By Bjorn Fehrm
Introduction
April 7, 2015: There is not a month going by without a strike at some of the European airlines, big or small. The strikes are the tip of an iceberg, which is called “restructuring”; “restructuring for profitability,” “for survival” and for “having a future.”
European airlines are the most unprofitable next to African airlines, according to International Civil Aviation Organization (ICAO). The collected profits from all European airlines are less than one third of the profits in North America. The strikes are called from unions that are fighting managements as these try to change the fundamental cost structure of the airline to be able to compete, not only with Europe internal competitions from LCCs eating away on domestic traffic but now also from Gulf carriers taking away international traffic at an alarming rate.
Discussion
European airlines stem from the time when each country (there are 50 of them) had their own flag carrier. While some countries like Russia have large populations (140m people) and there are several medium sized (Germany 81m, Turkey 76m, France 64m, UK 62m, Italy 60m), the rest are smaller countries. Of Europe’s total of 740m inhabitants 57% live in these larger countries. This leaves 320m to be divided over 44 countries.
This shall be compared to North America which has 355m inhabitants in USA and Canada alone. These two countries are dominated by four mainline carriers: American, Delta, United and Air Canada; with one major LCC, Southwest Airlines, and a number of other LCCs.
If we do the same count for Europe, we have three larger carriers of the size of the US ones: Lufthansa Group, Air France-KLM and IAG (British Airways/Iberia Airlines). On the LCC side we have Ryanair and Easyjet being the size of Southwest or larger. Then would follow a tail of over 200 additional airlines, all struggling for market share and critical size to survive. The numbers tell a convincing story: not all these airlines will and can survive on a market smaller than the US market.
The fight to the bottom
The strikes that we started with are the manifestation of the airline managements trying to address this situation: none of the smaller airlines are profitable (with a few exceptions) and they all try to lower their costs mass beside fuel and aircraft costs (personnel costs were 28% of cost mass for Lufthansa’s passenger group during 2014). The trade unions fight for their earned salaries and perks. They know that as long as the states are involved, bankruptcy is improbable. That things still can grind to a halt was shown by Swissair before its reorganization into Swiss, later acquired by Lufthansa.
The fight for keeping their wages by European airline pilots or cabin crew are little different than how it was fought in the US. There difference is that US airlines, at the usual end of the line after negotiating concessions and selling everything that can be leased back, could use the business friendlier bankruptcy laws under Chapter 11 to make the contracts with the employees void and created the environment for a settlement.
Other than Swissair and SABENA, airlines with the state as a major shareholder do not want the electoral trauma of bankruptcy and the unions knows that. They play a high stakes game, thrusting that things do not go to the extreme that the management is telling them will be the consequence unless more of the traffic can be shifted to the groups LCC (Germanwings, Transavia, Vueling…) or that working hours, salaries and benefits can be adjusted.
History shows that no group give up earned compensation levels without a major fight. The only thing that will move this position is the clear realization that the alternative is nothing. But that nothing has be a credible threat, otherwise it is better for the union negotiators to halt the already-ailing airline with an additional strike putting it even closer to the point of no return.
What will happen?
State owners of airline shares realize they are taken as public hostage. They have all exit plans worked out. The problem is there are few buyers of their share. A good example is SAS, the airline with three state owners (Sweden, Denmark and Norway) and worse still, three trade unions for each employee group. This contains so much dynamite that no one want to buy the airline despite the states wanting to sell and exit. Lufthansa and others have had a look but seems to mean: let SAS sort its own problems (where Norwegian Air Service is one) and then we might have a look.
There are airlines that are balancing on the profitability line like Finnair, they might be able to keep a niche on domestic and long haul due to being unattractive for Gulf and LCC carriers as their market is small (5m inhabitants) and customer loyalty still high but for how long?
Most of the once proud national carriers will go the way of Aer Lingus, the subject of three takeover bids from Ryanair and now IAG, or Alitalia de facto taken over by Ethiad (49%). They will be absorbed into larger entities who controls one of the few European mega-hubs, which is now taking over more and more of the profitable long haul traffic. With LLC eating away on domestic and intra European short haul and the large network carriers and Gulf taking the long haul there is simply nowhere to go.
