Why SAS will go bankrupt (most probably)

Leadership. Culture. Lack of change. Lack of innovation.
These are the factors that will drive SAS into bankruptcy. 

I love flying SAS. Always have. I think they have a great product with good service at a fair price. Yet, I still believe they will go bankrupt. Regretfully. And the main reason: leadership. Or more specifically, lack thereof.

This week I’ve had an interesting Twitter exchange with an highly engaged SAS-employee. That exchange prompted this blog.

Taking the cut

SAS’ troubles have been heavily featured in the news recently. The Scandinavian airline has lost most of its nok 11 bn equity provided by the owners over the last three years. Today, the national governments who own 50 % of the company, has said “no more government support’’. Well, they revised that to, ‘’no more government support – until you save nok 3 bn and sell off assets for 3 bn. Then and only then might we step in to save you once again’’.

So, SAS needs to shave nok 6bn of its cost structure, and do it fast. They need a plan; a good one. The company was scheduled to present this plan last week Thursday. They postponed it. Now, the date is set for Nov. 12th, tomorrow. I guess a lot of people are working around the clock this weekend to come up with a solution. But I am afraid they will fail. Not in the planning. That’s easy. But in the implementation. That’s the change part.

Why?
An absolute lack of leadership at the top level of SAS.

Hilarious leadership behavior

Over the last few days, sources close to SAS, have leaked cost-cutting ideas like “Employees’ salaries will have to be cut by 15 – 25%, effective immediately”. A good idea, and most probably a required one in the short run. But here’s the fun part.

Asked by the press how much the management team would cut its salaries by, the reply was “we don’t know”. An answer that’s easily interpreted as “nothing at all”. This caused a few prying journalist, most notably DN.no, to look more closely at SAS top management salary structure. And their findings are funny.

SAS CEO takes home a fixed salary of NOK 10 million yearly, and a  pension scheme that pays nok 3 million a year. Should he keep the CEO post until retirement, he will have a total pension package of nok 56 million.

Asked by the press, SAS press officers stated “he has a competitive pay package on market terms”. Hahaha.

First of all. Nobody should take home a fixed salary of 10+ million in a company that’s losing a cool billion a year. Nobody.

Second. If we were to compare SAS vs. Norwegian:

SAS Passenger flown pr. employee (metric for efficiency in business model): 1818

Norwegian Passenger flown pr. employee: 6400

SAS market value: 1,79 bn nok

Norwegian market value: 4,35 bn nok

SAS annual result: -1,7 bn nok

Norwegian annual result:  167 mill nok

Fixed salary SAS CEO: 10 million

Fixed salary Norwegian CEO: 1,3 million

In fact, SAS’ CEO takes home more than the entire seven person management team of Norwegian combined. That’s one CEO losing billions taking home more fixed salary than the entire management team of their main competitor, combined.

The stockmarket has seen this coming for months.

Development in share price SAS (orange) vs. NAS (green)

Change o’hoy

This wouldn’t be an issue if SAS was profitable. But it is not. It’s been losing an average 1,3 bn  a year recently. In fact, the company needs to cut 6 bn. It needs to cut 3 bn in salaries. It has hinted at employees to take a 15 – 25 % pay cut. But the CEO is not taking part in it.

Back to the Twitter conversation with the engaged SAS employee:

I wrote:
‘’#CEO #SAS has zero credibility with 10 million in fixed salary – and demanding cuts by others. He should cut 90% of his fixed salary”

Her reply:
“The CEO taking 90% pay cut would earn the same as a captain. Sure, I agree, but is it likely?”.

Well. Not only should it be likely. It should be a requirement. SAS is facing perhaps the most challenging moment in its history. There is a very real chance of imminent bankruptcy. Turning this situation around requires significant and massive change. Now. Doing so requires leading by example. Managing this change requires true leadership. Handling unions who refuse to discuss any lay-offs or salary cuts makes it an requirement. SAS employees are fuming already.

The airline industry has a long history of poor leadership, strikes and forced bankruptcies. There are two one significant exceptions: Southwest Airlines and JAL. Southwest Airlines has a long history of managing change, managing external disruptions and handling difficult times. Looking into CEO compensation at Soutwest Airlines reveals a series of voluntary pay cuts over the years.

Herb Kelleher, former CEO says about tough times: ‘’you should share it. When we were experiencing hard times two years ago, I went to the board and told them I wanted to cut my salary. I cut all the officers’ bonuses 10%, mine 20%.”

Japanese JAL, successfully managed a dramatic turnaround between 2008 and 2010. As one part of this process, CEO Haruka Nishimatsu cut his own salary below that of the airline pilots. Financially significant; not really. Symbolically important; absolutely.

