Scandinavian airline SAS is creating an Irish subsidiary — also called SAS — to fly some shorter routes because that’s the only way it can compete on costs with discounters like Norwegian Air, Ryanair and EasyJet on certain competitive routes, its CEO told Skift in a recent interview.

The airline’s foreign competitors obviously do not use a Scandinavian operating certificate on short international flights that touch SAS’s hubs in Stockholm, Oslo and Copenhagen, giving them a labor cost advantage. But even Oslo-based Norwegian Air, SAS’ most fierce competitor, operates many European flights under an Irish certificate, rather than a Norwegian one.

Over time, SAS CEO Rickard Gustafson said, SAS learned it could not profitably compete on some routes, such as Copenhagen to London, using the current model, where customers demand one-way tickets for 30 to 35 Euros, or roughly $33 to $39.

“If you know that your competitors, by flying from London to Scandinavia rather than flying from Scandinavia to London can have cost advantage around 35 percent, it’s tough to compete,” he said last week during an interview at the IATA Annual General Meeting in Cancun, an annual conference of airline executives.

The new Irish airline should be flying by year-end. It expects to have nine Airbus A320s and two bases, one in London and the other in Spain, the airline has said.

Cost control

The Irish airline will be assigned to routes like Copenhagen-London, which has 25 daily departures on SAS, British Airways, Ryanair, Norwegian and EasyJet, according to Gustafson. It will also fly between Scandinavia and southern Spain, shuttling vacation-seekers to the beach. Gustafson called that a, “growing market.”

Among its competitors to London, SAS is the only airline that must pay its employees according to Scandinavian laws, Gustafson said. British Airways employs its crews in the UK, while the other airlines can hire from anywhere in Europe, giving them a major cost advantage.

The new SAS, like its competitors, will hire employees from outside Scandinavia. The alternative, Gustafson said, might taking drastic action, like leaving London.

“We are going to hire people who are going to fly from there to Scandinavia,” he said.

Other European airlines have created or bought a lower cost brand, and they sometimes base them in other countries to capitalize on friendlier laws. But most give the new carriers a different name so customers will not confuse the two operations.

But Gustafson said SAS, with a fleet of about 150 jets, is too small for a sub-brand. Plus, unlike Lufthansa Group, which wants to differentiate between carriers like Swiss International Air Lines, a full-service operation, and Eurowings, its low-cost brand, SAS wants customers to believe they’re flying one airline.

Indeed, customers may have not know they’re traveling on anything other than the 70-year-old Swedish carrier. Planes will have SAS painted on them, and SAS will sell tickets.

“We have a very, very strong brand,” Gustafson said, “so we believe you’re better off trying to build on that brand rather than trying to spin off and build another brand from scratch.”

No plans to add long haul

SAS also has considerable competition on many long-haul routes, but without discounters like Ryanair and EasyJet flying them, the threat is less acute. And none of the existing long-haul airlines have such a big cost advantage over SAS.

Norwegian’s Boeing 787s, which compete directly with SAS on many U.S. routes, are registered in Norway, though the airline’s Boeing 737s Max aircraft now flying short routes from the Eastern United States to Western Europe, are on the Irish certificate.

But even if Norwegian shifts more long-haul aircraft to Ireland, SAS may not follow. Gustafson noted SAS has only 16 Airbus A340s and A330s in its long-haul fleet, and it splitting the fleet in two makes little sense.

“Then you’re into sub-scale operations,” he said. “Another reason is that our core idea is to continue to create a cost-effective and highly effective core SAS, and that’s plan A for us.”

Too late?

The threat from low cost carriers is not new. Many low cost brands moved into SAS’s markets years ago, but Gustafson, who took over in 2014, said he doesn’t want to dwell on the past.

“It’s always easy to look back what you should have done in the past when you sit there with all the facts,” he said.

As for whether it’s too late, a recent report from CAPA, an aviation analysis firm, suggested SAS may still have time to recover. The report called it a “pragmatic approach to intense competition,” from lower cost airlines.

“After years of cost reduction programs – also years of initiatives aimed at enhancing the appeal of SAS’s product and brand to its core target market of Scandinavia’s frequent flyers – a bolder step is needed,” the report said.

Photo Credit: This Boeing 737-600 is registered in Sweden. But starting this year, some of SAS's planes will belong to a separate Irish operation. SAS