But that is something we will worry about tomorrow says the leaders for the trade unions that put on the last strikes, “we fight for what has been given to us and no-one expect us to give it up”.
Summary
Europe is the continent with the unprofitable network carriers and well doing low cost carriers. Ryaniar, Wizzair, Easyjet Pegasus and Jet2.com are all independent, profitable and expanding fast. No-one is subject of overtake discussions or trying to be bought.
For the larger as well as the smaller network carriers it is a daily fight; for the larger to get the trade unions to accept lower personal cost solutions be it shift traffic to the groups LCC or outright lower benefits; for the smaller it is a fight for survival or to restructure so successfully that someone will buy it.
What they all have in common is troubled management, trades unions and travelling public, who does not know if the booked flight next week will fly or not.
“What they all have in common is troubled management, trades unions and travelling public, who does not know if the booked flight next week will fly or not.”
During 25 years of flying in Western Europe I have experienced 1 strike from 1 airline. (that had 1 strike in those 25 years).
I myself always have lots of choice, reasonable quality standards, well maintained aircraft and friendly staff. And I see many hard working loyal people that seem to love their jobs.
We have seen many mergers over the last 20-30 years in the world, often leading to huge companies with people happy to still have a job but low motivation & it shows. Just good enough junk as equipment and flexible contracts. MBA managers trying to pull even more from the company with long term survival a low priority.
Progress ?
I fly quite regularly and I have been placing my flights in the last years to avoid strike prone airlines or countries. In two weeks I have an Air France-KLM flight with no other alternative and quite frankly I tried to find alternatives but there were none. So bad has the carrier and the country become and Germany is not much better.
Air France Customer Service is horrible and their FAs can be downright nasty………and top that off with some really un-kept planes (sanitary wise). How many Air France disasters have happened in the past 15 or so years? Travelers avoid flying part of the Group.
I do recall a European Commission Hearing in Brussels having to do with the KLM-Air France Group. They are going to need a serious Cash-Infusion(Government Handout) soon……..or they will go bust. That was back in November 2014—-ish time-frame
Quasi-Marxist Capitalism does not work in the EU…………more so; when all the employees( Bloated bureaucratic Management and vicious Union-Syndicates) fee “entitled” to rob the company when there are no funds to rob.
Michael O’Leary in a conference in Belgium (I think 2013) pointed-out………..EU Legacy Carriers are a Bust…….meaning they can come-out with “no-frills” off-shoots to compete with the likes of >>>>>(EasyJet/RyanAir,etc)………..but with Bloated Management/labor syndicates…and the same “ole way” of business….their “no-frill Carriers” have been hugely unsuccessful, because they are stuck in their own unsuccessful means of conducting Business.
Fliers continue to flock to EasyJet/RyanAir and recent (Non Legacy Carriers) upstarts….even the East Block Upstart Carriers flying old A320,737s or whatever is airworthy are making money; While Lufthansa,Norwegian,Air France “no frills” Choices struggle to make a Euro.
In two weeks I have an Air France-KLM flight with no other alternative and quite frankly I tried to find alternatives but there were none.
To be honest – no offence – a lot of your article seems to be informed by your demonstrated dislike of strike action as a customer.
My point being: There has to be a sort of checks and balances. Too much union influence isn’t good – but effectively abolishing it just to get rid of those annoying strikes doesn’t do any good, either. Other than sparing some people some annoyance, which shouldn’t be the guiding principle in these matters.
I know strikes can be a nuisance – but such is life. There’s always some annoyance. Get in your car and you end up in a traffic jam (because of all the *other* cars on the road). Press the button to call the elevator and somebody else has pressed the button on their floor first. Try to get home from Japan and some Icelandic volcano has erupted leaving you stranded (that actually happened to me). Arrive at the 2nd leg of your flight and you’re told you’ve been booked of the plane because you couldn’t have physically arrived on time and the seat has been resold; next flight to your destination in 11 hours (that also actually happened to me). Try and go for a relaxing walk on your first proper day off in two months, and there’s a storm blowing that leaves parts of your neighbour’s roof on your front lawn. Try and take that handy bus/train/flight from A to B and find management discontinued it, making the whole journey much more time-consuming and expensive. Sell something on ebay and the darn buyer won’t even leave positive feedback for you.
