SAS AB (SASDF) CEO Rickard Gustafson on Q4 2018 Results - Earnings Call Transcript

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About: SAS AB (SASDF)
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Earning Call Audio

SAS AB (OTC:SASDF) Q4 2018 Results Earnings Conference Call December 4, 2018 4:00 AM ET

Executives

Rickard Gustafson - CEO and President

Torbjørn Wist - EVP and CFO

Analysts

Hans-Erik Jacobsen - Nordea

Jacob Pedersen - Sydbank

Operator

Ladies and gentlemen, welcome to the SAS Year End Report 2018. Today, I'm pleased to present Rickard Gustafson, President and CEO; and Executive Vice President, CFO, Torbjørn Wist. For the first part of the call, all participants will be in listen-only mode and afterwards there will be a question-and-answer session.

Speakers, please begin your meeting.

Rickard Gustafson

Thank you very much, operator and welcome everyone to this SAS interim report for the fourth quarter and 2018. This is Rickard Gustafson, CEO, speaking and I will start this presentation by providing a high level overview of the quarter and then talk more about the full year and some of the strategic directions that we intend to embark on going forward.

And after a while, I will hand over to our CFO, Mr. Torbjørn Wist, who will take you through some more in-depth into the numbers for the quarter and full year. And then Torbjørn and I will join when we try to manage the Q&A session as we get to that part of this call.

I hope you have the presentation visible online and I'm going to try to guide you through the page that we are talking to. So, if we get going and if I ask you then to flip to the first page headed Q4 financial highlights. I am very pleased to report that we delivered in line with our guidance and that our earnings before tax ended up at roughly SEK800 million in the quarter, which is a bit ahead of last year. The same number for before tax and non-recurring items is SEK842 million, which is somewhat below the same quarter last year, but that's primarily driven by the increased fuel cost that you also see on this page.

Some of the key drivers of the strong result in the quarter is that we're seeing a maintained great response from the customers and the market. And the consumers continue to value our offering.

In the quarter, we had 8.3 million passengers, which is 240,000 more than the same quarter last year. We were able to maintain yields fairly well. Yields on a nominal basis are up 5.1%. On the FX-adjusted, it's more of a flattish development which is a rather acceptable in an environment where we have seen a large capacity increase.

We have been able to improve our load factor which is up 0.8 percentage points in the quarter. And our revenue -- unit revenue of RASK is up 7% on a nominal basis and 1.2% on an FX-adjusted basis.

Our efficiency program, we continue to deliver and we reached almost to SEK200 million in the quarter, which enabled us to deliver on the SEK700 million for the full year as we set out when we started the year.

The cost initiative is resulting in a flattish unit cost development if you exclude FX and fuel, which means that we have also seen some inflation in our cost base which we've been mitigate primarily though through this efficiency program of ours.

If I move to the next page and leave the quarter behind and start to reflect more on the full year, I have here with a report -- scorecard for the full year, which we feel pretty comfortable and good about.

When we started the year, we said that we needed to enhance our customer experience. We said that we need to improve our cost efficiency and flexibility. We said that we need to further develop our operating model and that we needed to drive digitalization and automation.

We have delivered all of these four dimensions and I will surely take you through some examples in each of these areas. But collectively, these have actually been the foundation to deliver those financial results that you can see on the right hand side of this chart where target of a ROIC north of the 12% has been achieved. We delivered in the -- on our earnings before tax guidance that was started the year SEK1.5 billion to SEK2 billion and in Q3, we had around SEK2 billion and rounded up at SEK2.1 billion.

The -- our financial preparedness should be north of 25%, which we also have delivered with some margin in this year. And that our net debt at over EBITDAR should be below three times, which also we have been able to achieve. And Torbjørn will give you some more details into this later on into this presentation.

But then if we take these four focus areas and if I just briefly will take you through each one of them and give you some more flavor of what we've done, starting with the customer experience in the next page. We have and we will continue to constantly improve our offering to ensure that we are relevant and provide a high quality and well-priced products to our target audience, i.e. those who fly frequently to, from, and within Scandinavia.

And I'd like to highlight a few things that we really put some emphasis on into the quarter. Of course, we -- the seasonal adjustments are critical and if you recall from our third quarter, we had a good summer where we are able to really take more -- play harder during the summer season and that is vital for our long-term earnings and full year earnings.

In terms of climate, there's been an ongoing debate regarding that and a lot of customer expressed concern about the negative CO2 footprint from flying. Therefore, I'm pleased that we are moving quickly and driving our company and our industry towards a more sustainable future. And some examples we've witnessed is the partnership we have entered into with Preem, where they plan to build a new production plant for bio-based jet fuel as of 2022. And we start to build commercial agreements with them to benefit from that. And we have also introduced the fact that we will CO2 [ph] compensate all our used tickets and we start that already in April.

