A personal selection of some recent contextual developments

January 2010

 

European airlines continue to face the twin pressures of falling demand and declining yield.

European airlines are having to contend with more than issues of cost and price, however. Currently they need to compete on several fronts at the same time and, for many of them, with reduced managerial numbers – a result of the need to cut costs at all levels.

The continued growth of the low cost (or new model) airlines is maintaining the pressure on the domestic and European routes of the network airlines. Meanwhile increased international pressure on Asian and Pacific routes comes from the well equipped and high quality Gulf State airlines. From Asia they face competitors who are also struggling but some of whom are in receipt of government support as they seek to maintain new high profile expansion.

Reinforcing the view that airlines really do operate in a global market are the urgent discussions and negotiations that embrace the interwoven threads of anti-trust immunity for alliances operating across the North Atlantic; the stage 2 negotiations between the EC and the USA; regulatory investigation of the possible anti-competitive nature of global alliances; and the sudden restructuring of JAL.

As if this was not enough to occupy airline managers the last weeks have seen severe operational disruption due to unusually adverse weather conditions. Also a growing number of actual or actual strikes by disaffected employees.

The managerial challenge is therefore one of adapting to these strategic threats and opportunities, making sense of conflicting and ambiguous data and opinions, and maintaining a coherent story in both the market place and for staff – even as the context changes again.

To explore some of the themes summarised above:

• The low cost European airlines are now estimated to hold some 36% of the intra-European market share. Although easyJet has reported a decline in profits it has also reported that non-UK originating revenue now exceeds that from the UK and the airline continues to build or expand bases in Italy, France and Spain. This pan-European strength mirrors that of Ryanair and is the next target for the two other major low cost airlines Air Berlin and Wizz Air to emulate. EasyJet has also reinforced the speed of reaction that characterizes these new business model airlines. They have rapidly offered services to replace those abandoned by Aer Lingus at London Gatwick and have also continued to sell old inefficient aircraft and close down underperforming routes. The scale and speed of this ability to adapt may be seen in their closing some twenty underperforming routes last year, whilst opening 70 new ones. With Ryanair now able to claim to be the largest international scheduled airline in the world (by passengers carried) the European regional and network airlines face an ever increasing threat. Much has been made of Ryanair deciding not to purchase additional Boeing aircraft but all the major low cost airlines are still planning to accept new deliveries this year – and that capacity is increasingly likely to be deployed head to head on routes that were previously seen to be safe from low cost incursion.

• There is a growing awareness that Asian and Arabian airlines will play an increasing role in European aviation. The economic recession and the US reaction to terrorism have combined in the opinion of some commentators to see a revitalisation of the old overland trade routes of the ‘Silk Road’, or the Islamic sea corridors established by Ibn Battata. The growth of trade between the Gulf States and China in particular has been extraordinary and whilst the USA will continue as a major market the difficulty of entry faced by people from certain countries, or who look as if they come from certain countries, has encouraged many GCC businessmen to focus more on the links now possible between countries east of the Mediterranean – no longer the middle sea. With the added development of the central Asian republics, many rich in oil, gas and minerals, the new Gulf airports and high quality Gulf airlines are well equipped to serve these growing markets.

• Some of the major Asian airlines are struggling, however, and Europeans may be concerned at the sums required to ‘restructure’ China Eastern Airlines, Air India, Garuda, Indonesia, Thai Airways and Malaysia Airlines. Here the government investments are described as being in the interest of preserving jobs and maintaining air services and will not necessarily lead to independent financial structures in the future. The competitive threat to an independent airline from state subsidized one is real: they have capacity to fill. European aviation saw very similar activities not so long ago, however, as Air France, Alitalia, Olympic and others were nurtured through bad times – not as may be seen by the latter cases always successfully.

• The US and EC decisions on the anti-trust application by American Airlines, British Airways, Finnair, Iberia and Royal Jordanian are still awaited. Preliminary reports suggest that the authorities are particularly concerned by the potential alliance dominance on six routes – with the US Department of Justice claiming that such dominance would likely lead to fares being raised by 15% if the immunity is granted. The decision is now part of a much wider debate as Democrats in the US Congress, led by James Oberstar, wish for a much wider review of the benefits of global alliances. Their view is that the current alliances have reduced competition and customer benefits. Lufthansa, SAS, Air France KLM and others are therefore lobbying hard against proposals to limit alliances that already have anti-trust immunity. The need to restructure JAL has further raised the level of this debate. The reported preference of the Japanese Transport Ministry for a restructured JAL to leave the Oneworld Alliance and join SkyTeam has raised awareness of the significance of metal neutral alliances pioneered by KLM and Northwest Airlines over the last twenty years. Metal neutral alliances require a quite different managerial approach and demand new mindsets from managers who grew up with concepts of route specific and airline branding.

• The recent increased security threat following the attack on a Continental flight to Detroit over Christmas has impacted on airport operations in Europe. The use of new whole body image scanners, backed by more intensive passenger profiling, is already being implemented. For airline managers this will require review of terminal operations if long queues, overcrowded lounges, and missed flights and connections are to be avoided. The new measures in Europe are also likely to result in higher airport charges.

• There have been major recent investments in cabin and airport facilities as airlines such as Air France and Air New Zealand seek to retain scarce premium fare passengers, and attract new higher fare passengers with special economy seats and service, and also faster track ground handling. Here the major airlines are often following innovations pioneered by the low cost airlines and whether the services attract higher fares or payments for ancillary services the operation has to deliver and meet customer expectations. The recent bad weather gave the major European airlines some good news as their ability to implement prompt service recovery appears to have significantly outstripped their low cost rivals Largely because they could muster additional staff to deal directly with passengers – but at a cost - and also rely upon experienced and motivated staff.

• This last point highlights an interesting paradox for European airlines at the moment. The messages to staff are uniformly about survival and the need to cut costs. Then under pressure the network airlines need staff to ‘step up to the plate’. The ability of airline managers to make sense of this ambiguity and above all make sure that all staff feel recognised other than as a unit of cost may well be critical over the next few months. The problems British Airways faces with its cabin crews are well documented – a product of many factors but working hard on full planes may make it hard for otherwise loyal crew members to understand the logic of reduced crewing and new efficiency measures. Similarly Finnair ground operations staff may be puzzled as to why outsourcing will improve customer services, and Lufthansa pilots query why their skills cannot be more highly recompensed when the airline can afford to engage in a series of investments in weak or failing airlines. There is therefore a possibility that many airlines will face growing industrial relations problems this year – they have been on the receiving end of cost cutting and job cutting exercise for two years now and unless they feel their efforts have been recognised the industry has a long tradition of emotion holding sway – even in the face of business logic.

@ The Management Coach-house Ltd 2010