When the going gets tough, the tough get going, or so the saying goes. If the maxim runs true then Sabena will need to toughen up its act.
The Belgian flag carrier may be regaining ground. Thanks to the quality Swissair management at its helm, it has identified cost-cutting initiatives under its restructuring programme - Horizon '98 - and even reinstated a dialogue with its unwieldy unions. But will this be enough to stop it from reaching crisis point? 'Sabena is trying the softly, softly approach . . . [but] what they really need is an electric shock,' claims one Brussels-based consultant.
Sabena cannot waste time floundering. If the Belgian flag carrier fails to turn around its heavy losses and regain profitability within two years, it risks losing the support of its 49.5 per cent shareholder, Swissair.
Yet if it pushes through necessary changes such as job cuts, it risks losing its other key playing card, union backing. 'This year is crucial - if Sabena doesn't get people out of the door, it can't be profitable,' states one Belgian-based consultant.
State aid is not an alternative. 'It's very clear that this is it from the European Commission,' says Paul Reutlinger, Sabena president and CEO since April 1996, and formerly executive vice president marketing at Swissair.
The carrier's problems do not stop there. 'Sabena has been wrecked by poor service and strikes while its load factors are too low - it needs to increase its frequencies to get a more viable product,' says SG Warburg analyst Andrew Barker. Furthermore, the airline's fleet is a mishmash of types, it has a weak long-haul network, and competitive pressures are mounting at its Brussels hub.
Yet despite the growing problems, the Belgian flag carrier persists in claiming that it will turn around heavy losses and reach profitability in two years' time thanks to the initiatives introduced under Horizon '98. Not an easy task - Sabena's 1996 net loss leapt to BFr 8.87 billion (US$250 million) from BFr1.66 billion in 1995, although last year's result included BFr4.1 billion in restructuring costs.
Patrick du Bois, executive vice president and secretary general of Sabena, blames the poor results on strikes in initial protest about the proposed restructuring changes. The social unrest led to a fall in average seat load factors from 63 to 59 per cent.
Like Sabena, Swissair dismisses the higher than expected losses and stresses its confidence that Sabena will break even by 1998. Swissair refers to the expected write-off of its investment in the Belgian airline as a mere accounting mechanism and not an indication that it will walk away from its struggling partner. One observer, however, sees the pending write-off as a threat to Sabena. 'Swissair will stay one more year but after that Sabena will have to be cautious.'
Reutlinger concedes that if Sabena does not attain profitability 'Swissair will have to decide whether to stay with that investment.' He is adamant, however, that Sabena will not start exploring alternative support mechanisms to those supplied by Swissair, until necessary. 'I refuse to work on any scenario different to the one we have now.'
So what magic formulas does Horizon '98 contain? The restructuring plan is set to cut annual costs by BFr4.7 billion ($136 million) by 1999, with BFr2.7 billion in savings coming from 'operational improvements' by management and BFr2 billion from union commitments to lower labour costs and more flexible working hours.
The 'operational improvements' will include:weeding out unprofitable routes and opening up new destinations; the development of Sabena's Brussels hub; strengthening current partnerships; fleet harmonisation; a stronger brand image; and capitalising on synergies with Swissair, explains Sabena vice president corporate controlling Xavier Goddaer.
The agreement in October by Sabena's four unions and its pilots' association to reduce labour costs was hammered out after two months of negotiations. The agreement specifies an average 2 per cent salary decrease; the loss of 730 jobs from Sabena's 9,000 workforce through early retirements and voluntary redundancies; and 'flexibility' in working hours, meaning that employees' hours are calculated on a yearly basis and work loads are adapted to seasonality and business needs.
The reinstated dialogue with the unions is a major achievement in itself, particularly in view of earlier union animosity towards the previous management led by Pierre Godfroid. 'The resistance to change at Sabena has been enormous,' proclaims one Brussels source.
Yet significantly Godfroid was also popular with the unions for his first four years at Sabena - until he tried to push through changes that were essential to the survival of the airline. Reutlinger may need to offer more than his undoubted charisma and diplomacy to placate the unions as times get tougher.
Cynics say Reutlinger may have lured the unions into agreement by threatening that Swissair would withdraw its support if Sabena failed to meet the set targets. Further sacrifices may not be accepted, however.
