KLM Cityhopper, SAS Execs See Uncertain Winter Ahead

0:00Mikael Wångdahl: 1.5's direct air capture technology is designed to capture CO2, helping you address hard-to-abate emissions with high-quality carbon dioxide removal credits. Learn more at 1.5.com.

0:23Maarten Koopmans: Hello, everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm Air Transport World, Europe and Africa Bureau Chief, Victoria Moores, and I'm delighted to welcome you on board. This week, we're at the European Regions Airline Association General Assembly in Belfast, Northern Ireland. Now, ERAA is a body that represents 58 European airlines and more than 150 companies involved in European aviation. And today I'm joined by two of those airlines, so representatives of KLM Cityhopper and also SAS. So specifically coming from SAS Group, I've got VP for Airline Operations and External Production, Mikel Vangdal, and also KLM City Hopper Managing Director, Martin Koppmans.

1:12Maarten Koopmans: Welcome.

1:12Mikael Wångdahl: Thank you very much. Thank you.

1:14Maarten Koopmans: So thank you very much for joining me today for this episode of Window Seat. We just had a couple of very busy days hearing about the state of the European regional airline industry. Obviously, there's a lot of pressures out there, particularly cost pressures and regulatory pressures. I'm wondering to each of you, maybe starting with Mikael, did you hear anything that surprised you during the discussions here in Belfast?

1:39Mikael Wångdahl: I think most of the things that's been discussed are also the topics that we experienced today. And I think one thing that makes you maybe more concerned year on year is the aging fleet, and especially on the smaller aircraft, and also serving the smaller routes or the regions out in the outskirts of Europe. And the challenge there where they have really, really high, very long utilized aircraft have been utilized for many, many years. And there is not really any replacements. And the discussions on how to solve that is starting to be more and more of a concern in my reflection.

2:25Maarten Koopmans: And one of the things that we also heard coming into the conference is this idea of, obviously, regional routes could be used as a bit of a technology test bed for new entrants, new technologies. However, regional airlines, they don't really have the capacity to take that new technology risk. And is that really fitting into the kind of segment that you're looking at for the replacement? Is that still too small at this stage?

2:50Mikael Wångdahl: Yeah, I think what you look at is that you can look at the operating cost and the new technology, how that will develop and the footprint on the emission, which is, of course, very important. But the investment into the new technology is the burden for the smaller carriers. And how do you want to solve that capitalization of those investments?

3:13Maarten Koopmans: Yeah, absolutely. How about you, Martin? What have you been hearing at the event?

3:17Mikael Wångdahl: Well, I'm positively surprised that although we are in tough times and everybody is focusing on survival, that there's still the will to drive the way to sustainability. So you saw on the conference that there was still a lot of focus on it. A couple of years ago, it was all about sustainability. Then we get into more tough times and we focus on survival. But I'm happy to see that we don't keep our eyes closed for the future. We are here and we as smaller airlines will be the first to carry that new technology. And yes, it's not there yet. But I'm very happy to see that we still have that focus together.

3:54Maarten Koopmans: Yeah. Like you say, despite the headwinds, because I mean, times are challenging right now for regional airlines in particular. But despite that, there has been a real sense of how are we going to fix this problem? How are we going to move forward and how are we going to do that in both an environmentally and financially sustainable way to maintain the essential air links that you guys provide?

4:18Mikael Wångdahl: Yeah, because we as KLM City Hopper want to lead the path, but we need to run a business. If it's unpayable, then it won't happen. So we need help there as well. Yeah.

4:31Maarten Koopmans: You mentioned about running the business there. It really strikes me that each of you has a very different model for your airline operations within your regional sectors. So for KLM Cityhopper, you've got all of your own fleet. It's basically an all Embraer e-jet fleet. And over at SAS Link, you're much more dependent on outsourcing of the model. You've got your own internal embryo operations, and then also you go to a lot of wet lease providers. So I'm wondering, what are the specific challenges right now within each of those different models? Again, maybe starting with Mikael.

5:08Mikael Wångdahl: Yeah, no, I think for us, we have our SAS mainline, SAS Scandinavia, is the airline that is wet leasing in capacity from different sources. And that is SAS Connect and it's also SAS Link, the Embraer operator within SAS. So we have an internal wet leasing. So we don't run our own business, how do you say, brands or sales. It's one sales. In addition, we also use capacity providers such as CityJet and Bra and JetTime and DAT and other airlines that fits our seasonality needs. but also specific size of aircraft where we see that working with partners that is really specialized in those segments makes sense.

