Within three few weeks in late February and early March of 1996 the chairmen of three European state-controlled major airlines - Sabena, Alitalia and Olympic - lost their jobs. These changes were symptomatic of a deeper malaise, which is not fully understood, and indicate a failure of government rather than a failure of airline management. Unless politicians realise this many state airlines will follow the dodo into extinction.
In my own case, after 14 months as chairman and chief executive of Olympic I was ousted the day after announcing that in 1995 the airline had delivered the first bottom line profit since 1977!
In all three cases, the chairmen involved - Pierre Godfroid at Sabena, Renato Riverso at Alitalia and myself - were trying to push through changes which were essential to the survival of these state-owned airlines in the deregulated environment of the 1990s. But in doing so we met increasing opposition from very powerful trade unions - a characteristic of the airline industry. At the same time but for different reasons the governments in all three countries were relatively weak. It is this juxtaposition, where weak governments are unwilling to upset the unions, that leads to the change of chairmen. On leaving Alitalia after only two years Riverso clearly blamed his demise on the lack of political support: 'In tackling union reactions the management has remained isolated.' It was the same conjuncture of strong unions and weak government that had caused the fall of Bernard Attali from the top post at Air France two years earlier.
While some of the state-owned or formerly state-owned airlines of northern Europe, such as KLM, British Airways or Lufthansa, have been able to adapt to and successfully meet the challenges of the more competitive European environment, their counterparts in southern Europe have apparently failed despite huge injections of state aid. Why do Alitalia, Air France, Olympic, Iberia, and TAP Air Portugal continue to be problematical?
They all appear to suffer from what I call the 'Distressed State Airline Syndrome'. This is a political and organisational virus which affects many state-owned airlines. On the basis of my experience with Olympic Airways it is possible to identify the characteristics of the 'distressed state airline' (see chart). These provide a useful yardstick by which to judge which other state-owned airlines in Europe or elsewhere show the symptoms of this syndrome.
Money troubles
A key characteristic of distressed airlines is that they are in serious financial difficulties. Most of them have been losing money at least since the economic downturn of 1990 and some for very much longer. Air France has accumulated losses of US$3 billion over the last six years and until last year Olympic had not made a bottom line profit since 1977. Such airlines are also invariably undercapitalised with huge debts. Olympic before the write-off under the agreed state aid package had longterm debts of over US$2 billion. While the Greek flag carrier frequently made an operating profit, the servicing of its large debt mountain meant that it was pushed into a spiral of annual losses. Alitalia currently has debts of US$2.3 billion, rising to US$3.1 billion if aircraft lease liabilities are included.
Distressed state airlines are also over-politicised. In return for providing direct or indirect support, such as guarantees for loans to buy aircraft or to cover annual deficits, governments and taxpayers expect to be able both to influence the airline's management and to impose numerous obligations on the airline. To achieve these twin aims they change managements frequently and often without reason.
Between 1975 and 1995 Olympic has had some 25 chairmen, with an average job expectancy of nine months. One chairman lasted for 42 days but was called back a second time and stayed 11 months! Board members may also be changed frequently. During my 14 months in charge, between February 1995 and April 1996, Olympic's board was changed three times.
Owner governments interfere indirectly, as well as directly, in management. Examples abound. As a result of an 1976 agreement with the Greek newspaper publishers and distributors, Olympic agreed to charge GDr5 per kilo for transporting newspapers on its domestic flights. As a result of insidious government pressure, the airline has only been permitted to raise this tariff very marginally to around GDr7 (2.5 US cents). By contrast foreign newspapers air-freighted within Greece pay the Iata-based tariff, which is around 32 US cents per kilo. It is estimated that Olympic loses close to US$4 million a year in revenue as a result.
Moreover, Greek government departments and agencies delay payment for tickets issued for many months or years. As a result, the outstanding government debt to Olympic for unpaid tickets amounts to around US$16 million. Government interference also manifests itself in the expectation that the carrier will fly scheduled services to very small or new regional airports, irrespective of whether such services are profitable.
Governments find it difficult to understand that in the new single European market, airlines will only survive if they are freed from both government intervention and any obligations to the state. Unions encourage this blinkered view. They see government involvement as a safeguard. They fear that breaking the direct links between government and airline will lead to greater staff cuts, changes in work practices and a shrinking of the airline's network. They particularly fear privatisation.
Union power
Distressed state airlines, in Europe at least, are characterised by very powerful unions, and often by a multiplicity of different unions. Their power stems from the ability of almost every specialised group of workers to bring an airline to a halt. The union leaders have traditionally used their power and the threat of strike action to influence management decisions at every level.
Olympic's unions expect to have a say in every promotion or appointment so as to place their own people into key posts. They were outraged when anyone was promoted to a middle or junior manager's post whom they had not approved, and asked for such decisions to be reversed, even threatening strike action. On one occasion union leaders torpedoed the introduction of sleeper seats in business class on Olympic's B747s even though this was an essential part of a strategy to improve the product.