Annoyances and nuisances everywhere.
I know, I know – you want more customer focus. Customers hate delays.
But customers aren’t just customers, they’re citizens as well. So one’s interest doesn’t (or: shouldn’t) really stop at “does my plane leave on time” (which is something that even with Easyjet/Ryanair a lot of people don’t even get to contemplate because they have other things to worry about).
If you take customer focus to the extreme, you end up with a company like Amazon that doesn’t stop talking about how important its customers are, but that doesn’t exactly show the same care for its employees.
As I said above: There has to be a sort of checks and balances.
Ironically, Ryanair – which ticks all the boxes of low wages, no unions, etc. – is also one of the airlines that gets the most consistently negative feedback.
As it happens, a similar plot to the one you and others are laying down (Unions: Bad. State ownership/influence: Bad. Less labour protection and more labour flexibility: Good. Lower wages: Good. Deregulation: Good.) has already been told time and time again when Germany felt its car makers were under attack by the Japanese. And yet – German car makers are stronger than ever, with unions and (in the case of VW) state stakeholders still intact.
Yes, I know, different story in the US (too much union influence, combined with too much bad management) and France (management focusing on the lower-margin niches of the car market). My point being – the supposed causal relationship between unions/strikes/state-ownership and bad performance doesn’t necessarily exist.
Contract/ Direct Employee Pilots of RyanAir are some of the most well compensated. And if you (a beginner FA) works your way up in experience-tenure. RyanAir FAs are compensated equal-exceeding Legacy Carriers in the EU/UK and the USA.
Union Syndicates have tried to infiltrate……..by sheer vote or choice…….RyanAir Employees are mostly copacetic not having a Union dictate to them how and when to work/strike.
VW group (Skoda,SEAT, Audi/Porsche) are the most heavily subsidized car Brand in the World……….without annual Governemnt cash-handouts(which are fronted as profits) it would no exist.
Back in 2007-2008 Ferdinand Piech stated VW sales in North America would top 850,000-1,000.00 by 2013. Total sales hover 300,000 mark…..and that’s with expensive Dealer holdbacks,expensive ad campaings,Rebates,any trick to dupe USA consumers to buy VW. Most US/North American consumers know VW products are garbage……we by choice by Toyotas/Hondas by the Millions each year.
There is a joke about the Passat( only for China/North American Market); VW s largest customer for the car are Russians buying/then shipping them over there. USA/Canadian consumers prefer the reliability of a Camry or Accords versus the unrelaible Jalopy VW offerings.
Let me make one thing clear, I am not anti-Union…..they served their purpose(globally) in the USA/EU/Japan,etc.
Yet those very entities are responsible for their own roll numbers-destruction(loss of employment) by thinking they can hold Consumers and Corporations hostage by extortion,etc. (even in bad economic times).
Aviation Unions/Syndicates together with mis-guided decadent Management of Legacy Carriers are responsible for their own market-share slippage and eventual demise.
You’re not making a case for rational arguments here 😉
VW subsidized in Germany needs explanation.
toyota and VW group are about on par in worldwide sales.
There is an interesting point with unions.
the Postwar Unionscape in Germany was dominated by hierarchical industry wide unions under a common organisational umbrella (DGB) (and a range of small to microscopic unions with no impact whatsoever). The results were rather productive trade agreements and low strike incidence. Industry wide framework agreements and one company, one union make things much easier and simpler.
Neoliberal leaning managements tried to increase their cut via sabotaging this system by way of hand feeding these “orchid” unions and thus bypassing the DGB unions.
The current strikes are the harvest reaped from these “bright” moves. It placed blackmailing powers into the hands of “size 10 ego on size 3 shoes” people.
ergo: problems are selfafflicted.
now everybody clamors for laws that shall cut down this blackmailing power.