6:00Mikael Wångdahl: Yeah, so where we have the smaller volume in the traffic, we use partners that are specialized in working under those conditions.

6:10Maarten Koopmans: And it strikes me that some of those partners have also been under pressure as well. the capacity providers within Europe. So we've seen a lot of regional airlines diversify their business into doing scheduled flying plus wet lease work that companies like Braathens have been through. That's Bra, one of the companies you mentioned, have been through some very tough times themselves. And I imagine that that really impacts into the relationship between you and your capacity providers.

6:35Mikael Wångdahl: Yeah, it does. And I think several of these small providers, they have one big problem is that they can't really expand their brand outside their local region. And they are dependent on working together with larger brands and through code shares, interline agreements, and so on and so on. But still, it's difficult for them to reach out and expand on that. So for instance, Brawl, they found out that they wanted to change their business model completely and become a full-service ACMI provider instead. So one part of them entering out of their difficulties was to do exactly that. And then we started to work with them with the strategy of them serving our ATR capacity through our network.

7:31Maarten Koopmans: Okay. Moving along to more of the fully in-house model, what are the main challenges that you face with that, with having your own insourced fleet?

7:40Mikael Wångdahl: Well, I think it gives you a lot of control, but you have to account for the seasonality, as Michael is saying as well. So we are the capacity provider for KLM. We fly more than half of KLM's European network, but we also have some parties that we lease in as well. So most of it we do ourselves, and then for seasonality reasons, we also are able to get a few wet lease partners in. But we have a large fleet, almost 60 aircraft. We have a fleet of E1s and E2s, so fairly the same fleet, which means that you can optimize, if you have such a large fleet, you can optimize your own production, your own maintenance, those kind of things.

8:24Mikael Wångdahl: So I think being this size gives you the opportunity to do more yourselves and be more efficient. And I think one of the differences between us is that also the geographical, location. So we're in the outskirts of Europe. So in the domestic parts of our regions, it's quite small passenger volumes. And to serve those, we need to have a longer or a wider range of seat capacity or seat alternatives for the fleet to make these routes profitable. Yeah, because we can do with the 88, 100, 136 seats. We cover the whole network. And of course, every flight is a connecting flight. So one flight from Linköping or one flight from a smaller airport in the UK brings you to Stiphol and then the whole world.

9:16Mikael Wångdahl: So that also feeds into a lot of extra traffic. And we're happy to do with the fleet we have.

9:23Maarten Koopmans: Sticking with that theme of fleet, it seems so you are both pretty good customers for Embraer. So SAS has placed an order for 45 E2s. you already have 25 E2s and you've got 25 options, which you're currently considering whether or not you're going to go ahead with firming them. I'm wondering about that fleet development on the Embraer side. So what kind of a difference is that going to make to your activities as SAS?

9:53Mikael Wångdahl: Well, today we have on the turboprops, serving the shorter destinations, we have the ATR-72s, And then we have CRJ 900's 90-seat operation for our regional operation, the longer sectors, but still lower density airports. The difference it makes is that one, is that we can expand our business from the CRJ to a slightly bigger aircraft being the E2. We can match that more effectively also with the Airbus 320, where we might also be able to do some down gauging, where we can move the A320 capacity to other places where we can make more use of it. And the combination of the large and the mid-sized aircraft on European routes makes a higher flexibility to secure frequencies and also the range on the E2 and the capacity of carrying baggage and so on compared to a smaller regional jet.

10:56Maarten Koopmans: You already mentioned that obviously you've got a very diverse network. You need to serve different routes with different capacities, which is why you've gone for that wet-leasing model plus the Embraer's. Could you see the Embraer's replacing any of the capacity that you're already wet-leasing in or perhaps replacing some of the A320 needs that you might have?

11:18Mikael Wångdahl: Yeah, and it does. Today we have 16 MRA-1s, and so they will also be part of the fleet rollover into the E2s. But at one stage we had almost 25 CRJs, and from this winter we have 11. So, yes, we are replacing the fleet with a midsize over time. If it's completely going to be a one-to-one later on where we eventually remove the CRJ, it's still open to see because there is still a market in that segment where the E2 might be too big. The question is rather what will be that replacement capacity? Is that a CRJ or is it something else? Because the CRJ is also out of production. So it's getting older and the supply chain around that aircraft has all a difference.

