By Ross Tieman
Financial Times
Much of Europe’s aviation industry is caught in a vortex of seemingly-endless restructuring. No matter how much legacy airlines adapt, by the time they have reshaped, their operating environment has altered again, and new threats have emerged.
The 3,500 job cuts unveiled by Lufthansa on May 3 come against a dark horizon. The airline lost €381m in the first quarter of 2012. It expects an operating profit for the year, but is shedding 3 per cent of employees as part of a €1.5bn, three-year cost-cutting programme.
Air France-KLM has also launched a restructuring drive, designed to slash ex-fuel unit costs by 10 per cent, after a net loss of €809m in 2011.
And International Airlines Group (IAG) is seeking more work for less pay at its main Spanish arm Iberia, after winning a productivity deal at British Airways, newly enlarged by a takeover of former rival BMI which added take-off and landing slots at London’s Heathrow.
Restructuring experts say Europe has too many airlines, competing in an imperfect market distorted by state involvement. They also face higher costs from dearer fuel, at a time of intensifying competition.
Airline profit margins tend to be slim. But the International Air Transport Association (Iata) forecasts that while those in Asia, North America, Latin America and the Middle East are likely to remain profitable in 2012 unless oil prices spike higher, European airlines collectively will lose €600m.
Roger de Peyrecave, leader of the airlines team at PwC, says: “A lot of pressures are converging on Europe’s airlines in 2012 and beyond”.
Partial liberalisation of the European Union aviation market has enabled low-cost airlines, led by Ryanair and easyJet, to undercut rivals on short and medium-haul routes.
Now fares on long-haul routes are under pressure from restructured North American carriers, and highly-efficient airlines based in the Arabian Gulf.
Gulf airlines, by operating only large, fuel-efficient wide body aircraft, benefit from low costs and have operating bases handily located midway between Europe and Asia.
Historically, the leading European former flag carriers used profits from long-haul routes to subsidise the short-haul flights that bring passengers to and from their long-haul hubs.
But as long-haul fares come under pressure, European carriers must try to reach the highest levels of efficiency on each kind of route they operate.
Philipp Goedeking, a managing director and aviation expert at corporate turnround specialist AlixPartners, says: “A big, and very rapid change, is going on in the European aviation market”.
He identifies three main kinds of carrier among roughly 500 airlines in Europe.
The big full-service carriers have the scale to achieve efficiencies, but need to cut costs.
Partly because of historic agreements, they often pay higher salaries for lower productivity from staff than the second group, their big short and medium-haul low-cost rivals.
The third group comprises midsized flag carriers and a number of newish privately owned airlines. “There are many small unprofitable low-cost carriers, which in reality may be low-fare but certainly not low-cost,” he says. “Airlines are scale-driven.”
The difficulties of some of these under-scale companies, in a market where the European Commission is a vigilant opponent of state aid, are readily apparent. Two airlines, Spanair, backed by the state of Catalonia, and Malev, Hungary’s state airline, have collapsed this year.
LOT in Poland and CSA Czech Airlines are among state airlines that are simultaneously striving to improve efficiency and find a partner.
Advisers and consultants are working with many companies to find a way forward.
Restructuring airlines is complicated, Mr Goedeking says. “You have to work with governments, renegotiate incentives, explore alliances and consolidation opportunities, and – in parallel – cut all possible costs.”
Bigger carriers usually have only one reason to buy their smaller brethren. “You never buy an airline; you buy access to a market,” Mr Goedeking says.
Buying and closing airlines within Europe removes rivals and triggers competition concerns.
This year, Etihad, a fast-growing Gulf carrier, lifted its stake in Air Berlin to 29 per cent and acquired a near-3 per cent stake in Aer Lingus of Ireland.
Tanja Wielgoss, head of aviation activities in central Europe for AT Kearney, a consultancy, says: “This is a first sign of the way things may go.
“Instead of negotiating traffic rights with each of the European states, Etihad now has access to a Europe-wide feeder service for its Abu Dhabi hub.”
If Europe’s big legacy carriers are to respond effectively, they need a new vision that their employees, who are often asked to work harder for less money, can share, she says.
“Moreover, their almost exclusive focus on the bottom line may not be enough in times when the business model is fundamentally challenged.”
To thrive, European carriers will need to understand and provide what customers like, and are willing to pay for, she says.
But Ms Wielgoss also thinks governments should get out of the way. “It is time for national states to tear down the old system of traffic rights,” she says.
