Author`s name Dmitry Sudakov

European airlines give way to Asian competitors

Europe is the only part of the world where things the situation for air carriers leaves much to be desired. In 2012 the total loss of European companies amounted to over 1.2 billion euros. The media keeps delivering information about strikes of airline employees. As a result, flights are getting canceled and passengers suffer. What is behind the poor state of airlines in Europe?

The strike of ground services of Lufthansa that swept all the major German aviation hubs has led to the fact that over 1,700 airline flights were canceled. Protests have affected hundreds of thousands of passengers who could not travel. The major European carrier is threatened not only by a one-time multi-million dollar loss, but also loss of reputation and confidence of its passengers, which can be much more painful.

The strike affected the work of all major aviation hubs in airports of Munich, Hamburg, Frankfurt-am-Main, Stuttgart, Berlin and Dusseldorf. The airline was forced to cancel nearly all flights within Germany. Intercontinental flights were also affected. 1.72 thousands of flights were planned for yesterday, but only 32 aircraft operated.

The union of service workers Ver. di, the organizer of this event, announced the upcoming full-day warning strike in the morning of April 19th. The airline had plenty of time to notify its passengers and offer alternatives. The union demanded a raise for 33 thousand of Lufthansa employees by 5.2 percent.

The next round of negotiations on wages is to be held on April 29-30th. The union decided to put extra pressure on its employer through a strike. Ver. di already held a similar strike a month ago. Then the airline staff were on strike for only 7 hours. The airline was forced to cancel 700 flights at the time.

Six months ago, the most large-scale strike at Lufthansa took place. Then flight attendants went on strike for several days, causing thousands of flight cancellations, and the German carrier suffered major losses as a result. While air carriers in Germany still fight for their demands through strikes, the Spanish decided to use more extreme measures. Late last year, managers of Spanish airline Iberia announced dismissal of 4.5 thousand employees of the existing 20,000.

The main reasons for such a drastic step were expensive kerosene and financial crisis in Spain that forced passengers to seek services with lower costs. If international carriers somehow still survive in this market, regional carriers are in a very difficult situation. They suffer huge losses and cease their activity. Recently German company OLT Express Germany announced its bankruptcy. This carrier mainly operated in Germany and Switzerland.

OLT Express Germany was part of the Polish airline OLT Express. The head carrier ceased its operations last summer, and its German subsidiary tried to stay afloat. As explained by the company, the owners did not approve the plan of financial recovery proposed by the German branch.

Last year, total operating losses of three major European airlines - Lufthansa, International Airlines Group and Air France-KLM - amounted to 1.2 billion euros. According to experts, leaders of the sector must follow the example of the budget airlines and reduce their costs. Lufthansa's losses amounted to 381 million euros, Air France-KLM - 597 million euros, and the International Airlines Group - 230 million euros. Europe's airline industry is the worst position.

"The prospects are very bad, and, first of all, it concerns the European airlines", said head of the International Air Transport Association Tony Tyler. At the same time representatives of the "Big Three" carriers still argue that high fuel prices, flight fees, restrictions on night flights and quotas on emissions are to blame in their poor state.

The main problem of the "big three" is that in order to compete effectively with low cost companies in the segment of short-haul and medium-haul traffic, they need to cut costs. But in this case, European airlines risk losing to their Arab counterparts in the long-haul segment. Chairman of the Supervisory Board of Lufthansa Juergen Weber admitted that the situation was threatening. The fight at several fronts is hopeless, but is still underway.

The financial crisis in Europe, high price of jet fuel and labor costs are the main reasons for the lamentable state of the European airlines. According to the International Air Transport Association, IATA, European airlines also suffer from high taxes, inefficient air traffic management and infrastructure, and burdensome regulatory environment.

The most important factor in reducing the profitability of airlines, of course, is the cost of aviation fuel, which saw a nearly 40 percent increase over the past two years. The slightest increase in the price of oil automatically leads to great losses for airlines. Aviation market expert Sebastian Goschinarek believes that the deterioration of the financial performance of European carriers is caused by the reduction of the number of passengers and their gradual transition to lower-cost segments.

"Fewer people are travelling, some abandoned business class that was the main source of income for European airlines," he said. One of the reasons why the European airline business is in a poor state is the fact that many countries of the Old World still regard their national airline as a symbol of national pride. This means that foreign investors simply cannot get a majority in the national airlines.  

According to Lufthansa CEO Christoph Franz, European government airlines have extensive costs. For example, in Lufthansa they account for over 95 percent of turnover, whereas in the Emirates airline - 85. For European budget airlines this number is even smaller. However, they do not fly between the continents.

It is these ten percent of the difference that allow for a rapid growth of young airlines. The difference comes from lower pension contributions, as well as cheaper labor. In addition, in Arab countries unions are not developed unlike in the Old World, where any small change in the employment contract turns into strikes and consequent losses.

Another important factor is that foreign fleets of budget airlines tend to be much younger than the aircraft of major European companies. Therefore, the cost of repairing privatized state-owned airlines in Asia is significantly lower than in Europe. In the European market there are many low-cost airlines (mainly from Asia), so local carriers have to reduce the cost of flights, and consequently, their profits.

Major carriers certainly do not want to lose profits and give the market to their cheaper Arab and Asian colleagues. But they are well aware that without reducing the costs they cannot compete for a long time. Everyone knows that the easiest way to reduce the costs of any enterprise is to reduce wages of the employees. But such measures will not cause anything but strikes, disruption of flights and a loss of customer confidence. European airlines need to find other methods to reduce costs and increase profits.

Sergei Vasilenkov


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