Scandinavian Airlines System and Texas Air, the largest airline company in the United States, signed a major agreement Tuesday to coordinate their advertising, scheduling and reservations and giving SAS the right to buy up to 10% of Texas Air’s stock.
SAS’ investment in Texas Air, which owns Eastern Airlines and Continental Airlines, will represent the first stake in a major U.S. carrier by any foreign airline. The value of 10% of Texas Air’s stock at current prices would be about $58 million.
SAS also agreed to pay Texas Air $50 million over the next few years in return for the marketing tie-up.
The agreement clearly is aimed in part at helping to improve the reputation of the two Texas Air carriers, both of which have had serious service problems in recent years. SAS, in turn, will get a strong feed of Texas Air’s domestic passengers onto its transatlantic flights.
“This is the beginning of a trend,” said Kevin Murphy, airline analyst with the New York brokerage firm of Morgan Stanley. “All of the European airlines will now start scurrying for American partners. A lot of the foreign flag carriers want the U.S. domestic feed and the resulting incremental passengers.”
However, the agreement is not the first between U.S. and foreign airlines, but it is unique in some ways. United Airlines, the biggest U.S. carrier, agreed last year to set up a worldwide marketing partnership with British Airways. But that deal did not include an equity stake in United for British Airways.
Texas Air Chairman Frank Lorenzo said at a news conference here that talks between the two transportation companies had been going on for nine months. He would not deny in an interview later that the agreement will help his company improve its stature and its reputation.
“We were looking for a global partnership, and we went after the best,” he said. “I learned when I was a kid that when you associate with the best, you get better.” SAS has been ranked high in polls of airlines for its superior service.
Jan Carlzon, president and chief executive of SAS, will become a member of the Texas Air board as part of the agreement. He conceded in an interview that his company’s primary consideration was to be able to tap into Continental Airline’s “most extensive traffic system out of the New York area to different parts of the United States.” But he added that he was also impressed by Texas Air management’s “dedication” to service.
“My experience, investigation and research has shown that the Continental service is as good as any other American airline,” he said. “What is most important for us is the dedication shown by management to go for higher quality service as a competitive strength.” He added that SAS’ new involvement with Texas Air will play a role in helping Continental to improve.
As part of the agreement, beginning next May, SAS will operate passenger service out of Continental’s new terminal at Newark International Airport, becoming the first major carrier to fly transatlantic from Newark. Passengers from throughout the United States will get one-stop service to Scandinavia via Newark.
A similar arrangement is contemplated in 1991 for Eastern’s terminal at New York’s John F. Kennedy Airport when extensive renovations there have been completed.
SAS, besides its European routes, flies between Scandinavia and four U.S. cities: New York, Chicago, Los Angeles and Seattle.
SAS’ first installment of $25 million will be paid to Texas Air soon. This will be followed by a $15-million payment to Continental and a $10-million payment to Eastern as joint operations come on line.
Lorenzo was asked in the interview whether the SAS investment in was in any sense a financial “rescue” of Texas Air. “Goodness, no!” he exclaimed. “The company is not for sale.”
The three carriers will coordinate marketing efforts, information systems and frequent-flier programs. Eastern and Continental sales personnel will represent SAS in this country wherever SAS does not have its own employees.
The two companies will also create what is to be known as the Texas Air-SAS Quality Service Institute. Within two years, 40,000 Eastern, Continental and SAS customer-contact workers will train there. The institute will be situated in the United States, Carlzon said, possibly in Miami or Houston.
“The SAS training is the best in the aviation business,” said Hans Plickert, airline analyst with the New York-based financial firm of Merrill Lynch, Pierce, Fenner & Smith. “That kind of access and expertise will be a plus for Continental and Eastern. Teaching them the techniques cannot hurt. But can European service niceties be transferred to American flight crews?”
SAS Approval Needed
SAS will purchase its shares in Texas Air on the open market within six months, Lorenzo said. Wall Street insiders noted that such purchases do not have to be agreed to by the company whose stock is being acquired but that it was probably a quid pro quo for Texas Air putting SAS’ president on its board.
The U.S. Department of Transportation must approve the purchase of 10% or more of any U.S. airline. But a DOT spokesman said that, contrary to what Texas Air had announced earlier in the day, it had told Transportation that SAS planned to purchase only up to 9.9%.
Federal law requires that foreign interests may not own more than 25% of any U.S. airline company.
SAS, founded in 1946, is a consortium of the national airlines of Denmark, Norway and Sweden. Danish Airlines owns two-sevenths, Norwegian Airlines owns two-sevenths and Swedish Airlines owns three-sevenths of SAS. Each of the three parent airlines is owned 50-50 by private interests and the respective governments.
The SAS group includes more than 20 subsidiaries and affiliates engaged in such travel-related fields as catering, restaurants, hotels, tour operators and travel agencies. The company employs 34,000 people and had revenue last year of $4 billion. Texas Air companies employ about 70,000 people, and its revenue totaled $8 billion in 1987.