12:16Mikael Wångdahl: And as a network carrier as we are, we are utilizing these aircraft quite a lot compared to smaller regional operations because we are combining them with the short and the long sectors and can put them into our network in other means to keep the production up. And therefore, the quality of the equipment is so important so that it can keep the performance.

12:47Maarten Koopmans: Moving back to KLM Cityhopper, obviously you've got this fleet decision coming up. I understand that you're looking to move to an all E2 fleet all E2-195s. Yeah. How would that then impact you in terms of the diversity of the fleet? Because you would lose the different capacity gauges.

13:07Mikael Wångdahl: So currently we have an 88-seater, a 100-seater and a 136-seater. From an operational perspective, you would like to have one aircraft only, one type. It helps on every aspect. Rebooking, it's just changing. Three letters, that's it. Equipment, training, everything. So yes, but then you lose the variety. So we're thinking of smart solutions for that. I cannot explain exactly what we're planning to do, but we might combine the two in a way. Combine the two in what way? Having one aircraft and still offer different sizes. This sounds a bit strange, but give me some time. Maybe in a couple of months or a year or so, I can tell you what our plan is.

13:53Maarten Koopmans: I can tell I'm not going to get anything further out of you on that one.

13:57Mikael Wångdahl: We're not that far yet. Okay. But from an operational perspective, it's really helpful to have the least types that you can have. It simplifies your operation so much. When you see the complexity of the airline industry at this moment, it's really necessary, especially a skip hole, to simplify, simplify and simplify.

14:15Maarten Koopmans: And it all starts with the fleet. Because you are operating in a constrained home hub.

14:21Mikael Wångdahl: Highly constrained home hub.

14:23Maarten Koopmans: That must make things challenging. You've just been recognized by ERA for your technology leadership. What would you say is your flagship technology project that you're working on within Cityhopper that perhaps other airlines aren't necessarily as engaged with at this point?

14:41Mikael Wångdahl: Well, I think there's a few things. It's never just one thing, but let's keep to a few things. I think what we're doing with AI and predictive maintenance is we're quite ahead. And we've saved over$5 million in the first year we have introduced AI into predictive maintenance. So that helps a lot. We have done a lot of change to our pilot training. Pilot training is quite expensive. And we are able to do that right now with VR. So that saves on actual flights, but also on simulator training. So that's an important one. But there's also other innovations. And I think in the beginning, we talked about sustainability.

15:24Mikael Wångdahl: We need to push also the demand for SAF. So we have decided also to sell 100 % SAF tickets to see how the market will react.

15:34Maarten Koopmans: Do those 100 % SAF tickets actually reflect the actual cost of the SAF? Or are they a contribution towards the cost of the SAF? No, no, no. In this case, when we did this, you have to make it real.

15:46Mikael Wångdahl: Yeah. But the premium at that time, it was the shorter flights, Amsterdam-London, Amsterdam-Hamburg, was 27 euros a stretch. But what you see in practice, there's a big say-do-guet. So a lot of people say they are very involved, but they feel it's our problem to solve. Okay, I understand what you say. But as we already discussed, we're in a very difficult industry, very small margins. So if we want to use more stuff and we want it, we need help from Europe. Europe needs to start understanding their position with the geopolitical issues we have right now, the enormously high curating prices. This is the moment to step in and come with an alternative and scale up that alternative for us to be affordable, right?

16:36Mikael Wångdahl: Because it's not affordable at the moment, a big scale.

16:39Maarten Koopmans: Okay, you've given me a great link in there. you're mentioning scale. Talking of scale, that brings us on to consolidation in Europe. The two of you are obviously operating as independent businesses right now. You're not able to do anything more than that. But KLM Cityhopper's parent company, Air France KLM, is getting very involved with SAS. They're hoping to increase their stake that's going through competition clearance at the moment. In theory, we're not talking about in terms of you having discussions here, but in theory, where would you see the potential synergies between your two businesses?

17:15Mikael Wångdahl: Well, given the fact that some of the fleet is the same, I think there is there are synergies in maintenance, but there will also be synergies in network. Probably, as you said, we haven't been able to discuss. Michael and I have been on the board for a while, but we keep that really, that's really a Chinese wall there, but you can see where we can win together and i think there there is quite some opportunities starting with with the with maintenance and everything fleet involved and i think yeah and i agree and i think uh if you start with the first immediate part is of course the development of uh our hubs because it's constrained hubs in europe and how do we develop that how do we how do we increase our customer proposition That is probably the first one that is going to be on focus.