Our EuroBonus program is vital and important to -- for our connectivity with our customers and also the loyalty with our customers. I would like to high -- I would like to draw your attention to. We are a member of Star and for our customers, that's an important value proposition that through Star, we reach 1,200 destinations globally. And nowadays, they can also use their award points or points to do online award bookings with our Star partners, which has done very, very positive and important for our EuroBonus members.

And also, they recently announced the agreement or relationship with Live Nation had started -- off to a good start where customers get a chance to get their hands on very attractive tickets before they go into the public -- all of the public.

You know our aircraft story where we are replacing and renewing our fleet with brand-new 320neos and we now have 22 Airbus 320neos in production. We have continued our journey and efforts to improve our ground capabilities. I'm talking about Fast Track and Lounge, primarily. And during the quarter, we opened -- reopened our flagship lounge in Copenhagen, which come through a significant uplift. And at the same time, we also opened a new service desk and an upgraded Fast Track -- dedicated Fast Track capability in Copenhagen.

WiFi is something our customers and we, as you know, are investing in high-speed WiFi in our short-haul fleet. And year-to-date, we have 39 aircraft equipped with this technology and more to come in 2019.

And then we also upgraded the interiors of our fleet, two-thirds are done and we are constantly also looking into the food and menus on-board to stay on top and make sure that our customers have a good experience in terms of food quality on-board on our flights. So, a broad set of activities that we have completed during the year and this journey will of course continue as we move forward.

Moving to the next page and talking about our efficiency and flexibility. I think there are some good reports there as well. Starting with the unit cost, we have been able to reduce unit cost by 1.1% on an FX and fuel-adjusted basis. And that is primarily driven by our delivery in the efficiency program, which I will touch upon shortly. But also that enable to continue the rightsizing of our fleet and also that our operating model starting now to kick-in where SAS Ireland was did not exist a year ago and now operating with eight aircraft and a ninth aircraft to come during 2019, which also impacting our cost -- unit cost positively.

The efficiency program, as I mentioned, we started the year by saying that we anticipate to deliver SEK700 million for the full year FY 2018 and we've come in at SEK723 million, just north of SEK700 million for the full year, which is in line then with our own expectations and plans.

I'd like to draw your attention to the fact that we have changed the target for 2019 somewhat. We now anticipate that we're going to do SEK900 million in 2019 as we have compared to previously said SEK1.1 billion. SEK200 million have moved into FY 2020 due to some of the delays in delivery realization of those activities. And Torbjørn again will come back to that during his part of the presentation.

And then the seasonal adjustments is kind of more repetition from the third quarter, but what we can realize that there are, as always, been significant difference between the winter season and the summer season. But amplitude is just getting bigger and bigger where the summer season is significantly bigger than the winter season and that will continue as we move into the future.

Moving on to our operating model and I think there are some important things also to report there for the full year in all three of our operating platforms. Starting with the -- our battle [ph] platform, SAS Scandinavia, where the fleet renewal is ongoing where we'll be replacing older aircraft with brand-new A320neos. And during 2018, 5 million of our SAS passengers actually flew with a brand-new Airbus 320neo. And of course, that equation of that and a part of the customer base will continue to increase.

We have also strengthened our productivity and competitiveness in SAS Scandinavia through some of the enhancements and efficiency program that I'm talking about, creating more ability to talk to the seasonal adjustments. And also started to improve our demography profile where some of our more senior cabin crew and flight deck employees are retiring and we are then backfilling them with younger talent.

All in all, of our 30 million passengers, the 4 million flew with SAS Scandinavia and that again reflects that this is our backbone production platform that is then supplemented and complemented by SAS Ireland and regional partners.

Talking about SAS Ireland, it was established and started as operation in December last year, yes, before Christmas last year in 2017. And throughout this year, there has been -- they have completed more than 8,000 flights and roughly one million passengers have flown SAS Ireland. And they have now eight aircraft and the final aircraft will come shortly in 2019.

And another milestone has also been there. IOSA certification that secured during the year, which also is an important thing for them to engage and [Indiscernible] co-brand with -- cooperate with other carriers in our Star Alliance network.

Final then on the regional partners, this is the first year 2018 where we have actually been completely in an outsourced environment where we completed the divestment of Cimber. That was out a year ago which has also been part of the cost efficiency.

There has been some ups and downs. We are confident that this model is the right model for SAS going forward, but we need to further strengthen our ability to execute, integrate our planning procedures. We have made some big steps forward and regarding this in the year and more to come as we move forward.

