BahrainLad
9th Jul 2001, 09:01
Fasten your seatbelts
Jul 5th 2001
From The Economist Global Agenda
A rash of strikes is making air travel even more stressful than usual for millions of passengers. But life for airline managers and shareholders is not too pleasant either. Falling traffic numbers, rising losses and failed mergers are adding to the industry’s gloom
ON ANY given day, more than 4m people around the world take to the air. If any industry seems naturally global, it is surely the airline industry, with routes that crisscross borders everywhere. But as a recent rash of strikes shows, airline companies have found that building global alliances is creating all sorts of problems for them, from regulatory tangles to growing resentment and fear from their own workers. With threats of more industrial action to come, airlines will struggle financially and many already disgruntled passengers will face chaos. And all this has erupted just as the growth in air travel is stalling. The last time that happened was a decade ago, when a combination of recession and the Gulf war ravaged the industry. So passengers, managers, and employees all look set for a bumpy ride in the next few months.
Airline staff are unhappy in America, Europe and Asia. Industrial action by pilots, in particular, has been growing. The latest wave of trouble started last summer when pilots at United Airlines in America won pay increases of around 24%, followed by their colleagues at Delta Air Lines. Now pilots at Hong Kong’s Cathay Pacific are on a go-slow and those with Spain’s Iberia down joysticks every other day. They were doing likewise until last month when an outside mediator gave them most of the huge pay rise that they wanted. Lufthansa’s pilots were seeking parity with their colleagues in the German airline’s American alliance partner, the open-handed United.
The world’s biggest airlines have flocked together into alliances in an attempt to expand their networks around the world and to cut costs by sharing some parts of their operations. Going global, however, has encouraged staff to compare their wage packets. The result is that flight crews in Europe and Asia are now demanding global pay—harmonised, of course, at the more generous American levels.
Although many airlines have made fat profits in recent years, they have been less successful in cutting costs through alliances. There are now three main groups, known as Star Alliance (United, Lufthansa, Singapore and ten others), Oneworld (led by British Airways, American Airlines and Cathay Pacific), and Skyteam (Delta, Air France and Korean Air among others). The pilots have organised themselves along similar lines. They have formed associations for each of the big three alliances. The Star one is called—wait for it—ASAP (which officially stands for Association of Star Alliance Pilots, but which is better known as an abbreviation for “as soon as possible” ;). Aptly, its members have wasted no time in swapping notes on pay and conditions, and on negotiating tactics.
Pilots had feared that the alliance airlines would draft in pilots from their partners in lower-wage countries, as already happens with cabin attendants. Instead, the pilots have sought to level up to American salaries. John Lindquist of the Boston Consulting Group, and the author of a new study on alliances, reckons the airlines risk losing more money from this sort of pilot activism than they could ever recoup in back-office cost savings.
Fly me to the moon
All this labour trouble comes at an awkward time for the airlines. The trouble is that huge pay rises are increasing costs just as the industry goes into a cyclical downturn and profits melt away. Moreover, big pay rises for pilots make humbler workers in the travel business keen to get more than the modest rises they would normally expect. In the meantime they become surly because they feel they are exploited. And surly is not good in a service industry. Striking bus drivers in some Spanish resorts left thousands of European holiday makers stranded at airports at the end of June.
The slowdown in air travel will be a shock for the airlines themselves. After a long and comfortable period of growing by 5% a year, which was faster than GDP in all its main markets, air travel in Europe and America fell by about 2% in May, year-on-year. This is already hitting the bottom line. This week, shares in the Dutch airline KLM fell by 5% after it gave a warning that its first-quarter profit would be “substantially” below that of last year. In America, only Southwest Airlines and Continental stayed in profit in the first quarter of this year (admittedly, always a slack period for airlines). In Europe, Air France, Lufthansa and British Airways have been making losses. United Airlines said this week that it would cut its dividend by 84% because the tough conditions of the first quarter carried through to the second and are eating into profits.
United’s woes illustrate the wider picture of a beleaguered industry that is struggling to consolidate while it tries to become more global. United now plans to scrap its agreed takeover of US Airways, which was announced in May last year and which would have made it the biggest airline in the world. Unfortunately for the airline, the plan raised serious competition worries and was likely to be blocked.
Another merger that has gone sour is Swissair’s flirtation with Belgium’s Sabena, in which it has a 49.5% stake. Swissair has crushing problems of its own and is unwilling to pour in more money unless the Belgian government chips in and orders big job cuts. Furious Sabena workers blocked a runway to prevent a Swissair flight from taking off from Brussels on July 3rd.
Despite these failed marriages, tougher times may force more airlines together. Air France and Alitalia agreed at the end of June to form an operating alliance that could lead them to take equity stakes in each other. This follows Alitalia’s failure to woo KLM. And British Airways has high hopes that it can re-launch its so-called “virtual” merger with American Airlines, which stalled when European Union regulators raised objections. But with employees and their unions linking up in alliances too, even if some of these incipient mergers and alliances eventually succeed, the current turbulence in the industry will be far from over.
