Passengers only care about one thing -- and it's creating a huge shift at one of the world's oldest airlines

Scandinavian Airlines is in the process of a transformation.

The 70-year old company serves as the national airline of Denmark, Norway and Sweden.

SAS currently flies more than 28 million passengers a year on routes to nearly 120 destinations from its hubs in Copenhagen, Oslo and Stockholm.

Although SAS is firmly entrenched in its position as one of Europe’s leading legacy carriers, the airline has come under immense pressure in recent years from low cost carriers such as Ryanair, EasyJet and Oslo, Norway-based Norwegian Air Shuttle.

At the controls of this multi-national, international airline is the company’s president and CEO Rickard Gustafson.

Gustafson spoke with Business Insider recently around the launch of the airline’s new route from Stockholm, Sweden to Los Angeles.

He said airline customers care about cost more than anything else.

“This business has become a low-margin business,” Gustafson said. “If you want to jump into this game, you have to have a proposition that’s above all else really competitive on cost.”

Gustafson — whose resume includes a long career at GE Capital and a stint as CEO of Codan Insurance — took over the top job at SAS in February of 2011.

“If you aren’t cost competitive, don’t even bother.”

On low-cost carriers

“Today, the European market is actually defined by the low-cost model,” Gustafson said. “If you want to make money, you have to compete against low-cost carriers.”

In 1993, Norwegian Air Shuttle and its low cost business model opened up shop in Oslo. In the 23 years since, the airline has grown to become a major competitor for SAS in its own backyard. In 2015, Norwegian served more than 26 million passengers.

Airbus A330 300 SAS Scandinavian airlinesAirbusSAS Airbus A330-300

But SAS isn’t stand idle.

“We have made significant transformative changes to stay competitive and to survive,” Gustafson added. “We have cut overhead costs, adjusted pensions and union contracts.”

According to the SAS CEO, his company has to keep adapting to its environment to survive.

“We are not done changing yet because the low-cost competition is growing everyday.”

According to SAS, low-cost competition (including Norwegian Air Shuttle) in Scandinavia has grown to cover roughly 35% of the market. As a result of the efforts of SAS and other legacy carriers, LCC’s marketshare has stabilised at hat 35% figure.

On Scandinavia’s role in future of European aviation

Amsterdam, Frankfurt and London Heathrow have all become major transit hubs by capitalising on business from passengers using the airport as a gateway to Europe and Asia.

SAS currently operates out of three main hubs in Oslo, Stockholm and Copenhagen. However, Gustafson does not believe Scandinavia and his airline will head in that direction.

Norwegian airNorwegianNorwegian Air Shuttle Boeing 787-8.

“I don’t really see using Scandinavia as a transfer hub,” Gustafson said. “Our geographic location is not really ideal for a transit-based business. To make it work, you would have to find a way to generate a lot of traffic from central Europe to Scandinavia and then you would also have to compete with the Middle East and other European hubs.

“Trying to turn Scandinavia into a transit hub would be expensive and dangerous for us to undertake.”

As a result, SAS is more focused on developing routes that would serve destination travellers.

“When we look for new destinations, we look for a good mix of business and leisure travel. We look for routes with enough demand for travel directly between that destination and Scandinavia.”

On the future of the airline’s fleet

SAS currently operates a fleet of roughly 150 regional, narrow body mainline and widebody long haul airliners from Bombardier, Boeing and Airbus. One of the airline’s widebody workhorses is the Airbus A340-300. The model was launched in the early 1990s for long range intercontinental routes. However, due to its less than ideal fuel economy, the A340 fell out of favour with many of its operators over the past few years. Airlines have elected to retire the four-engined jet in favour of more fuel efficient, twin-engine jets such as the Boeing 777 and Airbus A330.

Airbus A340 300 SASSASSAS Airbus A340-300.

But SAS will be sticking with its A340-300 fleet.

“We are keeping them around,” Gustafson said. “Our next round of expansion will be using our A340s.”

A few years ago, the airline placed orders for new Airbus A320neo single aisle jets as well as A330-300E and A350-900 long haul wide-bodies. As a result of the cheaper fuel, ordering new aircraft has become more difficult to justify and the older A340 is now a rather attractive proposition.

“When we ordered our new (more fuel efficient jets), the decision was made with the price of fuel at $1000 per ton, today it’s half that amount,” the CEO explained. “To buy a new widebody jet requires hundreds of millions of dollars in costs. We can operate our A340s for a tenth of that.”

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