And also in this platform we have seen a re-fleeting where our partners have invested in brand-new aircraft and we have replaced some of their older aircraft. And the average age of our regional fleet that is now operating for us is just north of two years. So it's a brand-new fleet that's being operated by our partners. And as you can see, 5 million passengers flew with our regional partners during the year.

Then finally then on the next page on the digital efforts that we've done during the year, I'd like to stress those icons there in this chart illustrates our three strategic pillars and this journey underpins all those digital pillars.

Starting with the winning the frequent travelers, going through kind of trade an efficient and sustainable operating platforms or models, and then finally, secure the right capabilities.

But starting top then, to give you some flavor on what we've done in terms of improving our offering to our customers. You have seen upgraded our web and app continuously throughout the year. As I mentioned before, 39 aircraft and is now equipped with high-speed WiFi. We have been able to improve our ability for customers to preorder seats, lounge access and meals, et cetera, and also all our communication -- direct communication -- one-to-one communication with our customers is now done much more personalized and much more agile than it's been in the past.

Moving forward, you would expect to see more development in EuroBonus related to point, pooling, and ability to combine paying both by cash and using EuroBonus points. We will invest in new distribution platform. That is becoming the new global standard driven by IATA called NDC, new distribution capabilities. That platform is going to be -- we'll invest going forward and that will start to really have significant impact on 2020 and beyond as we foresee it.

And then there are a number of other activities that we will drive in this space in the years to come. Creating our operating model, I think we have invested in advanced analytical tools and techniques and methods and for our revenue management. So, some of the success you've seen and improved revenue throughout the year and also our ability to maintain our regime -- management essentially as a result of effective digitalization in our revenue management areas.

We have seen better system for fuel optimization, also for flight planning has come into play. And going forward, we see opportunities for deploying artificial intelligence and machine learning for some of our planning processes. We anticipate that we'll see more automation in terms of customer service where there will be digital robots that will do a lot of the customer interaction by phone or by chat going forward.

You will see investments from SAS to improve our ability to deal with the irregularities when it happens, so it will be more faster and more efficient, can rebook not just a single passenger, but the full aircraft can be rebooked very smoothly and effectively.

And finally then on the right capabilities, we have equipped all our crew with tablets, which is of course helping them. Moving forward, we are also doing the same thing for our ground personnel so they can engage directly with the customers at the floor and not need to be standing behind the desk at the airports. That's going to be an important thing.

We continue to try to make it more efficient for our employees to have more predictability for their future schedules and also ability to adopt their schedule for personal needs to find a better balance between work and their personal life. And one tool that we recently launched is something called Trip Trade, which is a digital tool that will make it smoother for our cabin crew to swap and change some of their schedules with each other.

And then, of course, we have moved all our employees over to mobile and cloud-based work tools, which in enhancing our ability to collaborate across our businesses and across our geographies in a more effective way.

So that just kind of gives you a flavor of what's going on and what will happen in the digital space. And again, my key point here that digital is not something we do for customers, but it's something that actually underpins all parts of our business as we move forward.

Then on the next page, if I give you some sense for what I foresee for the future and that was the strategic for the future. We acknowledge that we are facing some headwinds and there are some challenges that we need to deal with. This is an industry that's always impacted by external events and 2019 is no different. And we, for example, we see a rather volatile jet fuel development, driven by the volatile oil price. It's going up and down.

We see from an SAS perspective an unfavorable FX development, especially the Swedish krona versus the U.S. dollar and the Swedish krona versus the Norwegian krona. We see an increased competition where a number of carriers, primarily the so-called low-cost carriers, they will take delivery of a rather significant amount of new aircraft that will be deployed in Europe and some of them directly in our backyard as we move into the winter program.

We see an increased awareness related to sustainability which both provides a challenge, but also an opportunity in order to differentiate and make sure that we really take flight clear some customers that would take this seriously and that SAS is actually in the forefront and creating a more sustainable aviation industry.

And then I have to also touch upon the geopolitical environment that we see at the moment, which is there's a lot of uncertainty. And in the very near future, all the question marks that we have around the Brexit landing, will it be hard or a soft landing. And of course that will not just impact SAS, but it will impact the European aviation industry, and therefore, also I think the European economy as such.

But given this, we don't really see that we are going to change our strategic direction. We believe that this strategic direction of ours has created the value that we've seen and created the best results in our history in 2018 [Indiscernible] to continue down the same path. We will continue to invest in our customer offering, as I described before and we are excited about next year. We also will take delivery of the first Airbus 350 and also of course, the number of additional Airbus 320s.

