European airlines forced into drastic action

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As the bite of the downturn becomes more painful, airlines in Europe are being forced into taking drastic action to further cut their costs, with some examining the possibility of deep structural changes.

British Airways recently offered voluntary redundancy to 1,400 senior and middle ­management employees across every department. A total of 450 managers took up the offer ahead of the closing date, which has now passed. BA says it would have made cuts to its ­management ranks anyway, but admits that this particular round of cuts was "brought forward" by the current downturn and high fuel prices.

The carrier has also closed a cabin crew base in Glasgow, affecting 135 staff, but it says that "there were no compulsory redundancies. Staff were entitled to transfer to Heathrow or take voluntary redundancy".

DESPERATE CUTS

Ireland's Aer Lingus is also ­desperately trying to push through another major round of cost cuts. According to the SIPTU union, which represents 1,700 Aer Lingus workers, the carrier plans to cut 1,500 of its staff by outsourcing its ground handling work and re-jigging its cabin crew ­operation.

aer lingus tail
Aer Lingus is urgently trying to push through a new round of cost cuts

This latest round of cost-cutting measures at Aer Lingus is needed urgently to address the fact that "consumer demand is at rock bottom", according to the carrier's director of corporate affairs Enda Corneille.

"There is an urgency about what we are trying to achieve. The airline has a very strong future but we need to take these actions now to put us on a firm footing," adds Corneille, although he insists that "this is not the last chance saloon" for the carrier. "We've said to the unions that we'll sit down with them, but we can only do this until the end of November. After this we will move forward with the plan. We believe these savings are ­absolutely necessary."

Aer Lingus will face tough opposition from its unions and the likelihood of strike action, but Corneille points out that "the economic environment is deteriorating all the time and staff will have to balance this up".

RBS airlines analyst Andrew Lobbenberg believes now is the time for carriers to implement changes, and they should see this as an opportunity. "If you're going to make changes, this is the ­environment to make changes in. Airlines have an opportunity here to try and make structural changes to their business," says Lobbenberg, adding that while there is an opportunity, there is also a threat from potential labour disruption. This means that ­airlines will "have to balance their judgment".

Another carrier targeting its staff costs as it tries to keep out of the red this year is Ryanair, which holds a 29.8% stake in Aer ­Lingus. It is imposing a week of unpaid leave on its pilots and cabin crew at its largest bases in Dublin and Stansted, says chief executive Michael O'Leary. This will involve some 400 staff and reflects the grounding of 20 of its aircraft this winter.

"Management will be taking a deeper pay cut than that," says O'Leary. The level has still to be decided, but it will be more than 10%. The move is part of ­Ryanair's response to its faltering profitability, which includes a return to fuel hedging for the quarter to December 2008. O'Leary says the carrier's lack of hedging has been costly.

A ­combination of Ryanair "being unhedged on oil and our ­commitment to continue to lower fares when everyone else is ­raising theirs has cost us about €480 million [$646.2 million] this year", he says.

Ryanair is hedged at $124 a barrel for the October to ­December quarter but remains "resolutely unhedged for Q4", says O'Leary. He is hoping to ­benefit from falling oil prices in this period.

Assuming that oil costs $100 a barrel in the fourth quarter and that yields do not fall by more than 5% this winter, Ryanair will break even in its financial year to March 2009, he says.

STRUCTURAL CHANGES

One carrier that could be on the verge of implementing more ­serious structural changes is SAS Group. SAS said in September that it was "in the process of ­evaluating various structural ­possibilities", and that "within this process SAS is conducting talks about a possible structural solution". However, it has so far declined to identify the parties with which it has been holding talks. In that same month, Stockholm's stock exchange suspended trading in SAS shares as reports circulated about a possible tie-up with Lufthansa.

SAS stepped up its cost-cutting drive in August by grounding seven more aircraft and slashing 500 additional jobs, after ­incurring a pre-tax loss of SKr106 million ($14.3 million) in the ­second quarter. It blamed its poor results on rising jet fuel prices and overcapacity in the market. The carrier had already embarked on a SKr1.1 ­billion cost-saving drive earlier this year after revealing first quarter losses (see table).

SAS is not alone in ­considering a tie-up with another ­airline in these difficult times. ­"Everyone is talking to ­everyone," says one industry insider. "Apart from the big three hub carriers and Ryanair, the rest of the ­industry has realised it has to evaluate other structural ­alternatives."

For more on how consolidation is changing the landscape of the European airline industry: flightglobal.com/takeovers