Let’s see, that Passat Plant (the Workers) voted unanimously to rid the encroachment of the UAW.
UAW till this day is claiming foul-play. Whatever the case may be Tennessee VW folks will (without hesitation) close that Plant down if the UAW ever has its way and ship it to Mexico.
After all, Most US consumers don’t want any VW product including the US assembled Passat. because they know its Garbage; ( Fisher-Price low- quality dash and all interior Plastics/Trim included in retail price).
Meanwhile Honda/Toyota Struggle to keep-up with demand for all their USA built Camry/Accord Platform mates.
Even with Threats from Merkel and the German Government/Labor Unions…………..GM is finally doing the right thing and leaving Germany for good and Australia ……..future “Chevy/Opel/Holden” branded marks will come from GM’s Daewoo/South Korea…………where the workers are grateful for acceptable wages and benefits…and don’t strike because their un-balanced feelings were hurt or some other BS.
Qantas is in its death throws(Stock is listed don’t buy/as Junk Status)…. most Australians/International travelers have much better options……….and yes….some of those Carriers are non-Union shops to.
Mercedes/BMW most productive assembly Lines (of high margin vehicles) are located in North America.
Obviously your rational is debunked………even the Subsidized German marks can’t survive with the Destructive Antics of German Syndicate/labor Unions.
Toyota is the Number 1 brand in sales worldwide. People in the EU by Peugeot,VW,Fiat,etc…………because they feel some ” patriotic-nationality reasoning” even if there vehicles are not on par with Japanese (slowly encroaching Korean offerings).
Even As I write this, BMW needing Toyota for their next Generation of RWD platforms. Mercedes Smart vehicle? Mitsubishi built Power-train.
The slide-ruler effect when all those Union Boeing folks went on Strike? Boeing lost many sales for Carriers to Airbus and even Embraer for their regional needs. So did the Unions win in their strike?
NOPE!
“GM is finally doing the right thing and leaving Germany for good”
Opel’s downfall can mostly be blamed on the central management at GM. They blocked Opel to expand to growth markets like china. They kept the local product development on a tight leash, resulting in products less than appealing to local taste.
What works in USA doesn’t neccessarly work in Euroland (and vice versa). Companies like VW and Walmart had to find out that truth the hard way, too.
“To be honest – no offence – a lot of your article seems to be informed by your demonstrated dislike of strike action as a customer.”
No offence, but you are off the mark with your long response making a lot of assumptions.
I have no problem with unions, have been part of them, they are necessary and many times does a very good job. I have lived and worked in several countries and industries and have seen the effect of smart unions (lets make a sensible decision so the cake get larger for everyone to share and more people keep their job or gets employed) and stupid unions (we don’t care; we want our stuff regardless).
The point is that regardless of industry there comes a point when the industry and/or the world around them has changed and company management and unions needs to sit down and agree:
– what has changed
– how does that affect us
– what is the smart route to adapt so we still have a solid cake to share, ideally a growing one going forward.
Failing that, which many airlines do and it is a failure of both management and unions, you start to make the cake smaller than it could have been. Air France-KLM is a good example, I and people I know now avoid them if we can, this can not be the result management and unions should have achieved.
Another thing I have seen over the years, when an industry change one better change with it, and early. Catching up later gets harder and harder until it gets mortal.
“To be honest – no offence – a lot of your article seems to be informed by your demonstrated dislike of strike action as a customer.”
No offence, but you are off the mark with your long response making a lot of assumptions.
No offence taken, thanks for your response. 🙂
Sorry, but I had to go by what you had written in your article and your comments so far, which, to me, made those assumptions that I did make reasonable enough.
Your additional comments do obviously change my perspective/assumptions somewhat.
The point is that regardless of industry there comes a point when the industry and/or the world around them has changed and company management and unions needs to sit down and agree:
– what has changed
– how does that affect us
– what is the smart route to adapt so we still have a solid cake to share, ideally a growing one going forward.
Completely agree with this, and – in many more words – that was also what I was getting at in my comments. You did it somewhat more concisely, of course. (Let that be a stern reminder for myself to never enter into a Summarise Proust Competition.)