In terms of our operating model, we are confident that this model creates the flexibility that we need in order to cope -- to deal with the seasonality in our business. And also to ensure that we can continue to include the number of small destinations in our network and maintain a timetable that is second to none in the market.

We do acknowledge that we have had some stability issues in this model during 2018, and we're going to invest in ensuring that we create the better stability in all platforms in 2019.

So, we will invest in some additional reserves both in our own production and also in our external production. We will adopt our network to provide with some more margins in between some departures -- in landings and departures and we will continue also to ensure that we have a better prepared in terms of the crew needs during the summer season that were some of that -- some of the misses that we had this summer.

And then in terms of capabilities, we will continue to invest in our very, very skilled employees and to ensure that they have the right capabilities and the right tools to do their best for our customers and provide the best opportunities for them to continue to develop our business.

And these three strategic pillars will be underpinned by the digital investment that we described before and then also, of course, with an even further emphasis on sustainability. This is key and we will continue to drive aggressively towards a more sustainable industry where we, of course, the investment in new aircraft plays an important part, but not just that.

We also anticipate a further engaged with Preem and other potential bio-based jet fuel providers to ensure that we get more access to bio-based jet fuel. We will continue to use technology to improve our logistic flows so that more customers can preorder what they need to eat and drink on board.

Doing that, we will not load more things than required, which will reduce the weight on the aircraft and that will, of course, also reduce our CO2 footprint and it will eliminate waste also for things that we don't sell or will not be consumed as we -- given the situation we're at today.

So, this is the strategic kind of landscape that we see -- that we will continue to drive aggressively and will help us also to navigate in an environment where we're going to face some challenges in 2019.

I think I'm going to stop there and ask Torbjørn to continue to provide some more details regarding our numbers both for the fourth quarter and the full year. So, over to you, Torbjørn.

Torbjørn Wist

Thank you, Rickard. If we turn to page 10, I'll give you a quick high level summary for the fourth quarter as well as the fiscal year 2018.

In Q4, the capacity was up 2.4%, mainly driven by increases on the European routes. Over the full year, capacity grew with 1.5%, again, due to increases on European routes, thanks to the -- call it flexible disposition of our network and this obviously really paid off during the summer period.

The traffic increased by 3.4% during the quarter, predominantly driven by a 4% increase in European traffic. During the fiscal year, traffic was flat due to increased European traffic being offset by reduced lower traffic on some of our intercontinental routes such as Beijing, Hong Kong, and Miami.

The underlying PASK trended slightly positive during the quarter and grew by 0.3%. This was driven by increased yields and load factors on the long-haul routes. During the fiscal year, the PASK increase was somewhat higher, in large part due to strong demand for long-haul traffic.

The currency adjusted unit cost excluding jet fuel remained more or less flat during the quarter. However, the higher dollar did have a negative impact with nominal CASK excluding jet fuel and including non-recurring items increasing by 7.3%.

For the full year, currency adjusted CASK excluding jet fuel; this decreased by 1.1% due to improved cost efficiency and increased capacity. Of course, the increased cost we have seen for traffic irregularities has prevented a further reduction.

The revenue developed strongly in the quarter, increasing by just over SEK1 billion driven by positive traffic and yield development. The stronger NOK is the main driver for the positive currency impact of SEK653 million. For the fiscal year 2018, revenue increased by over SEK2 billion again due to positive traffic and yield development.

The reported result before tax improved by SEK152 million to just above SEK800 million for the quarter. With the positive revenue trend dampened somewhat by increased fuel costs and negative currency effects due to the -- what Rickard described the weakness of the Swedish krona relative to the U.S. dollar.

The quarterly result means that we achieved a full year EBT of over SEK2 billion, which is above the consensus of the market. The result before non-recurring items was SEK2.217 billion, which is above somewhat above our guidance.

The cash flow from operations remain flat during the quarter compared to last year. For the fiscal year, cash flow from operations has improved significantly. The large difference is increased -- is affected by an increase in the [Indiscernible] in transportation revenue and as well the fact that in Q3 last year, had the SEK700 million fine to the EU commission in relation to the alleged participation in the cargo cartel which we are disputing.

Turning to page 11 on the income statement, as noted before, the reported EBT landed just above SEK800 million, which is SEK152 million better than last year. However, for EBT before non-recurring items, the opposite is true with the lower result in last year.

Looking at the P&L, I'd like to note the following. The jet fuel costs increased by SEK669 million versus last year, driven by higher jet fuel prices, which are close to 50% higher than last year.

Other OpEx increased by SEK296 million, in large part due to the irregularity costs during the quarter. Depreciation has increased by SEK57 million in part due to new aircraft as well as other equipment such as WiFi on the balance sheet.