“Passengers would benefit if there were real economies of scale. Travellers would be able to choose between clearly defined services and standards.”
Source: http://www.ft.com
The 3,500 job cuts unveiled by Lufthansa on May 3 come against a dark horizon. The airline lost €381m in the first quarter of 2012. It expects an operating profit for the year, but is shedding 3 per cent of employees as part of a €1.5bn, three-year cost-cutting programme.
Air France-KLM has also launched a restructuring drive, designed to slash ex-fuel unit costs by 10 per cent, after a net loss of €809m in 2011.
And International Airlines Group (IAG) is seeking more work for less pay at its main Spanish arm Iberia, after winning a productivity deal at British Airways, newly enlarged by a takeover of former rival BMI which added take-off and landing slots at London’s Heathrow.
Restructuring experts say Europe has too many airlines, competing in an imperfect market distorted by state involvement. They also face higher costs from dearer fuel, at a time of intensifying competition.
Airline profit margins tend to be slim. But the International Air Transport Association (Iata) forecasts that while those in Asia, North America, Latin America and the Middle East are likely to remain profitable in 2012 unless oil prices spike higher, European airlines collectively will lose €600m.
Roger de Peyrecave, leader of the airlines team at PwC, says: “A lot of pressures are converging on Europe’s airlines in 2012 and beyond”.
Partial liberalisation of the European Union aviation market has enabled low-cost airlines, led by Ryanair and easyJet, to undercut rivals on short and medium-haul routes.
Now fares on long-haul routes are under pressure from restructured North American carriers, and highly-efficient airlines based in the Arabian Gulf.
Gulf airlines, by operating only large, fuel-efficient wide body aircraft, benefit from low costs and have operating bases handily located midway between Europe and Asia.
Historically, the leading European former flag carriers used profits from long-haul routes to subsidise the short-haul flights that bring passengers to and from their long-haul hubs.
But as long-haul fares come under pressure, European carriers must try to reach the highest levels of efficiency on each kind of route they operate.
Philipp Goedeking, a managing director and aviation expert at corporate turnround specialist AlixPartners, says: “A big, and very rapid change, is going on in the European aviation market”.
He identifies three main kinds of carrier among roughly 500 airlines in Europe.
The big full-service carriers have the scale to achieve efficiencies, but need to cut costs.
Partly because of historic agreements, they often pay higher salaries for lower productivity from staff than the second group, their big short and medium-haul low-cost rivals.
The third group comprises midsized flag carriers and a number of newish privately owned airlines. “There are many small unprofitable low-cost carriers, which in reality may be low-fare but certainly not low-cost,” he says. “Airlines are scale-driven.”
The difficulties of some of these under-scale companies, in a market where the European Commission is a vigilant opponent of state aid, are readily apparent. Two airlines, Spanair, backed by the state of Catalonia, and Malev, Hungary’s state airline, have collapsed this year.
LOT in Poland and CSA Czech Airlines are among state airlines that are simultaneously striving to improve efficiency and find a partner.
Advisers and consultants are working with many companies to find a way forward.
Restructuring airlines is complicated, Mr Goedeking says. “You have to work with governments, renegotiate incentives, explore alliances and consolidation opportunities, and – in parallel – cut all possible costs.”
Bigger carriers usually have only one reason to buy their smaller brethren. “You never buy an airline; you buy access to a market,” Mr Goedeking says.
Buying and closing airlines within Europe removes rivals and triggers competition concerns.
This year, Etihad, a fast-growing Gulf carrier, lifted its stake in Air Berlin to 29 per cent and acquired a near-3 per cent stake in Aer Lingus of Ireland.
Tanja Wielgoss, head of aviation activities in central Europe for AT Kearney, a consultancy, says: “This is a first sign of the way things may go.
“Instead of negotiating traffic rights with each of the European states, Etihad now has access to a Europe-wide feeder service for its Abu Dhabi hub.”
If Europe’s big legacy carriers are to respond effectively, they need a new vision that their employees, who are often asked to work harder for less money, can share, she says.
“Moreover, their almost exclusive focus on the bottom line may not be enough in times when the business model is fundamentally challenged.”
To thrive, European carriers will need to understand and provide what customers like, and are willing to pay for, she says.
But Ms Wielgoss also thinks governments should get out of the way. “It is time for national states to tear down the old system of traffic rights,” she says.
“Passengers would benefit if there were real economies of scale. Travellers would be able to choose between clearly defined services and standards.”
Source: http://www.ft.com
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