SAS will discontinue its six weekly Houston – Stanvanger service in Winter 2015, operated on a 44-seat all-business class 737-700 operated by Privatair. The route commenced in August 2014 and was intended to connect two oil markets at a time when crude prices were $98 per barrel.
With oil prices now at $45 per barrel, without an indication of rising further, SAS has pragmatically decided to cancel the route and instead re-deploy the 737 in a 2-class reconfigured cabin (premium and economy) on its existing Copenhagen – Newark route.
Niche route plagued by unfortunate circumstances with low oil prices
The Houston – Stavanger flight was strictly designed to accommodate lucrative oil traffic as the market saw roughly 35 passengers traveling per day, each way (PDEW) prior to the route startup last August. However, given the reductions in activity in the oil industry, the flight struggled to achieve sustainable load factors with lower-than-expected levels of demand for an all-business class flight.
Stavanger has had to contend with not only losing its nonstop route to Houston this winter, but also will lose nonstop service on Air France to Paris (2 daily flights) and Lufthansa to Frankfurt (3 daily peak flights) around the same time as the SAS cancellation. Houston passengers will still have the option to reach Stavanger via British Airways, KLM or United/SAS through Newark and Copenhagen.
Houston has experienced a major increase in foreign carrier seat capacity over the past few months with the recent entrances from Korean Air in May 2014 as well as All Nippon Airways and EVA Air in June 2015. Korean Air and ANA have maintained daily levels of service to Houston, while EVA had initially intended to expand its Houston – Taipei flight from 4 weekly to daily in early February 2016, but has pushed back this extension until late March 2016.
Houston is also served by Qatar Airways, Singapore Airlines and Emirates, which have similarly felt the pressure from decreased demand for premium oil and gas (O&G) traffic. Emirates and Qatar compete for a sizable portion of O&G demand to and from the Gulf region and Arabian Peninsula, while Singapore Airlines provides a nonstop flight 5 times weekly to Moscow (which continues onto Singapore Changi airport) and also has tended to carry a large volume of oil traffic between Houston and Russia.
SAS has realized that capacity cuts are necessary for long-term survival
SAS has learned the hard way that it cannot afford to continue operating unprofitable or marginal long-haul routes over a long period in order to survive. The carrier posted a profit of $217M SEK for the 9 months ended in July 2015 (SAS’ 12-month financial period runs through the end of October each calendar year), a sizable improvement over last years’ operating loss of 628M SEK for the 9 month period ending July 2014.
SAS trimmed roughly 4.1% of its long-haul capacity year-over-year while its European and domestic network remained fairly flat. The carrier intends to grow its long-haul network elsewhere starting this month with a 5 weekly Stockholm – Hong Kong flight, along with a daily Stockholm – Los Angeles flight in March 2016 and a daily flight to Miami in Autumn 2016 (alternating between Oslo four times per week and Copenhagen three times per week). SAS also plans to boost capacity in existing markets such as Newark, Chicago, Shanghai and San Francisco.
As mentioned previously, the loss in the Houston – Stavanger flight will be back-filled by extra services to Newark, utilizing a higher-density configured aircraft that will still be able to fly nonstop from Copenhagen to Newark. While the drop in oil prices led to the curtailment of the Houston – Stavanger flight, it has enabled SAS to become less risk-averse in experimenting with growth in its long-haul sector, particularly from its secondary hubs in Stockholm and Oslo.
With eight Airbus A350s on order, a favorable fuel environment, a stronger balance sheet and a revamped in-flight product, SAS may be slowly getting its mojo back, even when speedbumps occur that fall outside of its control.