I'd like to point out that non-recurring items contains SEK100 million that we have set up as a onetime award to personnel subject to certain conditions. There are also some impairment charges and capital gains included in this amount.

Overall, we had SEK85 million of positive currency effects on our earnings in the quarter. This is mostly driven by the stronger NOK, which offsets the impact from the dollar.

Turning to page 12, focusing of the revenue side, I'd like to note the following. The revenues increased SEK1.034 billion versus last year. If you adjust for the SEK653 million in positive currency effects, the underlying revenue increased by SEK381 million compared to last year.

The passenger revenue was positively affected by both increased capacity and load factor, whereas the yield was somewhat lower than last year. Other traffic revenue was up at SEK135 million, primarily due to a combination of unused tickets as well as sale of excess baggage, increased revenue in cargo, as well as various other charges.

Other operating revenue is up SEK5 million and that's sort of the sum of many different movements. I'm not going to go to the details on that.

Turning on page 13, for the OpEx for Q4, the currency is negative primarily due to the weaker SEK versus the dollar. The jet fuel costs are up some SEK489 million. The reason why this number is different to the one you saw a couple of pages ago is that we hear breaking up jet fuel, so the report of the jet fuel in the currency effect. There will be part of the jet fuel in the volume effect. So, these are more clean numbers.

The overall cost increase on jet fuel was mitigated by SEK134 million due to our hedges. There are also some other minor cost components such as handling included in the jet fuel.

In terms of volume, the 2.4% increase of production increased our costs by SEK77 million in the quarter. General inflation and price effects were some SEK91 million in Q4. It is worth noting that we have had a positive effect from the new agreement with Copenhagen Airport during the quarter.

The efficiency program continues to deliver in line with our expectations and contributed with SEK193 million during the quarter and this includes SEK21 million in relation to the Copenhagen Airport just mentioned.

In terms of other costs, they increased about SEK192 million, primarily driven by traffic disturbances in the quarter. Altogether, our OpEx and the quarter was some SEK10.5 billion, which adjusted for currency was SEK656 million or 6.7% higher than last year.

Turning to the cash flow analysis on page 14, the cash flow from operating activities was a little bit down versus last year. The net investments are down SEK223 million. The difference is explained by lower amount of aircraft prepayments in this quarter.

Financing activities are up some SEK830 million. This is primarily due to receipt of $49 million as part of our JOLCO financing for one A320neo aircraft, and a lower level of loan repayments compared to Q4 last year. Altogether, this leaves us with a healthy cash balance of SEK9.8 billion at the end of the period, which is considerably above last year.

Moving on to the full fiscal year, as mentioned, the reported EBT reached just above SEK2 billion, which is a noticeable improvement on last year. The same goes for the result for non-recurring items which was just above SEK2.1 billion, slightly north of our guidance for the year.

Looking at the P&L, I would like to point out the jet fuel costs, which increased by SEK1.16 billion versus last year. And if you remember from the Q4 slide, roughly half of this effect occurred in the fourth quarter.

Other OpEx increased by SEK589 million and this has again been affected by irregularity costs in the past two quarters.

I would also like to highlight that the non-recurring items contains the SEK100 million that we have set up as a one-time award. And overall, we've had a SEK333 million positive currency effects on our earnings in the quarter, again, driven by the stronger NOK.

Turning to the revenue analysis on page 16, revenues increased SEK2.064 billion versus last year. If you adjust for the SEK930 million -- SEK931 million in positive currency effect, the underlying revenues increased SEK1.1 billion compared with last year.

Passenger revenue was positively affected by both increased capacity and yield, whereas the load factor was slightly below last year. Other traffic revenue was up SEK311 million due to SEK134 million of higher cargo revenue, offset by SEK66 million of lower charter revenues.

Other traffic revenue rose SEK243 million, primarily due to traffic revenue from other airlines and adjustment of assumptions relating to unused ticket. The other operating revenue increased by SEK146 million, mainly due to increased sale of EuroBonus, as well as handling volumes to other airline.

On the operating expense side for the full year, currency is negative with some SEK573 million. The jet fuel costs currency adjusted are up some SEK1.344 billion. The underlying price increase of SEK2.1 billion was mitigated by some SEK855 million due to our hedges. Again, here, there are some minor cost components such as handling included in the jet fuel.

In terms of volume, the 1% increase in production increased our costs by SEK305 million and there were some SEK292 million of general inflation effects.

The efficiency program continues to deliver and contributed with SEK723 million during 2019, of which Copenhagen as mentioned in the Q4 numbers contributed with SEK132 million.