Another thing I have seen over the years, when an industry change one better change with it, and early. Catching up later gets harder and harder until it gets mortal.
Again, I fully agree.
Profits or losses.
It’s not only Chapt.11 that makes a difference.
no inventive bookkeeping with pensions.
A lot of things that are union negotiated in the US are state mandated here. cost for Health care, pensions and a range of other requirements/benefits. ( from the outside it looks like even the much chided ME3 do care better for their crews than american companies get away with).
Competition from rail services is much stronger here as well.
IMHO painting this as EU markets trailing on their way to a US market like setup is “off color”. ( I’ve referenced describing a problem in scope of known solutions as problematic before. )
Airlines are tertiary industries operating in the service sector. Their armed force is in the “front line”, the spearhead that Janne Carlzon proposed to turn around into the top of the Pyramid, reducing Middle Management to servicing and delivering the operational needs of the front line. Motivating airline personnel, a very particular brand of vocational singulars, is an art that very few P&CEOs have fully mastered. Herb Kelleher, Janne himself and a handful of others succeeded, but the species is ebbing out to zero as the mutual understanding between Shareholders and Airline Personnel evolve into trench warfare. But Janne was right : you motivate airline personnel giving them the power to correctly service the Customer … which is very different from giving means to the same personnel to, themselves, live better.
It is this generational clasp, this organisational misunderstanding that creates opposition between airline shareholders and frontline personnel.
What we need is a new brand of “second decade Business Gurus” of XXIst Century, capable of insufflating a new spirit of commitment to the airline. How this can be done is beyond my caption but there are certain individuals who have this skill … find them and put them at the helm and the airline turns around to success in less time than it takes to write the within post ?
Other than Swissair and SABENA, airlines with the state as a major shareholder do not want the electoral trauma of bankruptcy and the unions knows that. […] traffic can be shifted to the groups LCC (Germanwings, Transavia, Vueling…)
You’re implying here that the state still is a major stakeholder in the parent companies of Germanwings, Transavia and Vueling.
That’s only the case for 1/3 of your list, though.
Lufthansa aren’t government-owned and haven’t been since 1997; Vueling was originally a private company, which had its majority bought by IAG in 2013 – who don’t have a state/government-owned investor listed in their top 10 of biggest investors.
Most of the once proud national carriers will go the way of Aer Lingus, the subject of three takeover bids from Ryanair and now IAG
How is “going the way of Aer Lingus” a bad thing, though?
“The way of Aer Lingus” is going from highly loss-making, uncompetitive, marginalised, sub-standard to pretty competitive (against Ryanair, no less) and profit-making. Which is why they’re subject of those takeover bids to begin with.
All of that despite the fact that Aer Lingus a) still has the state as a significant stakeholder (at >25%), b) has strong unions (and strikes over pension disputes), c) has its base in a pretty small country, d) has the fiercest competition imaginable in Ryanair, and e) has its biggest competitor also as an unfriendly majority stakeholder (at >29%).
I’m curious to see how Aer Lingus are going to do once Christoph Mueller (who apparently likes difficult jobs, as he’s moving to MAS), is gone.
On the whole, the article describes some of the pressures that Europea legacy carriers are under, but ignores a few recent developments. Such as Ryanair starting to at least try and treat passengers with a little less hostility, and *not* planning any long-haul activities for the time being. Which serves as a big qualifier to the supposed “fight to the bottom”.
I’m also slightly disappointed that the article, while placing blame on states, unions and bad management, doesn’t really offer any solution(s). As I’ve hinted at in my previous post, I realise union-bashing is quite the “saveur du jour” (and has been for a while), but it’s a view that’s too mono-causal in my opinion.
Bad management is usually the main reason an airline (or any company, really) gets into trouble, not unions. Sure, some unions don’t exactly help at that point, but in most cases, unions only really start kicking up a fuss once relations between management and staff have soured significantly, making it very hard to come to any sort of compromise. Cases in point: Alitalia (pre Etihad), Boeing (particularly in Washington), GM/Opel.