If SAS is to have any kind of chance to survive in, the CEO and management team will have to lead by example. This means cutting costs. Starting with their own. By 90%. Then, and only then, does the leadership show that they are willing to walk to walk. Not just talk the talk.

Will they?

Cutting is not future

But, regardless how much SAS will be able to cut, I am afraid it’s too little, too late. Steve Jobs once said: ‘’The cure for Apple is not cost-cutting. The cure for Apple is to innovate its way out of its current predicament’’. SAS has been cutting costs and searching for a strategic direction for the last 10+ years. This is the reactive side to change.

The essence of change: innovation

The essence of change management is innovation and creation. Creating the future. Creating a better tomorrow then yesterday. Stir up the positive emotional forces of the organization and the greater eco-system and direct them towards a shared aspiration. Reinvent dying industries. Create new markets. Launch new business models. Shape the future, don’t get shaped by it. ‘’Lean into the future’’, to quote Amazon CEO Jeff Bezos. This is the proactive side to change. “Change is fun”, says former GE CEO Jack Welch, “because we are the ones doing it”.

Strategic innovation needed

When I look at SAS today, I see a company stuck in the past. I see a reactive company. The mindset, the technologies, the fleet of out-dated aircrafts, the layers of management believing they should earn the same salary as the CEO of Statoil.

What I don’t see is a mindset for innovation. A proactive mindset to create the future. To be bold. To invent new business models. What I don’t see is a flexible organizational structure and organizational culture that is reinventing themselves and the industry. What I don’t see is a company crying out “we want to become the world’s greatest airline; and our strategy as revolution mindset will make that happen”.

“Forget everything you know about long distance flying. Welcome to the long distance revolution”. That’s this week’s ad campaign, signed by Norwegian. It could have been SAS. It’s not.

Why SAS will go bankrupt (most probably)

Kodak and its inability to change: a tale for many

The Jan 14th issue of The Economist published a truly excellent article on disruptive innovation and change management. We’ve long known of Kodak´s troubles. But few mainstream newspapers or magazines have written such an insightful piece as this.

Kodak was, as the Economist writes, the Google of its days. Highly inventive, highly innovative and successfully rolling out new, sustaining innovations. This lead to a 90% market share in film (can you spell market leader) and 85% of camera sales in the US. Well into the 1990’s, Kodak was rated as one of the world’s most valuable brands.

“By 1976 Kodak accounted for 90% of film and 85% of camera sales in America. Until the 1990s it was regularly rated one of the world’s five most valuable brands”. In fact, In 1996, Kodak was ranked the world’s fourth most-valuable brand behind Disney, Coca-Cola and McDonald’s….

Then digital hit. At least, that’s what most people seem to believe.
But in reality, Kodak had been sitting on the Digital Camera and digital technology since 1973. Only they were afraid of the consequences…

Kodak engineer, Steven Sasson is credited with inventing the first digital camera in 1975 (first prototypes in 1973). Only to put it away for years…..when the company started developing its digital strategies, it was too little, too half-hearted and eventually too late. Starting 2000, the speed and size of the digital shift increased to the point of driving Kodak into a death spiral. Yet, Kodak was attemting to innovate. Using the framework of the Innovation Pyramid , Kodak did innovate on level one (Design and marketing) and level two (Products). The company failed, however, in level eight (business model innovation). So despite its launch of digital products, the lack of transformation on the business model level led to the eventual death of Kodak.

On January 19th 2012, Kodak officially announced the results of some 15 years of failed transformation. The company filed for “Voluntary Chapter 11 Business Reorganization” or Bankruptcy. For special interest, you can read the filing here.

The company´s success and downturn makes for a world class case study in the failures of leading change.
This 2006 Businessweek article “Mistakes Made On The Road To Innovation..
.” paints some of the inner life challenges Kodak had. Analyzing Kodak against the likes of Apple, DELL, IBM and Cisco, reveals what could have been if the company had been able to change.

At it´s peak Kodak employed 144.000 people. Today it has less than 14.000. Soon, only a handful. Analyzing this article reveals layers of layers of innovation challenges. The last Kodak moment? is an article students and executives should study and learn from. It holds a series of truths valid for all companies across all industries: successful innovation requires successful change management.

For a truly amazing 368 slide journey in the history of Kodak, we urge everyone to view this incredible presentation by Christian Sandstrom.

Trying to understand the decline of Kodak from a stock market analyst perspective is also very revealing. For an analysis of how stock analysts look at the paradigm shifts in disruptive innovation, lean back and enjoy this slideshow.

All images from The Economist.

Gallery

Implement strategy: involve and engage

Our friends at Implement Consulting Group shared an excellent visual presentation on change management and strategy execution.

Thought Leaders 2011 – Executive Summary from Implement Consulting Group on Vimeo.

Thanks, Implement!

Implement strategy: involve and engage