October 23, 2012
Europe’s big three airline groups are making serious cuts to stem mounting losses. But if British Airways 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 Iberia, 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 its London Heathrow Airport hub, 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.
Air France 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.