SAS’s Unpleasant Surprise

Partially owned by government? It is proving both a blessing and a curse for the Scandinavian airline company SAS, having given it both an air of state inefficiency and the reassurance of fail-safe protection.

Shares of the company, which is 50.0% owned by the governments of Norway, Sweden and Denmark, dropped Tuesday after the company reported a fourth-quarter loss of 2.8 billion Swedish kronor ($334.6 million) that was wider than even the more negative-leaning forecasts and said it was seeking 6.0 billion Swedish kronor ($720.0 million) in a rights issue. SAS shares sank by 8.80 Swedish kronor ($1.95), or 20.4%, to 34.30 Swedish kronor ($4.10), in Stockholm Tuesday morning. The rights issue announcement puts to rest any notions that the airline group is looking for a buyer. (See “Sending Out An SAS.”)

But it also makes the company look weak, according to Carnegie analyst Erik Gustafsson: “I think they will be able to get the money, but it will be tough with a lot of shareholders. They’ll be skeptical because SAS has been struggling to make money.” SAS also said it had swung to a fiscal-year loss of 6.3 billion Swedish kronor ($752.9 million), after taking a 4.9 billion Swedish kronor ($585.6 million) charge related to the divestment of Spanair.

Gustafsson is skeptical of SAS’s new cost-cutting pledges; the company is eliminating 3,000 jobs and selling stakes in subsidiaries like Air Greenland, BMI and Estonian Airways. “The problem with SAS is they’ve been making cost-cutting for so long, and you never really see it in the P&L [profit and loss statement]. They have for a long period of time been loss making or around the zero mark.”

Fortunately for the company, SAS’s 50.0% backing by governments places it beyond the risk of going completely bust, and its state owners are pledging to subscribe half the rights issue. Sweden’s powerful Wallenberg family owns 8.0% of SAS, making it the airline’s largest private shareholder, and it has also pledged to buy new shares of the firm.

Large airlines like SAS have been struggling in the economic downturn, as their bread-and-butter revenue source, business travel, drops off. “This will, for 2009 and in 2010, be a very tough market segment,” said Gustafsson, who has a “neutral” rating on SAS but a “negative” rating on the airline sector overall.