18:08Mikael Wångdahl: But you have a lot of logistics behind an airline. So, for instance, you have sometimes asked me already today for capacity and so on, as we do as just two independent businesses. So there is a lot of areas there where you can actually look into to see synergies. we've talked about when you train a pilot you have huge investments on simulators and so on and it's a high seasonality and it's also dependent on need how can you develop that further and making sure that we become cost effective in areas where we actually can complement each other there are several areas into this

18:50Maarten Koopmans: Would you be able to cooperate on things like backup aircraft or would that not be practical?

18:56Mikael Wångdahl: You can Yes, I think when it looks into backup aircraft, you have one thing is the backup aircraft on the day when things happen. You want to have that relatively close to your business. So that means that you want to have an aircraft in one of your hubs. So because you have the crew there, aircraft breaks down and the crew can go into the next aircraft. but when it looks in it comes into a period where you might have a more severe issue not severe on safety but severe on you have an engine issue or something it's going to take you two three days to solve that one and and and you might looking for excess capacity from elsewhere you can you can use each other capacity by wet listening to each other and that is of course possible already today if we want to yeah right now it's more complex of course but in in the future that might that might become much more easy and it helps that that's who knows what happens with TAP but in their fleet the same kind of aircraft so I foresee a future where we can really help each other out more intensively than we do today and easily than we do today and will that make a difference absolutely because as I said not only at Skitball but everywhere the walls are coming closer I would say in operation so it's very complex and we have to pay high non-performance cost on every flight that's not flown so anything where we can help each other out it really helps our business and when you see what we have to pay EU261 for problems that we don't want to to have then this kind of help this extra capacity is something important absolutely

20:39Maarten Koopmans: Just about up for time now. So in a nutshell, looking forwards through the winter that's just to come with the limited visibility that we've got for next summer. What are you anticipating? What's your immediate outlook for each of your businesses?

20:54Mikael Wångdahl: I think not only for SES, but I probably say the obvious, but that's fuel, fuel, fuel. we are under a word of hurt on the challenges we have with the fuel prices how they they rise in and how that affects so even if you have a healthy business it affects your bottom line severely and your cash exposure and and also your your your strategy on risk because how long will this keep on going i i think that's where we put most of our discussions at the moment absolutely I think both of us were probably covered by a fuel hedge, but now this last quarter, the prices really kick in. So it's going to be a tough winter.

21:39Mikael Wångdahl: It's going to be a tough winter. And if the prices of oil don't change, this might influence our network and might force us to make some choices. And the difficult choices you're making is because you can start, how do you say, compensating by reducing traffic. But also a challenge is that you normally also prepare for the next season during the winter. So when you go down, you also have to make sure you can go back up in the summer. So if the market goes back. So what is that balance? How much can you compensate? And when is it time? And how long will this last? that if you can help me with answering that, then you would be our senior advisor for life.

22:23Maarten Koopmans: It just sounds like a job opportunity there. For, just in terms of a nutshell, capacity, what capacity are you looking to add each of you through winter into next summer? Or is that still under evaluation for next summer?

22:36Mikael Wångdahl: It's still under evaluation. And when I look at the fleet, we have quite an optimistic plan, to be very honest. And there is growth in that plan, but fuel prices will decide a lot whether we go through with that yes or no.

22:49Maarten Koopmans: Okay.

22:50Mikael Wångdahl: Yeah, and yeah, the same here. Echo that. And what we do is also we're looking into, how do you say, since we have a seasonality curve, it says also how much extra capacity do we bring on and how much risk is that? So that's our concern right there.

23:06Maarten Koopmans: All to be decided. Well, it sounds as though we're going to be signing off with a bit of uncertainty there about how things are going to develop. Again, it's back to that theme of the challenging cost base right now in the business. But thank you so much for taking the time to speak to me, especially during such a busy conference. I really appreciate you joining us. Thank you for having us.

23:25Mikael Wångdahl: Thank you. Thank you very much.

23:26Maarten Koopmans: Thank you. And also thank you to our producers, Guy Fernieho and Corrie Hitt. And of course, a huge thank you to our listeners for following Window Seat. Make sure you don't miss us each week by subscribing to the Window Seat podcast on Apple Podcasts or wherever you listen. This is Victoria Moores disembarking from Window Seat.

23:53Mikael Wångdahl: 1.5's direct air capture technology is designed to capture CO2, helping you address hard-to-abate emissions with high-quality carbon dioxide removal credits. Learn more at 1.5.com.