The Austrian drama – how will it end?

The Lufthansa supervisory board has to decide whether Austrian Airlines will receive another capital injection on Wednesday. It came as somewhat of a surprise that Austrian Chairman and Lufthansa executive board member Stefan Lauer admitted the subsidiary’s cash need on Tuesday.

It remains to be seen if it was prudent to publicly confirm the fact. If the airline needs the money anyway, then its owner can hardly use the threat of withholding it as a tool in negotiations with pilots. Lufthansa is very, very unlikely to allow Austrian to fail after all.

The Lufthansa supervisory board is expected to approve of further financial support with conditions attached, and that has to be mainly lower staff costs. But how credible is the threat to not pay?

Here’s a guess: the board will conditionally agree to pay on Wednesday. The Austrian pilots will move a bit more until the end of the month and there will be a last minute deal without all the chaos of moving the entire operation under the Tyrolean roof.

And here’s another guess: the problems will not be solved. Austrian will be lower cost, but it will still be too big. There are more cuts to come.

Austrian – so much wasted time

Austrian Airlines is going to announce on Friday morning that Chief Commercial Officer Andreas Bierwirth is to leave the company. There will obviously be some sort of nice sounding explanation why he was forced out. True, Bierwirth, along with Peter Malanik, in the end was unsuccessful in turning around Austrian. But the problems go far deeper and don’t really have anything to do with him or, more generally, the sales organization.

When it became obvious that the airline had to cut staff costs, Austrian cut staff, but not staff unit costs. It left the collective bargaining agreements more or less intact. That has an astonishing effect: The airline is paying as much for salaries as three years ago, but for 2,000 less employees. If it does not do anything, it is facing another 7% increase next year.

This is simply unsustainable and the new CEO Jaan Albrecht is to be commended for his courage to terminate the agreements. Peter Malanik, by the way, was in charge of human resources all these years.

Now Lufthansa aims at drastic measures that could, in an extreme scenario, involve Austrian’s bankruptcy and rebuilding on the basis of regional carrier Tyrolean. Not unheard of, really, we have seen similar things in the cases of Swiss and Brussels Airlines. And maybe it really is the only option.

But it did not have to come this far. Lufthansa was to hesitant to act decisively at Austrian in the past few years and you have to wonder why. The facts (and wage contracts) were known to everybody. Strange that anybody could have ever assumed this could work.

Even more strange that anybody ever wanted to buy Austrian in the first place. Wolfgang Mayrhuber wanted, for some strange (sorry: strategic) reason. But it is definitely a good sign that Christoph Franz is cutting what does not make sense: BMI, Lufthansa Italia and now the old Austrian?

The Frankfurt ground controller strike – the power of the few

The German air transport sector is unanimous in its criticism of the GdF union. GdF usually represents air traffic controllers, but has recently convinced Frankfurt’s ground controllers to move over, too. Since Thursday afternoon, that small group of 200 Fraport employees is on strike and will continue to be until Friday evening. About half of Frankfurt’s usual flights will have to be cancelled.

The conflict can be summarized in very few points:

The union demands are most definitely too high.

Even if GdF believes they are justified, a strike spanning one and a half days at Germany’s busiest airport is too much.

And finally, but most interestingly, it is Germany’s Transport Minister Peter Ramsauer who should ask himself if it was really such a good idea to intervene in last year’s controller strike. When they were about to walk out again, Ramsauer stepped in effectively forcing German air traffic control provider DFS to agree to a very expensive deal with GdF. Who knows what would have happened if DFS had been allowed to keep its tough stance?

This way the union could feel encouraged and it was, as it demonstrates now, only a few months later. The only difference is: Ramsauer did not interfere this time.

Spanair – the right signal

It’s needless to say that the Spanair grounding is a disaster for its employees and passengers. But it actually sends the right signal into Europe’s struggling airline industry. The signal is: the state is no longer prepared to fund loss-making unviable airlines.

But the reality is still very different in many parts of Europe. More or less all of the Eastern European flag carriers are government-owned and have enjoyed a host of questionable loans and capital increases over the years without which they would most likely not be around any more. Malev has just been ordered by the European Commission to pay back illegal subsidies – of course it can’t. There is an in-debth investigation into state aid for Air Malta, and of course the Olympic Airways and Alitalia sagas are all too well known. Even the sale of Austrian Airlines to Lufthansa did not happen without Austria taking over €500 million in old debt.

There is still too much of the old thinking that every country or even every region needs its own airline. Because it does not. The Barcelona market will be well served by Vueling, Iberia, Ryanair, Easyjet and all the others, there does not have to be a local carrier (in fact there still happens to be one, Vueling). Subsidized overcapacity makes life much more difficult for the more innovative carriers and for no good reason.

And if Europe wants to credibly argue against state support for Gulf carriers it should bring its own house in order first. At this stage, it’s still a mess.

Weber pushes for change at Lufthansa

Jürgen Weber, Lufthansa’s Chairman and former CEO, is not famous for his diplomatic skills, to say the least. It has been his trademark throughout his carrier that he spoke up whenever he thought it to be necessary.

