Cabin crews prepare for hard landing

October 7, 2009

There’s no point trying to be a low-cost airline if your revenues fall a long way short of your running costs. Since staff wages account for a large chunk of most airlines’ bills, job cuts such as those just announced by British Airways and Aer Lingus are only the beginning as the industry scrambles to adopt a no-frills model.

Low-cost upstarts like Ryanair and EasyJet operate on a far lower cost base than the national carriers whose local business they have been eating into. Attempts by the incumbents to respond by charging for baggage, meals or reserving specific seats isn’t going to solve the fundamental problem that their costs are higher.

But the conundrum for the traditional airlines making this necessary and overdue transition — through one of the toughest periods ever for the industry — is that taking costs out of the business by shedding staff is neither quick nor easy. The threat of industrial action and the resulting passenger disruption is always high on executives’ list of concerns.

Despite this, British Airways took the plunge and risked the ire of its unions on Tuesday when it moved from pay cuts and freezes to cutting the equivalent of 1,700 jobs. Aer Lingus has followed suit with a jobs cull — under the banner of a “transformational restructuring plan” — which will see it shed 676 posts in an attempt to become dramatically more efficient. This should help in its battle with Irish rival and 30 percent shareholder Ryanair.

Societe Generale’s analysts see labour negotiations as one of the major concerns for British Airways, arguing its shares are overvalued “given that the sector is 2-3 years from mid-cycle and faces uncertainties over the pace of the recovery in traffic (especially premium), yields and earnings”.

That uncertainty is underlined by the latest traffic figures for European airlines, with Air France-KLM reporting a 3.7 percent fall in September, Finnair’s down nearly 11 percent and Scandinavian airline SAS’s passenger numbers falling by 17.7 percent in September.

And although the International Air Transport Association (IATA) is making more positive noises about a recovery in air traffic demand, it is distinctly bearish about airlines having any hope of making a profit. IATA expects the industry as a whole to lose $11 billion in 2009 and $3.8 billion in 2010.

One obvious solution to this conundrum is consolidation. But deals face multiple hurdles: BA and Iberia have been in talks for years, while Aer Lingus continues to resist Ryanair’s overtures. And even if these can be overcome the result will be more job cuts. Passengers will continue to demand cheap fares and choice. Ensuring they get that will mean cutting more than the frills.

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