The other cost decreased by SEK60 million because our operational challenges were offset by reductions in other areas such as maintenance cost. Altogether, our OpEx was SEK37.4 billion, which adjusted for currency was SEK1.157 billion or 3.2% higher than last year.

Turning to the financial targets, the return on invested capital is at 14% improving slightly due to our improved earnings. As we have noted numerous times, the capital base will continue to grow with the future deliveries of new aircraft. And this means that we need to continue to focus on improving our earnings to remain above our target.

The adjusted net debt to EBITDA remained at 2.7, below our limit of three times. The financial preparedness increased to 42% during the quarter and this was driven by our improved cash position which in the past has been critical for the stability of the company. It is worth noting that post the close of this quarter; we obviously used SEK1.1 billion of our liquidity to take out the remaining preference shares.

Turning to our debt profile and aircraft orders, SAS has about SEK2.3 billion maturities until October 2019 and this includes the unsecured convertible bond maturing in April. We are currently considering different solutions on how to deal with this maturity.

The year-end cash position of SEK9.8 billion gives us flexibility in relation to the upcoming maturity. But of course, the preference share redemption, which will complete tomorrow, will reduce our cash position with SEK1.1 billion, but in turn, remove what has been fairly expensive financing.

On the CapEx side, we have now completed the JOLCO financing of one A320 and are currently in final negotiations regarding the last A320neos from the 2011 order. They will also be financed through JOLCOs. In practice, this means that the next 24 aircraft are more or less financed with the completion of the JOLCOs.

For the nine, we have the first 15 aircraft in our 2018 order coming directly from lessors. Then of course, 2019, the calendar year will be very exciting with the delivery of the new A350 and we will commence the financing of this aircraft in the early part of 2019.

Turning to jet fuel and currencies, our policy is as you know to hedge between 40% to 80% of our fuel consumption for the next 12 months and up to 50% for the following six months.

As of the 31st of October, we had hedged some 52% of our fuel consumption for the fiscal year 2019 using a mixture of swaps and call options. The swaps obviously locks in the price whereas the call option give us outside protection in the event that prices should increase significantly.

For foreign currency, our policy is the same, to hedge 40% to 80% of the expected deficit or surplus for the next 12 months. And as of the 31st of October, we had hedged 43% of our dollar deficit and 60% -- 60% of our NOK krona surplus for the same period.

Finally, we come to the outlook and guidance for fiscal year 2019. We continue to see sizable seat capacity growth in Scandinavia starting in Q1. The average capacity growth in our market over the year is expected to be around 5%, which we expect will exceed demand growth. Clearly, this will increase competitive intensity in the market, which may impact our ability to offset any higher fuel prices through ticket prices.

As we have stated before, higher jet fuel prices and the continued weakness of the Swedish krona in relation to dollar creates headwinds. Since the end of the fiscal year, we have seen a substantial decline in the jet fuel price, but there is an expectation that prices will increase. Given the political curve, we expect prices to be volatile. And we have not yet seen any real signals of a strengthening Swedish krona.

Clearly, a new weakness in the Norwegian krona in relation to the SEK, as we have seen on the back of the drop in oil prices, removes some of the positive effects we have seen and referring to some of the previous pages, clearly, we have benefited from a strong Norwegian krona.

All these moving parts makes us err on the side of caution and not provide an expected range of outcomes at this point. But we do expect to be profitable in the fiscal year 2019 and aim, of course, to update the market as we move further into 2019.

So, with those words, Rickard and I would like to hand over to the operator to proceed with the Q&A session. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

First question is from Hans-Erik Jacobsen from Nordea. Please go ahead your line is open. Hans-Erik Jacobsen from Nordea, please go ahead your line is open.

Hans-Erik Jacobsen

Yes. Thank you. Good morning. Back to the increased competition with regard to Scandinavia, is that mainly due to one carrier or are you seeing more carriers entering the Scandinavian market?

And I would also like you to comment on the competition on long-haul. There has been quite a significant increase with Atlantic and we've have seen some Asian, particularly Chinese carriers entering Scandinavia and Europe. Could you comment on the outlook here?

Rickard Gustafson

Yes, Hans-Erik, this is Rickard. I'll try to. Starting with short-haul, there is more than one player that increased capacity in the market. We foresee that most of the low-cost carriers and also carriers low cost subseries of traditional carriers all have some significant fleet orders and take delivery of new aircraft. That will come in into the market.

So, we see a broad set of carriers that will actually increase the capacity in the market. And we anticipate that the market capacity growth north of 5%, which is rather significant.

In terms of long-haul, it's a bit of a different scenario there. You're absolutely right; we've seen an increased competition on our operation eastbound where we now have new competition on all our Asian production; Hong Kong, Beijing, and Shanghai where we are seeing increased competition.

