Europe’s big three airline groups are making serious cuts to stem mounting losses. But if CEO Keith Williams is right, it will be a very long time before they are remotely near the healthy profit margins of four to five years ago.
Williams, whose company is part of the International Airlines Group (IAG) along with, talked to a group of executives in Geneva earlier this month and admitted that the European airline industry was “too optimistic about economic recovery and adding capacity beyond sustainable levels.” He noted that “we failed to bring our costs in line with new market entrants and we have struggled to keep pace with them,” and he warned that an earlier prediction that a real recovery would not be seen before 2018 was “not unduly pessimistic.”
British Airways (BA) had come to that conclusion a long time ago. The airline has pulled out of many of its former short-haul routes—a primary source of losses— and left them to the low-fare carriers. The airline also sold its regional division to focus on itshub, which is less dependent on connecting traffic than Frankfurt and even Paris, thanks to the almost singular status of London as a destination.
But other airlines have postponed tackling flaws in their systems. BA’s own sister company, Iberia, still hopes to push through the necessary reforms in an arbitration process that would enable it to continue to expand its short-haul affiliate, Iberia Express. Only months after launch, and with a small fleet, the carrier now has much lower unit costs than its parent, based on higher-productivity aircraft and crew.
In parallel, Iberia’s management is working on a deeper restructuring to stave mounting red ink. Substantial capacity cuts that could lead to job losses are anticipated. The downsizing will affect short-haul runs, but long-haul flying to Latin America also could suffer. Parent IAG is expected to issue an update on Nov. 9 during its “capital markets day,” which involves dialogues with its investors.
is coping with its bleak financial outlook by splitting its passenger business into three units, encompassing separate divisions for long-haul, the Paris Charles de Gaulle-based (CDG) medium-haul routes, and a unit that covers Paris Orly and the regional airports.
The reorganization is part of the Transform 2015 restructuring plan that aims to improve efficiency by 20% to save €2 billion ($2.6 billion) annually. The total group is split into eight divisions. Along with the three passenger airline units, the others are Air France Cargo; French regional flying; Transavia France, a leisure destination carrier; Servair, covering catering and airport assistance; and industrial operations. The unit chiefs will be members of Air France’s executive board. “Each of the business units must optimize the economic performance of its scope of activity,” Air France states.
Cross-functional businesses for sales, finance, human resources, network, cockpit or cabin crews will remain in place. The changes are scheduled to become effective on Jan. 1.
Air France also has set up regional bases that are to be operated more efficiently than its CDG hub. But the airline intends to remain in secondary markets under its own brand. It also has a substantial, fully owned regional aircraft operation.
is taking more drastic steps. It has already cut back on regional capacity—at least as far its own aircraft are concerned—and now is pulling out of vast parts of its current European network. Flight operations for non-hub traffic are being transferred to its lower-cost subsidiary, . A revamped Germanwings will operate a fleet of almost 90 aircraft and will be covering all point-to-point markets outside the hubs in Frankfurt and Munich. The Lufthansa brand will exit this segment to focus exclusively on long-haul and hub-and-spoke routes.
“Our European operations have been taking substantial losses for a number of years,” Lufthansa CEO Christoph Franz says. In the past, significant profits in the long-haul field could be used to cross-subsidize the short-haul network, but that is no longer the case. “We are also seeing prices fall on long-haul routes,” Franz adds. So, the airline is now making serious efforts to return its short-haul operation to profitability.
Franz points out that in light of the recent links forged by/Oneworld, /Air France- and / , Lufthansa cannot ignore the structural changes in long-haul operations. The airline plans to cultivate relationships with existing joint ventures, such as or .
The new short-haul offspring will use the Germanwings brand and be based at Cologne/Bonn Airport.
Approximately 30 Lufthansaand A319s are to be transferred to Germanwings to bolster its fleet of about 30 A319s. Additionally, 19 , operated by regional carrier Eurowings, will complement the network, although Eurowings will not be merged into the new entity.
Carsten Spohr, CEO of Lufthansa’s passenger airline business, says unit costs in the segment are nearly 20% lower than in the hub-and-spoke system today, but another 20% is targeted. Spohr says the transition will take about two years.
The new Germanwings will not offer a business class, thus Lufthansa is the first major European legacy carrier to abandon that concept on short-haul services. Business class will be available only on hub-feeder services.
Significantly higher aircraft utilization is a key goal. The airline’s short-haul fleet currently flies about 8 block hr. per day due to the complexities of the hub-and-spoke operation and because it is rarely used on weekends. A bump up to 10 block hr. per day is being sought.