So in that sense I agree with Frequent Traveller:
Motivating airline personnel, a very particular brand of vocational singulars, is an art that very few P&CEOs have fully mastered. […] you motivate airline personnel giving them the power to correctly service the Customer … which is very different from giving means to the same personnel to, themselves, live better.
It is this generational clasp, this organisational misunderstanding that creates opposition between airline shareholders and frontline personnel.
As such, this applies to the likes of Ryanair much more than, say, Lufthansa or BA.
Those legacy carriers, though, suffer from a minor variant of the same motivational issue.
Their own aggrandised self-perception as somewhat better than everybody else, that feeling of “specialness” any “Lufthanseat” (as Lufthansa staff call themselves) used to feel is suddenly challenged everywhere and by everyone. By the media, by those pesky new(ish) competitors, by the perk/pay cuts being asked of them, etc.
This is exactly where good management becomes an important factor in a company’s success. Good management mediates between different interests within the company and aligns processes and structures with reality *without* destroying the company’s soul, and the staff’s self-esteem and morale.
That’s much more complicated and time-consuming than engaging in a game of blame-shifting and scapegoating, of course, and doesn’t translate well into the metrics presented in quarterly results.
“Ryanair is known to operate one of the most unusual hiring schemes. It refers many of its new hires to a company called Brookfield Aviation International, which according to its corporate registration is based in the British town of Epsom, within a building that houses a storefront cafe and betting parlor. Brookfield sends the pilots to accountants who set up small companies and then appoint groups of pilots as directors. These companies then “enter into a contract with [Brookfield] whereby the service company would provide the services of the pilot” and Brookfield “would, in turn, provide these services to Ryanair,” according to a 2013 British court ruling in favor of a pilot based in Belgium who successfully challenged part of the arrangement. Ryanair, the court found, avoided responsibility for “taxation or pay-related social insurance contributions” on behalf of pilots hired under the arrangement.”
http://skift.com/2015/02/12/the-creative-pilot-hiring-habits-of-ryanair-and-norwegian-air-shuttle/
In the case of Swissair the company has been since its creation in 1931 a private company, the Swiss State has never put a dime in the business. The great debacle at Swissair was a crazy Hunter strategy put in place, in which Swissair Top Management did not accept a Junior position in any alliance mainly because the company had an extreme loyal customer base – almost followers per say – and a very, very high yield base. So was designed and established that Swissair would have an alliance of its own – Qualiflyer – and the idea was Swissair to buy as much ailing airlines as possible and put them back to produce black numbers within a period of 5 years. Sabena, Tap, South African Airways, LOT Polish, AOM Group a collection of small airlines in France – AOM, Air Liberte and Air Litoral to mention a few, we’re basically the airlines that Swissair bought to create the Qualiflyer Alliance. Across the Atlantic in the US, Delta Airlines gave big deal of support to Swissair offering interlineability through its hubs and access to the US Market. Including during the tragedy of SR111, Delta stood shoulder to shoulder with Swissair and provided all the help possible and even went the extra mile considering DL was only the marketing carrier of that flight.
What is not certain was when the Hunter Strategy started to become the Insane Strategy because every time that Mr Philip B. went on an international trip the group’s CFO entered in panic with the possibility of another take over for him to fix or, if the Board of Directors of Swissair had better things to do than oversee and control its President and Group CEO because sitting at the Board of Directors of Swissair – was Mr Mario Corti President and CEO of Nestle and other peers like the President of UBS, President of Credit Swiss in which Swissair was the more humble chair that they occupied in their busy careers. After 9/11 someone must have stopped and looked the balance sheet of Swissair and pressed the alarm because almost immediately the airline biggest fuel provider at that time, Shell – dropped the bomb instructing its stations worldwide that from that moment on, fuel for Swissair was only possible on a cash basis.
After the shock and National commotion of loosing its simble of pride, joy and Swissness, the government bailout came in the form of the Phoenix Plan – 4 billion Swiss Francs for the creation of a new airline which was approved by a Public Referendum since Switzerland is an Eidgenossenschaft therefore a direct Democracy and the country realized that the creation of a new airline was necessary to help the country’s economy and exports since Switzerland is landlocked.