Looking -- going forward, though, we have not seen the announcement that other carriers or even more capacity is coming in. We believe that what we've seen right now is what we're going to expect at least for the short -- in terms of long-haul competition.

And the same thing on North America, there, we have a number of carriers already competing rather aggressively over Atlantic. But we haven't seen announcements of any additional carriers coming into the long-haul or the North American operation. But things can change rapidly, but that's what we know for now.

Hans-Erik Jacobsen

But in terms of industry in general, a lot of companies have gone bankrupt lately and more likely to come. I guess that could probably ease the competition on some routes.

Rickard Gustafson

Yes, you're right; we saw that happen with Air Berlin. For example, when they went under and yet, that eased a little bit of the competition, especially on Berlin for sure. And rather quickly, it's been up again, but probably not to this exact same level as before. So, I think that's a fair assumption. But I don't want to dare speculate on who's going to stay and who might be in financial troubles. We are putting all our efforts on focusing and trying to create a strong and sustainable SAS. And that's what we can actually impact and that's what we focus on.

Hans-Erik Jacobsen

Great. Thanks.

Rickard Gustafson

Thank you.

Operator

Next question is from the line of Jacob Pedersen from Sydbank. Please go ahead, your line is open.

Jacob Pedersen

Hi guys. I'd like some comments relating to, first of all, your fuel hedges. Any updates? The numbers you gave us are from October 31st. I know it's not a long time ago, but we have some massive swings in the fuel price since. Have you anything to add to this? You may want, for example, shows that there is a likelihood of fuel pricing ending up quite a bit below the interval that you provided just three months ago.

Torbjørn Wist

Yes. No, we don't call it the updated hedge position. But I think it's worth emphasizing a couple of points. One is that obviously the products that are in there are call it the max levels. And in line with many of the other European full-service carriers, we use a very good balance between swaps and [Indiscernible].

And as I said, the options are good if the price is really take off, then it kind of cash or down side, but it's obviously the price decline, we are not locked into a price. The swaps are clearly more locked-in in terms of price. But again, by using a balance of it, it means that we share a good part of the upside when prices decline, but have a clear cap on our downside if jet fuel prices increase.

Jacob Pedersen

Okay, okay. I'd also like a few comments on the currency. You have -- over the past couple of quarters; you've been quite negative on currency and citing the weak Swedish krona. But still you have ended the year now with a positive effect of around SEK300 million in currency. If currency stays where it is right now, what would the effect be in 2019?

Torbjørn Wist

Sorry, can you just -- what would the effect be? I mean, clearly if we see the -- we're not providing any specific guidance on as you will have seen. But clearly, if Swedish krona remain at the weak level, and we think the Swedish Central Bank has continued to sort of talk down the value of its own currency, that remains where it is. Clearly, that has a negative impact on us given that we have significant part of our expenses in dollars.

Any weakness in the Norwegian krona, of course, that would impact the positive side that we see on the topline and call it these moving parts that made as err on the side of caution, obviously, I'll call it the fairly volatile fuel price that we have seen in recent weeks in particular.

Jacob Pedersen

So, you don't expect a positive effect from currency in 2019, I can gather from your comments.

Torbjørn Wist

No, I think the only sort of caveat I can give you is that when you look at on page 20 and the currency hedges, we have obviously locked in a fair amount of the strong Norwegian krona in terms of the next 12 months. You see we have been locking in more NOKs because that's the surplus currency where it's beneficial to lock in at higher rates and had been up but more cautious and locking into the weak Swedish krona.

Jacob Pedersen

Yes, yes, okay. And then a question on your ticket prices. In this is also related to your guidance. When we add up all the numbers, I know you've taken SEK200 million off your expectations from the cost program this year. But still we have fuel cost or low fuel prices now. Where do you see ticket prices moving depending on the fuel price? Do you think that you'll be able to recover some of the high fuel cost on the ticket pricing in 2019?

Rickard Gustafson

Well, Jacob, that's very kind of the million-dollar question. And I think customers will dictate the answer to that question. I think that what we have done in 2018, we are pretty pleased, as I described, that we have been able to actually manage our yields pretty effectively. And we've seen a decent development in an environment that sees a lot of increased capacity.

So, I think that's a positive thing. If we will -- of course, we're going to strive constantly trying to do whatever we can to maximize the return that we can get in the market, but at the end of the day, consumers will dictate what they are willing to pay.

Jacob Pedersen

Yes, but I think you've also signaled from some of your larger competitors saying that the consumers will have to pay for the higher fuel cost.

