‘Daring’ Virgin wakes up its Nordic rival

Date: 24/10/1996

By Tim Jones

THE charmed life of Scandinavian Airlines System (SAS) over the past 50 years has come to a sudden end.

The company, formed in 1946 by the national airlines of Norway, Sweden and Denmark and dominant ever since in its constituent markets, is finally coming face to face with open European skies.

Taking advantage of the liberalisation of civil aviation in Europe, British billionaire and Virgin Express boss Richard Branson decided in September to compete with SAS on its Brussels-Copenhagen route, cutting single fares to 70 ecu - well below those on offer from the Nordic airline.

Already up against domestic competition from Transwede and Malmö Aviation, SAS has started to wake up.

“Virgin has been a dynamic factor,” admits Hans Ollongren, the newly- installed European director of the company in Brussels.

“Nobody can deny that. What Virgin will do is generate a significant increase in demand and encourage a number of people who would not normally fly, but take the car instead, to take the plane. People who previously travelled only two or three times a year may now travel once a month.”

When Virgin bought 'no-frills' carrier EuroBelgian Airlines for 45 million ecu in April, its intention was to identify over-priced destinations out of Brussels and offer customers uniformly priced, fully transferable tickets on those routes.

Branson wants to turn Virgin Express into a European version of Southwest Airlines, the company founded in Texas 25 years ago which specialises in no-extras, quick turn-round point-to-point flights.

“They are very daring,” acknowledges Ollongren. “They use non-traditional methods in their marketing while we are more careful, but it would be stupid of us not to take advantage of the extra demand that has been created. What they are doing is good for Virgin, good for SAS and certainly good for consumers.”

So why did SAS not cut ticket prices itself? “We have been far too careful,” confesses Ollongren.

Nevertheless, jumping on the extra-demand bandwagon, SAS slashed its cheapest economy class fares on three of its ten daily flights to and from Brussels and Copenhagen to compete with Virgin.

Jonathan Ornstein, the feisty American imported by Branson from Southwest to run Virgin Express, was furious. SAS, he said, was deliberately cutting fares only on the flights that competed with the new Virgin service to Copenhagen around lunch time. Moreover, he alleged, SAS was cutting fares below its costs.

Virgin sent a letter of complaint to Transport Commissioner Neil Kinnock, asking him to end these anti-competitive practices.

Ollongren may be ready to admit errors regarding his company's conser-vative approach to marketing, but he is not prepared to give ground to Virgin on the Brussels-Copenhagen affair.

“They say we have cut prices on flights timed close to theirs. This is more a coincidence than anything else. These just happen to be the flights where we have a lot of seats available. It would be very stupid if we cut the fare on flights that have a high load factor (measuring the number of seats taken). That could not be economically justified,” he insists.

On these flights - two from Brussels around midday, and one from Copenhagen in the early afternoon - load factors were just 30-40&percent;.

So, if SAS knew this, why did the company not cut ticket prices before Virgin arrived to make it happen?

“We kept them because we have a high load factor in the opposite direction. In Brussels, we often have this peculiar situation with good loads in one direction and bad in the other due to the character of the traffic here,” says Ollongren.

He rejects Virgin's suggestion that fares were cut below the costs of the flights.

“Something that Mr Ornstein seems to ignore is that we only sell a small number of seats at that fare, so you have to look at the total income on a particular flight. In any circumstances, these fares are certainly above our variable costs. We would never offer a fare below variable costs, not even to one consumer. Each rotation has to be profitable on its own merits,” he says.

In Scandinavia, SAS has been affected by competition, but this has not - at least so far - had the effect of boosting rivalry on a particular route.

For example, when Transwede arrived on the scene to fight SAS for traffic on certain routes within Sweden, the established airline merely pulled out.