Comments, anyone?
Jul 5th 2001
From The Economist Global Agenda
A rash of strikes is making air travel even more stressful than usual for millions of passengers. But life for airline managers and shareholders is not too pleasant either. Falling traffic numbers, rising losses and failed mergers are adding to the industry’s gloom
ON ANY given day, more than 4m people around the world take to the air. If any industry seems naturally global, it is surely the airline industry, with routes that crisscross borders everywhere. But as a recent rash of strikes shows, airline companies have found that building global alliances is creating all sorts of problems for them, from regulatory tangles to growing resentment and fear from their own workers. With threats of more industrial action to come, airlines will struggle financially and many already disgruntled passengers will face chaos. And all this has erupted just as the growth in air travel is stalling. The last time that happened was a decade ago, when a combination of recession and the Gulf war ravaged the industry. So passengers, managers, and employees all look set for a bumpy ride in the next few months.
Airline staff are unhappy in America, Europe and Asia. Industrial action by pilots, in particular, has been growing. The latest wave of trouble started last summer when pilots at United Airlines in America won pay increases of around 24%, followed by their colleagues at Delta Air Lines. Now pilots at Hong Kong’s Cathay Pacific are on a go-slow and those with Spain’s Iberia down joysticks every other day. They were doing likewise until last month when an outside mediator gave them most of the huge pay rise that they wanted. Lufthansa’s pilots were seeking parity with their colleagues in the German airline’s American alliance partner, the open-handed United.
The world’s biggest airlines have flocked together into alliances in an attempt to expand their networks around the world and to cut costs by sharing some parts of their operations. Going global, however, has encouraged staff to compare their wage packets. The result is that flight crews in Europe and Asia are now demanding global pay—harmonised, of course, at the more generous American levels.
Although many airlines have made fat profits in recent years, they have been less successful in cutting costs through alliances. There are now three main groups, known as Star Alliance (United, Lufthansa, Singapore and ten others), Oneworld (led by British Airways, American Airlines and Cathay Pacific), and Skyteam (Delta, Air France and Korean Air among others). The pilots have organised themselves along similar lines. They have formed associations for each of the big three alliances. The Star one is called—wait for it—ASAP (which officially stands for Association of Star Alliance Pilots, but which is better known as an abbreviation for “as soon as possible” ;). Aptly, its members have wasted no time in swapping notes on pay and conditions, and on negotiating tactics.
Pilots had feared that the alliance airlines would draft in pilots from their partners in lower-wage countries, as already happens with cabin attendants. Instead, the pilots have sought to level up to American salaries. John Lindquist of the Boston Consulting Group, and the author of a new study on alliances, reckons the airlines risk losing more money from this sort of pilot activism than they could ever recoup in back-office cost savings.
Fly me to the moon
All this labour trouble comes at an awkward time for the airlines. The trouble is that huge pay rises are increasing costs just as the industry goes into a cyclical downturn and profits melt away. Moreover, big pay rises for pilots make humbler workers in the travel business keen to get more than the modest rises they would normally expect. In the meantime they become surly because they feel they are exploited. And surly is not good in a service industry. Striking bus drivers in some Spanish resorts left thousands of European holiday makers stranded at airports at the end of June.
The slowdown in air travel will be a shock for the airlines themselves. After a long and comfortable period of growing by 5% a year, which was faster than GDP in all its main markets, air travel in Europe and America fell by about 2% in May, year-on-year. This is already hitting the bottom line. This week, shares in the Dutch airline KLM fell by 5% after it gave a warning that its first-quarter profit would be “substantially” below that of last year. In America, only Southwest Airlines and Continental stayed in profit in the first quarter of this year (admittedly, always a slack period for airlines). In Europe, Air France, Lufthansa and British Airways have been making losses. United Airlines said this week that it would cut its dividend by 84% because the tough conditions of the first quarter carried through to the second and are eating into profits.
United’s woes illustrate the wider picture of a beleaguered industry that is struggling to consolidate while it tries to become more global. United now plans to scrap its agreed takeover of US Airways, which was announced in May last year and which would have made it the biggest airline in the world. Unfortunately for the airline, the plan raised serious competition worries and was likely to be blocked.
Another merger that has gone sour is Swissair’s flirtation with Belgium’s Sabena, in which it has a 49.5% stake. Swissair has crushing problems of its own and is unwilling to pour in more money unless the Belgian government chips in and orders big job cuts. Furious Sabena workers blocked a runway to prevent a Swissair flight from taking off from Brussels on July 3rd.
Despite these failed marriages, tougher times may force more airlines together. Air France and Alitalia agreed at the end of June to form an operating alliance that could lead them to take equity stakes in each other. This follows Alitalia’s failure to woo KLM. And British Airways has high hopes that it can re-launch its so-called “virtual” merger with American Airlines, which stalled when European Union regulators raised objections. But with employees and their unions linking up in alliances too, even if some of these incipient mergers and alliances eventually succeed, the current turbulence in the industry will be far from over.
Comments, anyone?