years. The airline has considered various solutions to its difficult financial position. Its conclusion is that involving SAS as an owner represents the best and only way of ensuring continued operation, jobs and provision for customers. SAS shares this view.

As a result, it has agreed to acquire the shareholdings offered for sale by Braathen's largest owners - the Braathens family (Braganza and Bramora, with 38.8 per cent) and KLM with 30 per cent. Totalling 68.8 per cent, these holdings are being acquired at NOK 35 per share. This values the company's Norwegian operations at NOK 1 127 million. Braathen's operations in Sweden are excluded from the agreement, and will be divested before the acquisition has been implemented.

The same offer will be made to the other shareholders in Braathens. Conditions include approval by the relevant authorities and the acquisition of at least 90 per cent of the shares by SAS. Braathens will remain a separate brand and company, with its own organisation. Jobs in the two companies are safeguarded, and efforts will be made to resolve possible overstaffing through natural attrition, redeployment and retraining. Both domestic and international route networks will be strengthened, and Norway's civil aviation system safeguarded - with the consequences that has for regional development, industry, jobs and expertise.

Synergies obtainable through coordination, reducing excess capacity and adjustments will benefit the owners by providing a basis for further growth and development. Cost savings will also benefit customers, in part through an undertaking from the companies that prices will be kept unchanged for the next two years unless extraordinary circumstances arise. Two separate air mile programmes will be maintained, with mutual earning and use of air miles between the two companies.

Adapting capacity to the market base will reduce the existing excess, ensuring a more stable and robust civil aviation system. This also offers environmental gains through lower resource use, better fleet utilisation and reduced emissions. In addition, passenger services can be expanded because reducing excess capacity makes it possible to establish new direct routes both domestically and internationally as well as to increase frequencies on foreign flights from major Norwegian cities.

In overall terms, the route network and timetable will be improved. No existing destinations are to be discontinued. European national carriers - which represent a country in most bilateral air travel relationships - generally have a 60-95 per cent share of their domestic markets. This is essential for ensuring the strength at home to safeguard a robust international network through own operations and a strong position in various alliances. The present atypical position in Norway's civil aviation sector has meant poor profitability and excess capacity. In the longer term, such conditions will threaten jobs, expertise, the civil aviation system, routes and international competitiveness. That in turn would have very negative consequences for the Norwegian community. The acquisition of Braathens shares by SAS, and a consolidation in Norway, will not alter the existence of free competition in domestic Norwegian air travel.

Until now, excess capacity and two strong players operating parallel routes in a relatively small market have created a very high threshold for other players seeking to enter this sector. Norway and the Norwegian community need a strong and independent player which can look after their domestic and international requirements in a global civil aviation business. Competition in the airline sector is primarily between the major international players and alliances. It is limited at national level because these markets are normally too small to achieve profitable competition. The changes now underway in civil aviation create a strong need for consolidation to provide the strength and competitiveness needed in the international market. In the USA, the industry has been restructured from a large number of players and now consists primarily of four-five big companies. The same need exists in Europe, where membership of strong alliances has been one of the essential requirements for achieving competitiveness.