Union leaders change less frequently than the senior management, and are likely to be better informed and more knowledgeable than new chairmen or chief executives especially if they come from outside the airline industry. This gives the unions a distinct edge when negotiating with management or the government.
One direct consequence of being both over-politicised and over-unionised is that distressed state airlines are also overstaffed. The unions have used their power over many years to negotiate working conditions which drastically reduce labour productivity and force the airline to take on extra staff to fill the gaps.
Similarly, governments use airlines as a way of disbursing patronage and favours to their supporters by offering them jobs or promotions for those that are already employed. When a new party comes to power in Greece not only does it change Olympic's board of directors and chairman but it also fills the top 30-40 managerial posts from within the airline with its own party's supporters. The new appointees in turn change personnel lower down. The previous occupant of a post is pushed sideways, often to a non-existent job for which they are still paid. Even a change of transport minister within the same government may lead to many changes at the top.
Strategic mistakes
Distressed state airlines rarely have a clear and explicit development strategy. This is not surprising given the lack of management continuity. But it is also due in part to government intervention which confuses the management by imposing constraints on the airline. Governments will frequently veto any attempt to cut routes even though they may be hugely unprofitable. Without a coherent longterm strategy airline executives flounder from one strategic mistake to the next. One example was Iberia's foray to buy unprofitable Latin American airlines.
A major implication of the weak balance sheet of distressed state airlines is that re-equipment is delayed. This usually means that they have ageing fleets and aircraft which may not be the most appropriate for the routes operated. Often the fleet has too many different types, resulting in higher maintenance and crewing costs: Olympic with a jet fleet of only 34 aircraft has six totally different aircraft types, including only two Airbus A300-600s. Predictably, within the European Union the oldest aircraft tend to be found in the state airlines of southern Europe.
Overstaffing, frequent management changes and constant political interference breed a culture in which managers are afraid to take decisions and bureaucracy stifles initiative. Decision making becomes increasingly concentrated at the top of a sharply pyramidical management structure. Memos, requesting authorisation, are passed slowly up the pyramid gathering signatures on the way. At Olympic it was not uncommon for the chief executive to receive memos bearing five or more signatures. Centralised management may have been acceptable in the age of airline regulation, but it is totally inappropriate in today's deregulated and highly competitive environment, where decisions have to be taken quickly by the person most closely involved.
Finally, distressed state airlines are generally characterised by relatively poor service quality both in the air and on the ground. This partly reflects the strength of the unions, which are unwilling to relax outdated work rules and conditions in order to improve customer services. Even existing rules are frequently flouted with impunity. There is often a total absence of a service culture within the airline. But management too are at fault since they have been slow to adopt new ideas and new practices.
The symptoms of the 'Distressed State Airline Syndrome' will manifest themselves to varying degrees at different airlines. Any airline which is suffering badly from several of the symptoms is in serious trouble and in danger of becoming extinct in tomorrow's deregulated world. This is particularly so if it is over-politicised and has strong and outdated unions.
No alliance cure
Airline alliances are in fashion. Many airline chairmen claim them as the cornerstone of their survival strategy. Alitalia's new chairman Fausto Cereti, speaking at a London conference at the end of June 1996, stated that Alitalia was placing greatest emphasis on expanding its alliances. But alliances are not on end in themselves. They can reinforce competitive advantage, if it already exists, but they are rarely a means for creating it. Weak airlines are in any case more likely to attract weak alliance partners.
Alliances cannot overcome the fundamental problems of the distressed state airline. The first and most urgent requirement is financial restructuring through debt write-off and the injection of fresh capital. In the case of the large state-owned airlines of southern Europe this has required financial assistance from governments and approval for such state-aid from the European Commission.
In Olympic's case the Commission, in its decision of October 1994, approved a state aid package amounting to US$2.3 billion. Substantial aid packages have also been approved for Air France ($4 billion), Sabena ($1.8 billion), Iberia ($1.75 billion), TAP Air Portugal ($1.1 billion) and Aer Lingus ($270 million). The Italian government is currently seeking approval for $980 million in state aid to help bail out Alitalia.
Such state aid, if used effectively and sensibly to clear up an airline's balance sheet, is a necessary precondition for the survival of these carriers. Olympic's return to profit in 1995 was based on an effective restructuring plan approved by the European Commission.
The second precondition is to have stable professional management with clearly defined business aims, free from any form of political interference. The short term priorities for such managements are not to embark on a multiplicity of alliances but rather to reduce costs, improve labour productivity, and make their airlines more customer-orientated. This can only be done with the support and cooperation of the workforce. But many of the necessary actions will upset those union leaders who fail to grasp that change is the prerequisite for survival. Actions to improve the airline may also be politically unpopular.
There is and there will continue to be considerable opposition to change and to the radical restructuring of Europe's state-owned airlines. But ultimately the future of airlines such as Air France, Alitalia or Olympic does not depend on the managements. It depends primarily on their governments. Unless governments are prepared to grasp the nettle and fully support the managements they have chosen for a period long enough to implement the necessary changes, such airlines will splutter and cough their way to extinction. Like dodos they will disappear.
Source: Airline Business