Already the unions are failing to grasp the need for increased efforts. Demands for further productivity increases are therefore likely to fall on deaf ears. Pilots are already working at 'the maximum highest productivity' following an overall productivity increase of 25 per cent under Godfroid, according to Jean de Looze, secretary of Sabena's pilots' and flight engineers' association ABTNL.
Yet Reutlinger freely admits that the union agreement 'doesn't allow us to do what we want to do - definitely not'. He sees the measures accepted as 'a compromise'.
One nettle which the union agreement fails to grasp is overstaffing. 'Sabena has too many bodies, particularly in middle management,' declares one consultant. Despite the 730 voluntary job reductions planned by 1998, an increase in groundhandling staff in 1997 will mean a total net loss of only 300 staff. And personnel numbers actually rose by 280 in 1995-6. Reutlinger feels that 'for the time being 300 is enough', though he points out: 'I never said I wouldn't lay off people.'
Although the union agreement includes a salary freeze, Sabena still faces extremely high taxes and social costs due to its Belgian location. 'It's not the salaries that are high but the social costs. These account for some 30 per cent of salary costs - there's potential for a lot of improvement,' says Barker.
One solution Sabena is evaluating is delocalising crews to countries such as Luxembourg, meaning that although physically based in Belgium, crews would pay other countries' lower taxes. De Looze claims that pilots would accept this if it proved to be a 'win-win situation'. However he fears the risk of inferior employee benefits such as pensions.
Sabena management will need to tread carefully to avoid ruffling union feathers. There is evidence that the unions still wield influence over management in Sabena's deal with Virgin Express. The Brussels-based startup began to operate Sabena's nine daily Brussels London/Heathrow flights from October, with Sabena wet-leasing three Virgin Boeing 737-300s. Similar arrangements have followed from Brussels to Barcelona, Rome/Fiumicino and, from 30 March, London/Gatwick.
Yet, despite viewing the arrangement with Virgin as one of its key milestones towards profitability, Sabena has promised the unions that it will limit cooperation to four destinations, at least for the foreseeable future, concedes Du Bois. In exchange Sabena's pilots have agreed to let Virgin Express crew operate the services while extracting promises of flying new long-haul destinations.
Sabena management also wants to evaluate how passengers to Barcelona and Rome react to the product mix on the services, says Du Bois. In an unique arrangement, only Sabena sells business class tickets on the services while both airlines compete for the available economy seats.
One consultant echoes general industry surprise over Sabena having conceded the London/Heathrow route - Sabena's 'jewel in the crown' which it has been operating for 70 years - to Virgin. 'Flag carriers shouldn't be farming out key routes to new entrants,' he says. However another source speculates the arrangement may have been used to deter Virgin Express from going into Geneva. The consultant adds that 'Sabena can't be all that serious about cutting its costs, otherwise it wouldn't need Virgin'.
However Willy Goderis, Sabena vice president sales and revenue management, points out that Sabena had been suffering from 'a problem of basic profitability' on the route and Virgin 'provided us with a very good tool to increase frequencies and lower costs'.
Although Sabena has lost some business passengers on the Heathrow route, more business travellers are appreciating the drastic 50 per cent reduction in fares. There has been an 18 point load factor increase on the route and the cooperation is set to bring an annual net benefit of BFr 200 million, adds Goderis. De Looze, however, sees the deal as 'feeding arms to the enemy' and 'risking a catastrophe. Virgin wants to eventually kill and then replace Sabena,' he says.
The distinctive Virgin brand dominates the product, confusing Sabena customers. 'Apart from the blue Sabena ticket, everything else is in Virgin red,' says de Looze.
The Virgin Express low cost, no frills image rides uneasily with the quality business class persona that Sabena is at pains to create. 'It has been very difficult for us to marry it with our traditional concept,' says Goderis. Du Bois explains, somewhat awkwardly, his view of Sabena's market by saying the airline 'does not want to be seen as the very best as regards quality'.
The dominance of the Virgin hallmark is exacerbated by the weakness of Sabena's brand. Indeed Yvette Martinelli Reichard, in the newly created post of vice president product management at Sabena, says: 'Sabena has no image and if it does have one it's a bad one associated with strikes.'
