Editor’s Note: Following our previous CEO interview series in online travelhospitality, and destinations, as well as our CMO series across verticals, we’ve launched another series, this time focused on the CEOs of leading airlines outside of the United States.

Airlines_CEO_logo2To better understand the challenges facing airlines in an age of fluctuating oil prices, rapid growth, and changing passenger expectations, our Future of Passenger Experience series enables airline leaders to explain their best practices and insights. Read the rest of the series here.

This is the latest interview in the series.

For most of its 70-year history, Scandinavia’s SAS innovated more than most airlines. It was the first carrier to fly directly over the North Pole, show in-flight movies, establish regular around-the-world service, and hire a female pilot.

But most of its big innovations happened years ago. For the last couple of decades, SAS has been in a difficult situation. As an independent airline with about 150 aircraft, it’s tiny compared to Europe’s big players — Lufthansa Group, Air France-KLM and International Airlines Group, owner of British Airways and Iberia Airlines. And while it is lowering its costs, SAS is not as nimble as Europe’s leading low cost airlines, like Easyjet, Ryanair and Norwegian Air, its scrappy Scandinavian competitor.

Since joining SAS in 2014, CEO Rickard Gustafson has been trying to make it more competitive. Perhaps his biggest — and most unusual — strategy is his decision to create a new airline based in Ireland, where SAS will capitalize on cheaper labor costs. This Irish-based carrier, also to be called SAS, will operate starting later this year from two bases — one in London and one in southern Spain.

On some routes, Gustafson said the Dublin-based airline will make the Sweden-based parent company more cost-competitive with other airlines. It’ll be useful for routes like London-Copenhagen, because, for now, SAS is the only airline flying between the cities with Scandinavian-based crews. (Oslo-based Norwegian also registers many of its planes in Ireland to save money.)

Under Gustafson, SAS has also invested in technological innovation. The airline recently created SAS Lab, an innovation center charged with creating solutions that might be useful to travelers in three to five years. 

We spoke with Gustafson in early June at the IATA Annual General Meeting in Cancun, a conference for airline executives. We asked him how SAS can remain relevant against more the competition. We also learned about SAS Labs, and we discovered SAS has at least one employee with a microchip embedded in his hand.

Note: This interview has been edited for length and clarity. 

Skift: You set up SAS lab to research ideas for future innovation. What’s its mission?

Gustafson: We need to spark innovation in our business. We need to find ways to use new technology in a new, innovative way. So we said, ‘Let’s put a few people and give them a task to play around with technology and come up with wild ideas about how we can use technology in a smarter way to simplify the travel chain.’ That’s what they were tasked to do. They have come up with a number of fun ideas. Some will never be commercially viable, but at least it creates another way of thinking.

For example, we actually have implemented a chip in the hand of one person so you can board by reaching out your hand, and you can enter into our lounge by reaching out your hand. I don’t think that a lot of customers will let us implement a chip in their hands, but we’re playing around with technology. And out of that, there will come one or two good ideas that then could be commercially viable.

Skift: You have an employee at headquarters with a chip in his hand?

Gustafson: Right.

Skift: Has the team come up with any other fun or wild ideas?

Gustafson: One thing that we believe might be more successful is a bag tag which is by bluetooth. When you check in on our app, the tag is populated with information. There’s kind of a liquid screen on a bag tag. It’s reusable, so when you check-in, you already have populated your tags. When you get through the airport, you go to the self-service bag drop, you scan it and you put it on the belt. Then when you go back home again and you check in on the app, you have an automatically repopulated bag tag, and you’re all set to go. That could also be something that you will see in the market.

Skift: Could you innovate elsewhere, too?

Gustafson: There’s a lot of talk about self-driving cars. Well, we have a ton of trucks and so forth. Maybe you should start there and have remotely driven tow trucks and stuff like that. So yes, I think there are opportunities for further innovation in our industry. But I don’t think we have been standing still. I do acknowledge we need to do more.

Skift: Later this year, you’ll innovate in another way: You’ll start a subsidiary in Ireland. Customers may not notice the difference, since the new airline will be called SAS and will fly traditional SAS routes. Why are you doing this?

Gustafson: You’re going to get a little lengthy answer because I need to explain this. It is important.

We primarily operate within Europe and our target audience … is those who travel frequently within Scandinavia. One major destination for us is, of course, London. There’s huge traffic between London and Scandinavia, both business and leisure. The competition to London is significant. To give you an example: If you want to fly from Copenhagen to London, you can select from 25 daily departures. You can fly with SAS, British Airways, EasyJet, Ryanair, or Norwegian. Out of those five carriers, only SAS has to recruit and employ in Scandinavia. The others have them employed either, in BA’s case, in London or for the others anywhere in Europe.

Now, the average perception among customers, [is] a good price to go to London would be maybe 30 or 35 euros. And if you know then 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.

[Editors note: Gustafson is speaking about competitors like EasyJet and British Airways, which base aircraft and crews in the UK, and thus schedule planes to fly London-Copenhagen-London. SAS, meanwhile, registers planes and hires crews in Scandinavia, so it flies Copenhagen-London-Copenhagen. To the passenger, there’s no difference, but SAS has higher costs.]

