Farewell SAS, Welcome Icelandair - One Year Later

Today, July 31, 2010 marks the one year anniversary of the departure of SAS from the Seattle market after 43 years of service. Eight days ago on July 23, Icelandair celebrated their one year anniversary in the Seattle-Keflavik market. This article is to discuss the changes in the market after the departure of SAS and how Icelandair has performed in the year since they entered the market.

First, a bit of history. SAS started nonstop service between Copenhagen (CPH) and Seattle in 1966, first with a DC-8, then as they introduced larger aircraft into their fleet, the 747 in the 1970s, the DC-10 in the 1980s, the 767-300 in the 1990s, and finally the A340-300 in the 2001-2009 period. They were the first airline to offer a true Business Class product in the Seattle market and eventually, the first airline to offer a two cabin service, eliminating First Class in 1990. The rise of SAS in this market is largely due to the large Scandinavian home community here in the Seattle area as well as excellent connections beyond Copenhagen to points in Europe; more favorable than its competition, which for many years was only Pan Am and later British Airways over Heathrow.

The beginning of the demise of SAS in Seattle happened with Star Alliance came into existence in 1997, in which United, Lufthansa, SAS, Varig and Air Canada launched into a joint venture which has ultimately turned into the largest airline alliance in terms of airline participants. The concept of "code sharing", in which an airline puts their code on another airline's flight allowed greater visibility in the distribution computers of travel agents and later, the Internet as it became used for direct booking of airline travel. When SAS joined Star Alliance and began code sharing on United's flights, it lost one ally in the Pacific Northwest - Alaska Airlines.

As Alaska Airlines began to grow in dominance in the Pacific Northwest, it began to make selective code share marketing agreements with Northwest and Delta, as well as American Airlines. When Northwest began SEA-Amsterdam service, Alaska was there to provide them feed, and the NW/KLM agreement provided feed on the other side of the "pond". This began to seriously hurt SAS's ability to serve markets beyond Seattle; markets which it desperately needed in order to maintain the profitability of the flight.

Additionally, the move from the smaller 767-300 to the larger A340-300 seriously hurt the profitability of the route as a result of the A340s higher operating cost. The additional 140 seats in the market with less traffic meant more discounting by the carrier. The flights were indeed full (SAS never averaged an annual load factor less than 80%), but the flights were not profitable since the move to the A340. In 2007, Lufthansa entered the market in response to Air France's entry into the Seattle-Paris market. The combination of Lufthansa's strategic position in the middle of Europe and access to a far larger number of destinations beyond, as well as their presence in Portland and Vancouver and Air France and Northwest/Delta who had their code sharing agreements with Alaska Airlines, crippled SAS's ability to compete in the European market south of Copenhagen. With the operating costs of the A340 and the need to house at least two crews here, the losses SAS was incurring on the route could no longer be justified to maintain a Scandinavian presence in the Seattle market. In February 2009, SAS announced their withdrawal from the Seattle market.

Within three weeks of SAS's announcement, Icelandair (FI) announced 4x/week service between Keflavik and Seattle with a 757-200ER. As a result of the nature of the operation, FI would bring the aircraft to SEA, overnight it here, then fly the aircraft back the following day with the same crew that brought the aircraft in the day before. This action, while seemingly odd (having an aircraft sit anywhere for 26 hours is costly) was a smart move as it did not require the housing of a crew in Seattle for more than one night and the ancillary costs of maintaining a block of hotel rooms on a daily basis for crews. Maintenance on the aircraft is done in Seattle while it is here.

So what has been the result over the last year?
In June, FI posted a 93.3% load factor on 44 flight operations (22 arrivals and departures). Their average load factor for the past 12 months has been an impressive 81% and as a result, they have added a fifth flight for the summer period which is planned to operate beyond the 2010 summer season. While load factor alone is not a barometer for the profitability of a route, the likelihood that they are succeeding on a profitability basis are actually quite high.

Why is FI doing so well? Three reasons:

1. The 757 is an extremely efficient aircraft over long distances. With only 186 seats, FI's capacity is only about 2/3 that of its competition. Fuel burn is about 60,000lbs to KEF while fuel burn to European destinations with larger aircraft is about 2-3x that figure. Fewer passengers means fewer crew (the fact that the flight is less than eight hours means that the operation can be flown with two pilots instead of three and six cabin attendants vs. 10-14 depending upon the aircraft.
   
2. FEED: Very few people actually are traveling to Keflavik, although as time goes on this situation will change. The vast majority of people are traveling to/from Scandinavia, a market in which FI operates a large number of flights. In fact, traveling to/from Scandinavia is actually more efficient now using FI than SAS was in the past, especially to Norway; the travel time over the previous SAS operation has been cut by almost three hours.
3. The ability of FI to act quickly on its opportunities: When Icelandair began operations to Seattle, they signed an agreement with Alaska Airlines to do reciprocal frequent flyer marketing and an enhanced prorate agreement that allowed AS passengers to feed onto FI's service and v.v. at less cost to both carriers. This expanded FI's reach beyond Seattle into markets previously held by SAS, especially western Canada in which traffic to Scandinavia is especially strong. Just last week, AS and FI announced a code sharing agreement whereby FIs code will appear on AS flights from SEA to destinations in the west and ASs code will appear on FI's flights from SEA to Keflavik. This enhanced visibility and associated revenue sharing agreement will only make the relationship between the two carriers stronger and in the Seattle market-Alaska Airlines is king.

Icelandair has done what it does best: Seize opportunities and capitalize on them by providing a low cost alternative to other carriers operating in a market. By being a niche carrier and serving the need of the Scandinavian community here, it doesn't need to fill traffic down to other destinations in Europe as the other carriers do to survive, although I will say that there will be more of that now that the AS/FI relationship is stronger and people come to discover the Icelandair product.

SAS was a victim of a series of events not completely of their own making; however, their decision to join Star Alliance and the consequence of the move away from Alaska Airlines in the Pacific Northwest along with their fleet planning initiatives (larger aircraft on its long haul routes) were two drivers to the loss of the SEA-CPH route. Will they return? Unlikely. They have a different set of issues to address which don't relate to the SEA-CPH route issue, but as a result of these issues, they do not have the ability to operate a SEA-CPH route profitably and if a route cannot be operated profitably in this current environment - it isn't operated at all.

The real winner is the Scandinavian home market in Seattle. We may well miss SAS and the unique brand of service they provided in this market. However, Icelandair has filled that niche with their Nordic sensibilities and in this regard, there is no reason to believe that Icelandair won't be around Seattle for the next 40 years.