Helped by the deal with the unions, the airline is toiling to improve its public image. Martinelli has reviewed the product, homing in on elements such as cabin cleanliness and the attitude and friendliness of staff: 'We have a bit of a problem there - if the crew aren't friendly, you can forget the rest.'
The result is a new inflight product, emphasising 'safety, reliability and regularity', underlined by the not so snappy slogan 'Sabena is the friendly, fast and innovative European business airline flying the world and delivering value for money'.
The new motto may claim that Sabena is 'flying the world' but the Belgian carrier's version of the world map appears to be limited to Europe, Africa and North America. Sabena is however still number one from Europe to Africa, with 26 destinations, and currently serves four US cities in its own right, plus 10 more through codeshares. Reutlinger admits that Sabena needs more long-haul routes and is currently 'studying how to gain a better presence in the Far East' to expand its route network.
The carrier is increasing the number of destinations from 60 to 70 with the onset of the 1997 summer schedule. New routes opening in April and May include four weekly flights to Beirut; five weekly flights to Cincinnati; as well as a codeshare with South African carrier Nationwide to Capetown, Durban, George and Port Elizabeth. The new services should help Sabena reach its target of an 11 per cent capacity increase in 1997 on intercontinental routes, predicts Goderis.
New European services include a daily flight to Moscow; three weekly flights to Palma; three daily flights to Nantes through a wetlease with French carrier Régional Airlines; and joint flights on Antwerp-London/City with Belgian carrier VLM. Other routes under study are Toulouse and Cairo.
Reutlinger foresees that the new destinations combined with a 'better timetable, aggressive pricing and new market segments' will help increase 'unsatisfactory' European load factors from 49 per cent to 57 per cent and intercontinental load factors from 62 per cent to 67 per cent. Sabena is also sharing yield management technology in place at Swissair.
However, the emergence of City Bird as a long-haul competitor at Brussels is set to be another thorn in the side of Sabena's insubstantial long-haul strategy. City Bird started scheduled flights on 27 March 1997 and Reutlinger predicts its low-fare flights to Newark, which compete with Sabena's New York/JFK services, 'will probably hurt us a little'.
One consultant warns Sabena to watch its friends as well as its enemies, predicting that Sabena's partners Swissair and Delta Air Lines will gradually try to take over its long-haul destinations, pushing Sabena to focus on short-haul services. If Virgin Express in turn eats into the short-haul destinations, what will be left for Sabena, queries the consultant?
Reutlinger admits that the carrier's alliance strategy is geared around Swissair and Austrian Airlines in Europe and Delta in the US: 'We don't have a clear partner in the Far East. It's not a priority right now but it's something that we're looking at.'
Sabena sees the Atlantic Excellence partnership with Delta Air Lines, Swissair and Austrian Airlines as one of its key strengths. On 1 February 1997, the four partners integrated their transatlantic operations, establishing a revenue pool on the North Atlantic, abandoning fixed quotas of seats on their flights and instead providing access to all available seats. Traffic and bookings have increased since the partnership started, with Sabena's transatlantic flights achieving an average load factor of 68 per cent.
The four further enhanced cooperation in February with a joint order for Airbus A330s. Sabena ordered one A330 with five options as part of its planned fleet harmonisation with Swissair. Sabena means to phase out its Mcdonnell Douglas DC-10 and three A310s but will keep its two Boeing 747s while adding two A340s. Eventually its B747s will probably be phased out to meet the objective of flying only one long-haul aircraft family by 2000.
In Europe, by 1999 Sabena will be operating 28 B737s and, through subsidiary Delta Air Transport, 29 Avro RJ85/100s. The new aircraft - nine RJ100s have yet to be delivered - will help Sabena increase the number of waves at its Brussels hub from four to five a day by 1998.
If Sabena is to pull itself out of the doldrums it will need the support of its unions and partners. But the question remains whether the airline's restructuring will be harsh enough and sufficiently focused. One certainty is guaranteed, however. 'Everyone is watching the future of Sabena with worry', says de Looze.
If Sabena is to pull itself out of the doldrums it will need the support of its unions and partners. But the question remains whether the airline's restructuring will be harsh enough and sufficiently focused. One certainty is guaranteed, however. 'Everyone is watching the future of Sabena with worry', says de Looze.
Source: Airline Business