We said, OK, ‘Let’s set up a new production unit.’ We put up the [airline operating certificate] in Dublin. There is lot of competence there. And we hired a very skilled team. They’re going to operate out of two bases — one in London and one in southern Spain.

We’re going to deploy aircraft in London, and we’re going to hire people who are going to fly from there to Scandinavia. We’re going to do the same thing in southern Spain to make sure we can also take advantage of the growing leisure demand from Scandinavia to Spain.

It’s not a step-by-step move to take everything out of Scandinavia. This is to complement and protect our business and make sure that we have the best offer for our frequent travelers.

Skift: It’s 2017. Should SAS have tried this a decade ago, when it first saw the threat from low cost airlines?

Gustafson: It’s always easy to look back to what you should have done in the past when you sit there with all the facts. But I’d like to draw attention to that in the last 10 years, especially the last five six years. SAS has gone through some significant transformation. We have done more than any other carrier in Europe, and we have done that almost without any conflicts. We want to provide a fantastic product to our customs. We want to make sure that our 70-year history can actually continue into the future.

Skift: Norwegian Air has four operating certificates — two in Norway, one in Ireland and one in the UK. Some U.S. interests — mainly labor unions aligned with U.S. airlines — call this unfair. But many airline executives credit Norwegian with being a fierce and fair competitor. Do you believe Norwegian competes fairly?

Gustafson: They are tough competitors. I don’t say they compete unfairly. I don’t want to go there. However, I think that in Europe, the [rules] for how we should compete are a bit blurry. I think it would be helpful if the EU would step up and say, ‘OK guys, this is the playing field, these are the boundaries on this playing field, and this is how we all need to comply.’ I think that could be improved, the clarity around those boundaries so we all feel that we all have a level playing field, and we all operate within the same boundaries. I think that’s the issue, not that they’re doing something unfair.

Skift: You compete directly with Norwegian on some transatlantic routes, including Copenhagen-New York, and indirectly on others, like Copenhagen to California’s Bay Area, and Copenhagen to South Florida. But you bundle more free stuff in your fares, such as meals, and some advanced seat assignments. Do you still have to match Norwegian’s fares because customers expect it?

Gustafson: Yeah they do. They do. But when it comes to the [premium] game, there is a significant real demand for a good business product, which as of today, [Norwegian] does not have.

Skift: Norwegian has shown customers will pay for things that used to be free, so long as fares are cheap. Might you follow at some point?

Gustafson: We haven’t made that final decision, but the answer is yes. We’ve seen that what we’ve done in Europe is say ‘OK, we need to de-bundle more in order to show up with the right price comparison.’ Why wouldn’t long-haul go the same way? I wouldn’t be surprised if we start to see more de-bundling.

Skift: Has customer acceptance of Norwegian’s model surprised you?

Gustafson: A little bit I would say, because customers are clever people. They are not stupid. They just see the price for the seat. But [when] everything else they need throughout the travel is presented to them — the bag and the food and so forth — then the total price is very different. I’m a bit surprised that customers are not actually taking that into the equation when they make their purchase decisions. But it is what it is, and customers dictate what they expect from us and we need to comply.

Skift: You still give free food in coach on long-haul routes. Is that expensive?

Gustafson: Yes, of course it is. The biggest cost is not what you see. The biggest cost is not the cost for the raw material and the food itself. It’s more the logistics to get it on board, to actually produce it, and load it and all of that. That’s a significant cost.

Skift: For business class, you have a newish cabin with flatbed seats. How important is it to keep pace with other airlines?

Gustafson: It’s absolutely vital. In order to capture that market where there is a willingness to pay for a product that enables you to travel for work, you need to land refreshed. And if your product is not up to date with competitors, they will choose someone else. For us, it was absolutely vital to do this upgrade. We are extremely pleased with the product that we have today, and we are so happy about the feedback that we receive from many of our frequent travelers. They travel with our competitors as well, and many of them tell us that we have the best product in Europe at the moment. Of course, we feel good about that.

Skift: You’re expanding in the United States. Why?

Gustafson: Right now, we see a steadily growing demand for travel, and therefore we have been delighted to have been able to expand the footprint extensively in the past few years. We added Los Angeles, Miami, and Boston to the map. We have had a great response. And we see demand picking up. We are excited about it, and there might be even more opportunities going forward.

Skift: Do you find U.S. tourists visiting Scandinavia? Or do they just connect to elsewhere in Europe?

Gustafson: No, I think there are a lot of people coming to Scandinavia from the U.S. to explore what we have to offer. Of course there’s a lot of business traffic. We should not ignore that. Scandinavia is also known for its innovation, so there’s a lot of connectivity between California and Scandinavia from a business point of view.

Skift: What about Europeans coming to the United States? There has been anecdotal evidence that some Europeans are skipping a U.S. visit this year, in part because of American political turmoil.

Gustafson: So far, we haven’t seen any change in the booking patterns. There has been some media coverage that interest in the U.S. should have dropped and so forth. But we haven’t seen that in figures.

Photo Credit: SAS CEO Rickard Gustafson is tying to make his carrier more nimble so it can take on both low cost carriers and full-service competition. Peter Knutson / SAS