PILARSKI SAYS… Labour conflicts as a manifestation of possible future oversupply of aircraft

PILARSKI SAYS…

Labour conflicts as a manifestation of possible future oversupply of aircraft

Increased unrest by airline workforces could change the role of legacy carriers, writes Adam Pilarski, Senior Vice President at Avitas

As featured in Airfinance Journal Column PILARSKI SAYS

Now that fuel prices are, at least temporarily, at much lower levels, labour conflicts are becoming more important to the airline industry. Flight attendants of American rejected a contract by 16 votes from more than 16,000 cast. Qantas faces unrest and there is labour tension worldwide. Serious strikes at Lufthansa and Air France/KLM provided big news. The latter two cost hundreds of millions of euros, and forced Lufthansa to reduce its profit outlook a few times. These conflicts are the result of the different objectives of management and labour. Management wants to increase profits by squeezing salaries, while labour is averse to any reduction to their standard of work and living. The major way legacy airlines can reduce costs is to try to lower existing salaries. Not surprisingly, labour is vehemently opposed to such developments. So, various new approaches are attempted. One is to establish new low-cost subsidiaries of existing legacy carriers. This approach failed spectacularly in the US, where all the mini-me’s were aborted. The reason was that the new start-ups, while supposedly appealing to a more cost-conscious leisure-travelling segment of the population, were still faced with the same labour costs. The pilots were paid the same as those on other routes. Unions rationally understand that allowing those subsidiaries to pay less will eventually move more traffic to those entities, costing members’ jobs. Lowering costs through salary reductions is especially important for legacy carriers burdened by union agreements that tied salaries and retirement benefits to employees’ tenure. For a legacy carrier that means high average salaries and a substantial burden of pensions. The attempts at Lufthansa and Air France to reduce costs involved attempts to outsource jobs of existing union workers. Why do we have the much-publicized labour conflicts in Germany, France and other places now that the airline industry is on average relatively profitable? As union members see it, now that airlines make money, they can afford to pay their employees more. Management is more concerned with costs because of added competition from low-cost carriers and start-ups, mainly domiciled in the Middle East. Airlines in the US – which for the past few years have experienced horrendous losses – finally are doing better, and it is becoming the most profitable region in the world. The reality in the US is that the government actively supports consolidation and all mergers were approved, which resulted in a highly oligopolistic market with few remaining carriers restricting capacity growth and increasing fares. There have been no real start-ups in the US for quite some time and the remaining carriers divide the market by controlling capacity. The result is that the US industry has been highly, at least by historical standards, profitable. The legacy carriers in Asia and Europe face a very different environment. In Asia, new low-cost carriers are proceeding with huge orders threatening the legacies. In Europe, the situation is even direr for legacies. On shorter routes, where service differentiation and other benefits legacies can offer are much less relevant, low-cost carriers are expanding very fast. On longer routes, the Middle Eastern carriers expanded very fast and are on a trajectory to even faster growth. This growth is at the direct expense of European legacy carriers such as Lufthansa and Air France. The huge orders placed by low-cost carriers and Middle Eastern airlines indicate that the status quo cannot continue. European legacies will either have to stop expanding and cancel aircraft orders or dramatically reduce costs in order to compete. This is one of the reasons for the large order bubble we are experiencing, which is a major factor explaining the strikes in Germany and France. Two big changes are happening within the airlines as a result of changes in the competitive environment. One is the movement towards unbundling, or transparency, in charging passengers for every individual aspect of flight. The other is the attempt to reduce labour costs. Since labour will not accept lower salaries, especially in times of enhanced airline profitability, the management of legacy carriers tries to move part of their flying to entities with lower costs, attempting to avoid the mistakes committed in the US, where lower salaries were not allowed. Pressure for employing entities with lower labour costs creates strong resistance from unions, which led to the recent European strikes. What will the future bring? The labour conflict is a part of much bigger problems. If present realities continue, carriers such as Lufthansa and Air France will either have to shrink or dramatically change their cost structure. Labour conflicts always have a large irrational aspect to them. If I were a guessing man, I would bet the outcome would be a diminished role of legacy carriers in European flights. The recent collapse of oil prices, though, may help European legacy carriers by weakening their Gulf competitors.

As featured in Airfinance Journal Column PILARSKI SAYS