Rickard Gustafson

Right and again, I can't really second guess what's going to happen. Of course, I think we're all going to strive to compensate for increased cost into the extent possible, but with that said, though, we also face environments with significant capacity increase. So, at the end of the day, it will be the market conditions that will dictate our effective or successful we are on that space.

Jacob Pedersen

Great. Thanks so much.

Rickard Gustafson

Thanks Jacob.

Torbjørn Wist

Thank you.

Operator

[Operator Instructions]

Torbjørn Wist

We have a question on the webcast -- online questions. Perhaps this one could be answered by Rickard, I presume. It's from John, who asks do you see SAS being part of a European consolidation going forward?

Rickard Gustafson

Well, as I said before, I think the European consolidations ongoing and it's primarily driven by elimination rather than mergers at the moment. And I foresee that that trend might continue.

To be very open and clear, SAS is not in the position to drive or any consolidation in Europe and we don't spend a lot of time analyzing potential scenarios in that space. But rather trying to put all our energy and emphasis on how do we best build a sustainable and strong SAS. And that's what you're going to expect also from us in 2019. That's where we're going to have our emphasis and I don't dare to speculate how the European market space may evolve. But the only thing you could be sure of is that SAS will continue to fight for its competitiveness and fight for its customer base.

Operator

Okay. So, we have a follow-up question on the phone lines from the line of Jacob Pedersen from Sydbank. Please go ahead. Jacob your line is open.

Jacob Pedersen

Yes, hi. I'm just coming back with a couple of questions here. Can you make any more comments on the irregularities in the fourth quarter? I think -- I at least had the anticipation that it was a done deal at the end of the summer, but it seems that there has been some more irregularities. Any comments on that?

Rickard Gustafson

Sure Jacob. Well, it's a very different scenario versus the rest of the summer because now at this time of the year, it's easier for us to manage from this than face irregularities because we can then rebook our customers either on our own [Indiscernible].

So, the consumer impact is far less that we experienced during kind of the mid-July. We have had the situation is very, very different from the summer, but we have had some issues with our Boeing 737 fleet in primarily South Scandinavia where we have had some unscheduled -- large amounts of unscheduled maintenance anticipated. We have also continued to see some issues with late delivery of aircraft from Airbus unfortunately. And also we had a rather significant event in Brussels where we had that [Indiscernible] strike for almost a week and we had a few aircraft grounded there in Brussels, which also caused problems in our network.

So, the answer is yes, we have had irregularities at the level that is maybe not where we wanted to be. Also during fall, the consumer impact has been significantly less than what we experienced during the third quarter. And we have taken a number of steps and initiatives. And as of November, we are more confident that we are back on the normal track again.

Jacob Pedersen

Okay, okay. Last question from my side regards Brexit. Any comments to a possible impact of a hard Brexit?

Rickard Gustafson

Well, that's not a very important but difficult question to answer, Jacob. Of course, we've done a number of things and trying to prepare for both scenarios to the best of our ability. And one tangible thing that we have done is of course to ensure that pilots that may carry a U.K.-based license, they have now also been transferred. So, they also have an approval or license granted by an EU member state. So, at least that's something we can do.

But if we enter into a hard Brexit, there are things that we cannot control. I don't know what's going to happen with some of the customs rules, for example and how that might impact customer flows. I'm not sure it's going to happen to some of the spare parts that may be approved by a U.K. authorities that today actually sits on our fleet or any aircraft in Europe.

If aircraft then will be grounded with a hard exit until those components have had a European authority to ground approval [Indiscernible] them. And there are a number of things, Jacob, that are unknown to us. And we can only hope, I guess, that we end up in a controlled Brexit scenario rather than a hard Brexit. I think that will not negative impact on SAS, but on European aviation as such and thereby also by the European economy. So, we tried our best of our ability, Jacob, to plan and prepare, but there are things that is out of our control.

Jacob Pedersen

Yes, have you any numbers on how bigger part of your revenue is U.K. related?

Rickard Gustafson

Well, I don't think we--

Torbjørn Wist

We don't report.

Jacob Pedersen

[Indiscernible].

Torbjørn Wist

Yes. We don't -- we try to keep some things confidential out of competitive -- for competitive reasons.

Jacob Pedersen

Okay. I understand. Thanks so much guys.

Rickard Gustafson

Thanks Jacob.

Torbjørn Wist

Thank you.

Operator

There are currently no further questions registered on the phone lines. And with that, I will hand the call back to the speakers for any further questions on the webcast and for closing comments. Please go ahead.

Torbjørn Wist

Thank you. I think we all have to round off the webcast. Very nice talk to you. If you want any further information, you can find it at SAS -- www.sasgroup.net. Thank you.

Rickard Gustafson

Thank you very much and thanks for your--