And he still does. In a recent meeting with senior executives, Weber made clear that it is time for some serious changes within the group. In short: the old (the current) way of doing things is not good enough, he believes.

Staff newspaper Lufthanseat cites him as saying that now is the time “to more seriously take advantage of the existing synergies in the group and optimize processes.” Opportunities need to be explored, “but then they also need to be taken, please.”

Weber stands up against the “thinking in demarcation lines” and debates between centralists and those supporting local responsibility. “Don’t even let them rise.”

Weber’s argument is a significant departure from Lufthansa’s previous strategy putting together a group of airlines (Lufthansa, Swiss, Austrian, Brussels Airlines, BMI), but not integrating them, in short Wolfgang Mayrhuber’s way. Successor Christoph Franz has at least started axing some of the worst mistakes (BMI, Lufthansa Italia), but now the push has to go further.

Centralizing the group, harmonizing more, finding more ways to cooperate – all of this has to be the core of the next cost cutting program that Franz has announced. Details are to be announced in the next few weeks.

But you can only put together carriers that fit in terms of their business model. The process of moving the airline’s closer together has already begun in one case: unfortunately it is low fare affiliate Germanwings, which will soon be hardly distinguishable from the parent in terms of its cost structure and many of its product features. Who still needs it then in the end?

And when Weber says that the debate between centralists and their opponents shouldn’t even be started, then one point has to be made clear: That debate has been going on for years and the two camps have long been established. The only difference now is that, with the backing of their Chairman, the centralists seem to be on the winning side now.

Jaan Albrecht’s first move at Austrian

One thing is clear: Jaan Albrecht cannot be blamed with having wasted much time in his new position at Austrian. He has been in his new CEO position for only a few weeks, skipped the Christmas break, and came up with his new restructuring plan on day two after most people on his staff were back from vacation. There is a sense of urgency, and rightly so.

Austrian is still losing significant amounts of money. How difficult it will be to make the airline profitable on a sustainable basis is best illustrated by how expenses for staff developed: According to Albrecht, they are now were they were in 2009, but the company employed 1,500 more people back then. Legacy problems of a legacy carrier and if Albrecht wants to be successful, this is one of the most urgent issues to address.

Harmonizing the fleet is another one: Austrian has been flying a diverse fleet of many different models adding much to complexity. Part of that is owed to the takeover of Lauda Air that Austrian was forced to do by the country’s government. Now, many years later, Albrecht is trying to address that legacy, too, with the phase-out of the Boeing 737 NG fleet. It just does not fit into the Lufthansa group fleet strategy – Austrian is the only NG operator in the system, so harmonizing around the A320 makes sense.

There are much tougher tasks ahead. The airline is spending large sums for the urgently needed upgrade of its long-haul business class.  But that will be peanuts compared to what is coming up next. Its six Boeing 767s are waiting to be replaced, three of them are 19 years and older. And the four 777s also don’t fit into the Lufthansa group fleet. They are, of course, ex-Lauda Air.

Etihad’s Air Berlin deal – a few words of caution

Air Berlin and Etihad Airways celebrated their tie-up as a major breakthrough, when they announced it in the Berlin Intercontinental Hotel on Monday. The two CEOs, Hartmut Mehdorn and James Hogan, shook hands, clapped on each other’s shoulders and even shared their presentation on stage to demonstrate the spirit of cooperation.

As you might expect, some critical remarks about the deal have to be made nevertheless.

The equity investment by Etihad gives Air Berlin time to breath. But now the work has to begin. The deal itself does not solve the airline’s structural problems, its historically weak profitability and complexities. In fact, in some ways it makes the already complex business model even more difficult to deal with given that there is now more network adjustment needed around hubbing in Dusseldorf and Berlin as well as the Etihad hub in Abu Dhabi.

Selling long-haul services via Abu Dhabi to Asia may work from the four points in Germany with a nonstop flight to Abu Dhabi of either Air Berlin or Etihad – Dusseldorf, Frankfurt, Munich and Berlin. But selling two stop itineraries (connecting from a European service in Berlin or Dusseldorf onto the long-haul to Abu Dhabi with a further connection to somewhere in Asia) is a far more difficult value proposition, at least if the competition offers the same journey with one connection. You can sell those city pairs, but only with low fares. The budget traveller is not exactly what Etihad is aiming for.

The decision to take Etihad as its largest shareholder may have more strategic implications than Air Berlin’s management may be aware of. Etihad has an interest in getting feed for long-haul services and a dense European scheduled network that it can market to its own customers wishing to travel onwards in Europe. But that threatens to focus Air Berlin’s business on precisely the weakest performing segments: domestic and European scheduled services that have been particularly hard hit by the impact of the German air passenger tax and head-on competition with Lufthansa.

It is absolutely certain that with Air Berlin now in the Etihad camp and soon to be a member of the Oneworld alliance, the times of relatively friendly co-existence are over. Air Berlin would have had another option of focusing on the charter and leisure segment, where it is already strong, plus that part of European scheduled services where Lufthansa’s presence is less of a threat. Now it’s too late.

On the other hand, the deal is great for consumers and it gives Air Berlin a chance to get established in the longer term with strong financial backing.