By Bjorn Fehrm
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.
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”.
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.