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Flight to nowhere

29 October 2015 By Olaf Storbeck

Struggling flag carriers Lufthansa and Air France-KLM both have encountered an updraft of lower oil prices and unexpected strong summer demand. It’s probably just temporary. But try telling that to restive pilots who now have a reason to push back even harder on essential cost cuts.

The German and Franco-Dutch flag carriers increased their operating profit faster than expected in the third quarter. Lufthansa’s operating margin rose to 13.7 percent, up from 9.6 percent a year earlier, also because currency moves went in its favour. Air France-KLM reported an operating margin of 12.1 percent after last year’s 3.7 percent.

This though offers only temporary respite from the problems that plague flag carriers: bloated labour costs, nimble competition and an ageing fleet. No-frills airlines conquer the European short-haul market while state-supported Asian carriers like Emirates woo passengers on lucrative eastbound intercontinental routes. As a result, the two airlines’ returns over the past five years have been frankly horrible. Lufthansa shareholders had to put up with a total return of minus 1 percent, Eikon data shows, assuming dividends over that time were reinvested. Air France-KLM shareholders lost 49 percent over the same period, while investors in their budget rival Ryanair gained 279 percent.

Both airlines have tried to squeeze costs for years. Strings of efficiency programmes have left both with labour costs more than double the percentage of revenue best-in-class rivals boast. Pilots are getting feistier in defending their perks. In early October, they literally took the shirt from the back of Air France’s human resources chief, while Lufthansa has at best deferred its labour conflicts with a court injunction in July.

Positive one-offs have masked the issue. Air France even bravely reported revenue “excluding strike impact” on Oct. 29. But look past these, and Lufthansa’s unit costs per seat-kilometre flown have actually gone up in the third quarter. Air France has lowered its cost-cutting targets for the whole year. If the latest quarter’s apparent boost leaves disgruntled staff thinking things are better than they actually are, the airlines will be cursing their good luck.




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