European carriers feel the pain

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European network airline chiefs could hardly have met for the recent Association of European Airlines presidents' assembly at a tougher time. Most had already made cuts. But loss estimates for the region's carriers have kept growing and a fresh round of cuts sandwiched the meeting.

The numbers speak for themselves. AEA projects its members will carry 22 million fewer passengers this year. They are on course for a collective operating loss of €2.9 billion($4.4 billion) in 2009, 50% worse than its previous worst year in 2001. Over the course of the year 35,000 jobs at AEA carriers will be lost. It estimates another 60,000 jobs which depend indirectly on the airlines will also have been eliminated this year.

And while recent economic indicators have given cause for global optimism, the most recent traffic and revenues figures for European carriers show little sign of imminent improvement. AEA airlines traffic was down nearly 2% in August and its projections for September were for a 3% fall.

So have things got as bad as they are going to get? "No, this winter will be bleak," says AEA secretary general Ulrich Schulte-Strathaus."Bear in mind that the winter 2009/10 programme was essentially planned and budgeted fifteen months ago, and while the costs are still in the same ballpark, the revenues are nowhere in sight.Yes, of course there have been cutbacks, and 35,000 job losses is a lot more than fine-tuning, but when the industry hasn't made a penny profit during the peak summer, the winter losses are going to hit very hard indeed. As for next year, our crystal ball remains stubbornly opaque."

Little wonder that AEA chairman described the dimensions of the downturn as "unprecedented" in a collective statement after meeting in Dubrovnik, Croatia. "In the past 35 years we have not seen such devastation of value. And we will not return to 'normal' again; the consumers are changing their expectations, and this will continue."

European network carriers have talked about the need for structural change and Spanish flag carrier Iberia is among the carriers to show its hand. As part of its Plan 2012 turnaround strategy it is planning to establish a new Madrid-based network airline, which will feed and distribute traffic into its long-haul network from 2011, to provide the "paradigm shift" needed on its short- and medium-haul routes. At the same time it plans to focus and grow its long-haul network on its key market between Europe and Latin America. The carrier says these "two well-defined strategies will allow it to be larger, while also cutting losses". Its chief operations officer Rafael Sanchez-Lozano says: "It is essential for us to use imaginative means to transform Iberia into a sound and viable project."

Tough measures

Iberia's turnaround plan also includes a deepening of existing cost-cutting efforts. These include a hiring and salary freeze for the next two years and expanding planned layoffs to include 200 ground staff.It isof course far from alone in taking such measures. October alone had already seen other major cost-cutting moves announced. Iberia's oneworld and protracted merger talks partner British Airways said 1,700 cabin crew jobswere being cut, through a mix of voluntary redundancies and switches to part-time working, and it is looking to push ahead with plans for changes to cabin crew working conditions. It has since been locked in talks with cabin crew unions, who have warned of potential industrial action.

Job cuts were are also part of new Aer Lingus chief executive Christoph Mueller's turnaround plan, which began in September.The programme envisages 676 jobs cut intwo-phases by the end of 2011. Mueller, citing a poor outlook in its core markets and no sign of a near-term recovery, says: "Aer Lingus cannot continue with an operating cost basewhich is structurally uncompetitive when compared to that of its closest peers."

European airlines gained some respite over the summer by the European Commission relaxing its "use it or lose it" slot rules. Airline chiefs though have been pressing for an extension through the winter. "The summer cutbacks have allowed us to eliminate a million empty seats a month," says Croatia Airlines chief executive and AEA chairman Ivan Misetic. "In the absence of a waiver for the winter, we have a stark choice; put back that excess capacity or risk our future product integrity."

Schulte-Strathaus adds: "The prevalent mood amongst the AEA CEOs is one of extreme frustration that regulators, suppliers, service providers are not getting the message; the industry is in a bind and while it's not asking for a great deal, it's getting very little support at this crucial time."

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