During the past year the fortunes of Europe's flag carriers have, at best, been variable. And as 1996 gets underway there is a pervasive sense of unsettled agendas and greater events to come.
The European majors have reaped the benefits of fragile economic recovery and stronger demand to varying degrees, further increasing the divide between those northern carriers which tightened their costs and increased productivity during the recession, and those further south which are still struggling to implement their restructuring plans.
A key symptom of this process is the increasing market dominance of the northern European carriers, headed by British Airways, KLM and Lufthansa, over their weaker southern European counterparts.
In December Iberia and Alitalia continued to battle with their unions over restructuring and productivity improvements, though a decision by European transport commissioner Neil Kinnock to approve a state capital injection of Pta87 billion ($717 million) for Iberia has removed much of the uncertainty over the latter's future.
The amount falls short of the Pta130 billion originally requested, but Iberia has agreed to sell most of its stake in Aerolineas Argentinas, which has been a cash drain for the carrier. Iberia will doubtless emerge as a stronger player in the coming year even if its Latin American strategy appears to be in tatters.
Meanwhile the situation looks more hopeful at Olympic, which for 1995 expects to report a profit for the first time since 1978. While TAP Air Portugal has been sparse with details over its restructuring, the carrier is believed to have made progress but still lacks a northern European partner. Air France, weighed down by national strikes and turmoil under the Juppé government, risks losing all the gains it has laboured for over the past year. Alitalia has sold its stake in Aeroporti di Roma but must still finalise its new restructuring plan, under which it will receive a capital injection and will sell its headquarters building.
KLM, BA and Lufthansa continue to plan substantial capacity increases, well above the levels justified by economic growth. With an expected average 9.5 per cent increase in total revenue passenger km over the next three years, Lufthansa capacity is way above the forecast for average annual GDP growth of 2.2 per cent in Germany, says Charles Donald, European airline analyst at UBS. KLM's projected revenue tonne km growth of 8 per cent over the same period is similarly way in excess of UBS's 2.5 per cent forecast for GDP growth in the Netherlands.
In recent months the increases in business travel at these airlines - Lufthansa for example is enjoying double digit premium traffic growth - have provided a clear sign that market share is shifting away from southern European carriers, says Andrew Barker, director of global airline research at SG Warburg. 'They are predatory and it has succeeded handsomely,' he says, adding that KLM is the most aggressive, followed by BA. Barker sees the trend as part of a general process of consolidation.
A main driving force is likely to be KLM, whose stated goal is to raise its European market share. KLM's average capacity increases were running above 15 per cent in the third quarter, and the carrier has not flinched at declining load factors as part of its bid to expand in Europe. 'In the last six months KLM's load factor has fallen below the levels of two years ago in terms of passengers and cargo,' says Donald.
While the alliance picture moved little in 1995 - Swissair/Sabena and Lufthansa/SAS were the only significant new linkups - there is a feeling in Europe that KLM has something up its sleeve. The carrier's penchant for equity links, tension with its US partner Northwest over the latter's adoption of measures against hostile takeovers, and powerful ambitions to be a bigger player in Europe, may point to an equity link with a European major. Despite the rumours of talks in late December past experience may decide BA is not the right partner. Either way KLM could act as a catalyst: 'Which way KLM jumps will be a big deciding factor for everyone else,' says Barker.
Resurgence
This year could equally well be the year of the success or demise of the European startup movement. The resurgence in startup activity witnessed at the end of 1995 is affecting a number of markets, among them France, the UK, Greece and Italy. Many of the newcomers are targeting niche markets though a few, such as the UK's EasyJet and Italy's AirOne, are set on the riskier strategy of competing on trunk routes.
The deciding factor for many startups will be whether they remain content with niche markets and, if not, whether the dominant carriers show restraint. Some domestic start-ups may seek protection under EU competition rules from below cost pricing by carriers that are dominant on the routes concerned. On cross border routes the extent to which Brussels can be looked to for protection against predatory practices or majors charging fares below their costs could be finally tested in the coming year. Virgin's ambitious plan for a Brussels-based regional carrier looks to be a likely candidate.
The situation remains agitated on the labour front. Most of the European majors experienced some degree of strike action in 1995 and this seems likely to continue as work forces try to claw back concessions made during the recession, while resisting demands for increased productivity. Airline managers will need to insist upon tight control of costs and productivity levels despite the pressures. Swissair in particular faces the prospect of pilot strikes this year and is lagging behind other northern European carriers in terms of cost reductions.
The European Commission has had a poor 1995 - not likely to be improved by its mid-December decision not to class Iberia's latest capital injection as state aid - and will be looking to dust off its damaged image in 1996.
It is now generally accepted that the Commission has been sidelined by the US signing of open skies agreements with six member states, and little follow-up is expected to be given by the Council of Ministers to the Commission's study of the impact the agreements will have on the European Union's external relations. An initial study on the slot allocation code will need more work and another on codesharing has yet to be published. The Commission's one small victory was the approval of its amended draft directive on airport ground handling.
Challenge
A major challenge will be the negotiation with individual east European countries on the extension of the third package, though implementation is unlikely this year. The eastern European carriers will continue to battle against their problems, which include cash shortages at CSA Czech Airlines and Balkan Bulgarian, though LOT stands out as having forged a good product in preparation for a planned privatisation this year.
The air transport policy vacuum in Russia and uncertainty at the senior level within Aeroflot is likely to continue at least until the Spring elections which will decide the political fate of premier Boris Yeltsin.
Jackie Gallacher
Source: Airline Business
