Just more chest-beating from a gabby CEO? Not quite. Ryanair and its budget rivals, easyJet, Buzz and Go, are prospering hugely thanks to the EU’s deregulatory splurge of the late ’90s. Earlier this month O’Leary reported a 39 percent surge in interim profits to £55 million, defying the gloom in the global aviation industry. Already the Dublin-based airline is the second largest in Britain–it operates mainly from Stansted, near London–after British Airways. A second operating base will open in mainland Europe earlier next year. Meanwhile, the easyJet team headed by founder Stelios Haji-Ioannou announced an 82 percent rise in profits to £40.1 million. Confined to European routes, neither company suffered more than passing losses in the aftermath of September 11.
By contrast, the big players are struggling to stay aloft. Sabena of Belgium is bankrupt, although attempts at its rescue continue. Likewise, its old partner Swissair survives–though only in vestigial form thanks to a $2.4 billion bailout. Aer Lingus of Ireland has dismissed almost a quarter of its 7,000 staffers. Among the Big Three, Lufthansa has grounded aircraft, cut routes and asked staff to accept a four-day working week, pay cuts and early retirement. BA, the continent’s largest airline, is currently losing £2 million a day, and has cut 5,000 jobs.
All in all, 2001 has simply been a terrible year for the airlines. BA had shed 2,000 jobs before September 11 as part of a painful restructuring. After the attacks, things got even worse. Deutsche Bank predicts a 4.7 percent downturn in European air traffic this year to be followed by a tiny 0.6 rise next year. And this is no short-term crisis, says Rigas Doganis, former chairman and CEO of Greece’s Olympic Airways. “The flag carriers have made only marginal profits over the last 30 years,” he says, “and the rate of return has been way below other industries.”
Europe’s airlines are suffering from a longstanding malaise brought on by an excess of seats and hefty costs, particularly for labor. Change was inevitable; only its timing was in doubt. O’Leary’s view of the turmoil ahead for big carriers is a long way from fanciful, says Jonathan Wober, an airline-industry analyst at Deutsche Bank in London. “It’s the consensus whether you talk to Michael O’Leary or Jurgen Weber [CEO of Lufthansa]. Everyone is saying shades of the same thing… You can’t prop them up forever.”
Couldn’t the big carriers just trim their costs? Not so easy. For one thing, airlines are acutely vulnerable to industrial action when even the threat of a strike encourages passengers to switch allegiances. “The cabin unions realize they have a grip on the windpipe of the industry,” says Daniel Solon, a London-based consultant for Avmark International. Earlier this year, Lufthansa capitulated after a strike of just three days and awarded its pilots a 12 percent pay raise. Airlines had grown accustomed to taking the easy way out. Many are fat and complacent after pampered decades of government control. Tim Coombs of Aviation Economics says it’s “very difficult” for organizations with 50-year histories of state ownership to restructure, “especially when they have relatively strong unions.”
The general consensus is that a shakeout is inevitable, and necessary. “We can’t maintain 14 flag carriers in Europe, plus a lot of other regional carriers,” Loyola de Palacio, the EU’s Transport commissioner, has said. “We need to guarantee a good service throughout Europe. But we must go beyond the logic of the national flag carrier and think only of European flag carriers.” That’s not just talk. Brussels has been resisting calls for state aid after September 11, and will permit member governments to compensate their national carriers for only the four days when U.S. airspace was closed.
There are powerful obstacles to consolidation. The rights of the national flag carriers are jealously guarded, and small nations like Ireland or Belgium are particularly reluctant to see all air routes dominated by foreign airlines. Governments still control which airlines get landing rights in which cities, and those talks lead to cozy deals on other matters. Together, airlines agreed to hike ticket prices to match costs, rather than to meet market demand, says O’Leary. “The flag-carrier rip-off merchants have been sitting down together since Orville and Wilbur Wright first flew.” The result: “Europe now has the highest prices per seat in the world. ‘Highway robbery’ is the best description of it.”
The tangle of regulation also puts a check on mergers and acquisitions. If BA, for example, were ever to achieve its much-debated union with KLM, there is no guarantee that the new supercarrier could secure the vital routes from Amsterdam’s Schiphol airport. But the rules are not the only problem. Even if big airlines were free to land anywhere in Europe, they don’t have the cash to expand. Says Coombs: “None of the Big Three has enough on the balance sheet to go out and buy a second-tier carrier.”
In Asia, where there has been no regional round of deregulation, a big shakeout is highly unlikely. September 11 and the global downturn have led to huge cutbacks in an industry that had already suffered a 40 to 50 percent drop in business from the United States before the terror attacks. Yet cross-border mergers are seen as a nonstarter, because complicated landing rights still make it legally impossible for any airline to buy a rival in another Asian country. Patriotic attachment to airlines as national icons is, if anything, stronger than in Europe. The merger last week of Japan Airlines with rival Japan Air System was symbolic of the unspoken limits on a shakeout in Asia: domestic mergers only.
Asia does not have the new breed of discount international carriers that are causing upheaval in the European market. These newcomers are stealing away business passengers, who account for much of airline profits, in part by offering three or more flights a day to a particular destination, adding the extra flexibility that execs welcome. Just look at the suits queuing to check in for the easyJet flights at Luton. Costs are lower–tickets for easyJet are available only on the Internet–and new, larger aircraft have extended their reach. “Effectively they blanket all the economically interesting parts of Europe and North Africa,” says Solon. “Physically they can reach any point that the classic state-owned carriers can go. And the economics mean they can disembowel them.” The fight for survival is on.
