The three big European airline groups have been in restructuring mode for years. While International Airlines Group (IAG) has seen some improvement in the turnaround of , - and are discovering that they need to do more to reach sustainable cost levels.
Lufthansa has been working through a list of hundreds of previously identified cost-saving items as part of its Score restructuring program, which is meant to improve operating results by €1.5 billion ($1.97 billion) in 2015. Two core company aspects it has been reluctant to touch are pensions and bridge financing for pilots, many of whom opt to retire before the mandatory retirement age.
But in an abrupt about-face, the airline decided to unilaterally terminate collective-bargaining agreements covering company pensions and early retirement provisions for flight crew.
The move affects 60,000 employees based in Germany and is expected to provoke serious labor dissension. Lufthansa argues it can no longer afford to spend up to €400 million annually to address a widening pension deficit created by the difference between expected and actual interest rates. Exacerbating the problem is that average life expectancy has grown significantly in the past decades, so pensions have to be paid out for a longer span. Many large German corporations have already implemented lower-cost pension plans.
But one aspect of retirement regulations specifically affects flight crews. Lufthansa and its pilot union Vereinigung Cockpit (VC) have historically agreed on a mandatory retirement age of 60 for pilots. Pilots could retire at 55, but on average, flight crews opted to leave at 58. The company and its pilots have contributed to a transition fund that bridges the time between a pilot's last flight at the controls and age 63—the earliest possible general retirement age in Germany.
However, Lufthansa argues that the fundamentals for this arrangement are now moot, since a high court has ruled that requiring pilots to retire at 60 is discriminatory.
The airline wants to phase out the bridge financing arrangement, saying those who are closest to retirement should be affected the least. But new hires will likely have to fly much longer than their older cohorts, unless they accept lower pensions.
Lufthansa tried to appease its workers by stating that whatever has been contributed to the pension plan so far is not lost and will be counted against future payouts with no deduction. Vereinigung Cockpit's position is that it is “disgusted” and will actively defend the status quo. VC argues that since pilots have already started to retire later, the airline is actually saving money.
The airline and its union also have to negotiate a new pay deal. VC told Aviation Week it will demand significantly higher raises in light of the future pension shortfalls.
In another issue, Lufthansa is again facing uncertainty over the restructuring of its subsidiary, Austrian. A Vienna “first instance” (regional) court ruled that last year's transition of operations and employment from Austrian to its former regional subsidiary, Tyrolean, was illegal. The move was the cornerstone of the strategy to return Austrian to operating profit within five years.
If that ruling holds, Austrian's future would be in limbo.CEO Jaan Albrecht says the airline was “surprised” by the ruling. Austrian has no alternative plan. Its legacy pilots are still receiving the same pay at Tyrolean, but their pensions are greatly reduced. They also had to agree to a multiyear pay freeze, which will remain in place until the former regional pilots have caught up to the same pay level.
That whole arrangement has not only been the basis for extraordinary charges to last year's financial result, it was also the key to lower unit costs and, ultimately growth. Lufthansa has said it will only back financing of additional aircraft if Austrian is profitable.
Austrian is appealing the decision—a process likely to take years—so there is significant uncertainty about the airline's long-term viability.
By contrast, Air France-KLM still sees a need to focus on network issues to improve its situation. Air France is the main cause of the shortfalls. With losses of nearly €1 billion in 2012, the French unit was responsible for around 80% of the entire group's deficit. The airline has been slashing short- and medium-haul capacity, but this has not yet lead the airline back into profitability. Air France has been split into several units. Its regional bases in three French cities—Nice, Toulouse and Marseille—are major contributors to the airline's financial headaches. The carrier has tried to retain its own service at airports with a high level of business travel, while the more leisure-oriented markets have been assigned to Transavia France, the group's low-fare affiliate. More cuts are likely soon at the regional bases.
Rival Lufthansa has transferred all non-hub short- and medium-haul flying to its lower-cost subsidiary,.
Also, regional unit HUB may see more changes soon. The division, comprising Brit Air, Regional and Airlinair, has been merged on paper, but a lot of overlaps remain and are causing further inefficiencies. Air France has also been trying to sell its unprofitable subsidiary City Jet to Intro Aviation, an airline turnaround specialist based in Germany, but the process has been moving much slower than anticipated.
On the other hand, SAS Group is proving that decisive measures can have a positive effect. The airline, which was only hours away from bankruptcy early in the year, his posted a small net profit in the third quarter, admittedly its seasonally strongest period. The airline pushed through double-digit wage cuts for flight crew and ground staff and is in the process of selling Wideroe, its Norwegian regional unit. SAS predicts it will reach an operating margin above 3% in its fiscal 2012-13, which ends in October.
However, while the airline appears to have resolved its labor cost issues, it still suffers from the low-yield high-competition European short- and medium-haul market; SAS's long-haul network is subscale compared with others.
And things appear to be getting worse: Last week, rival Norwegianannounced new services to Orlando, Fla., Los Angeles, and Oakland, Calif. And Icelandair, which pulls a lot of Scandinavian traffic over its Reyjkavik hub, will fly to more North American destinations, too, adding Edmonton, Alberta; Vancouver, B.C.; and Anchorage, Alaska, to its network soon.