01-Apr-2014 3:41 PM

Lufthansa pilot strike highlights labour issues for Europe's legacy carriers. It's time to wake up

Analysis

An impending three day strike by Lufthansa pilots - described by the carrier as "one of the biggest walkouts" in its history - highlights what continues to be a challenging labour relations environment for Europe's legacy carriers. In spite of years of competition from LCCs and cost efficient long-haul players, and after significant progress with restructuring programmes, such disputes remain common.

Labour-related issues are affecting a number of other airlines, including Austrian Airlines, Air France, Aer Lingus, SAS and Finnair. Even LCC Norwegian Air Shuttle faces key strategic questions in connection with the use of low-cost labour to grow its nascent long-haul business. In general, however, LCCs enjoy a less unionised environment and greater labour flexibility.

It is not uncommon for labour unions to become more militant as the profit cycle picks up, but airlines cannot always hide behind this excuse. As IAG CEO Willie Walsh has said*, "it is not about unions, but management. Management needs determination and can do it if it wants to…Cost creep is requested by unions, but made by management".

Summary

Labour-related issues continue to affect legacy carriers in Europe, despite competition from low-cost carriers and restructuring efforts.
Lufthansa pilots plan a three-day strike over pay and retirement conditions, affecting over 425,000 passengers and costing millions of euros.
Austrian Airlines faces a legal challenge over the transfer of flight operations to subsidiary Tyrolean, potentially leading to further negotiations over pay and conditions.
Air France-KLM successfully implements its

*at CAPA's Airlines in Transition conference in Apr-2013. (This year's event is in Dublin on 10/11 Apr-2014)

Lufthansa accepts key demands by pilot union, but pilots vote to strike

Vereinigung Cockpit, the union representing pilots at Lufthansa, Lufthansa Cargo and low-cost subsidiary Germanwings, has called a three day strike from 2-Apr-2014 to 4-Apr-2014. The carrier estimates that the strike will affect more than 425,000 passengers and cost tens of millions of euros in lost profit.

A vote by 5,400 pilots resulted in 99.1% support for the strike, which relates to a dispute over pay and retirement conditions. Lufthansa said in a company statement on 28-Mar-2014 that it had improved its pay offer to the union and would continue to provide for early retirement.

Lufthansa also said that it would no longer link salary increases to company performance and that it had "therefore accepted key demands made by VC". This latter observation by Lufthansa may give some clue as to why the union has chosen to resort to such damaging industrial action. Perhaps it senses that it can get more if it pushes hard enough. It may also be rehearsing a warm welcome for incoming CEO Carsten Spohr, who takes over on 1-May-2014.

Austrian Airlines unions challenge transfer of operations to Tyrolean

Elsewhere in the Lufthansa Group, there remains a question mark over the transfer of flight operations from Austrian Airlines to its subsidiary Tyrolean. After attempting to renegotiate the collective labour agreement in Austrian Airlines itself in order to make the carrier competitive, management decided to effect this transfer in order to take advantage of the more favourable terms (to management) of the Tyrolean labour agreement.

The legality of this move has been challenged by labour unions representing Austrian Airlines employees and a final decision has not yet been reached by the courts. If the transfer were to be ruled illegal, this would force a resumption of difficult negotiations over pay and conditions at Austrian.

Air France-KLM's reality check

It often takes an existential threat to catalyse major cultural change and to pave the way for more efficient working practices. Air France-KLM CEO Alexandre de Juniac told the Financial Times (16-Mar-2014): "Frankly the company was on the brink, it was in a crisis, so it was easier for everyone to accept the reality in those circumstances. So we moved fast." The group devised its Transform 2015 restructuring plan in 2011 and managed to achieve the agreement of most of its unions to its broad objectives.

An important element of Air France-KLM's short/medium-haul restructuring is the greater use of LCC subsidiary Transavia France in the leisure segment of the market. The SPAF union, representing a minority of Air France pilots, called for strike action between 22-Feb-2014 and 25-Feb-2014 in protest against the development of Transavia France at the expense of Air France.

In addition, there have also been rumblings of discontent from the union CGT against what it has called an "unprecedented deterioration of our working conditions…" and "a destruction of jobs". These unions may not represent the majority, but their opposition suggests that not everyone is ready to accept the reality.

Air France must apply the same labour agreement to all cabin crew

Another important element of Air France-KLM's attempts to make its short/medium-haul operations more cost efficient and, thereby, to restore them to profitability, has been its French regional bases strategy. This involves basing aircraft and crew deployed in its point to point operations at regional bases in France, rather than keeping them all at Paris Orly. In addition, seeking improved labour productivity through offering revised terms and conditions to regionally based cabin crew at Marseille, Toulouse and Nice - through longer working hours and lower wages - is a key feature of this plan.

In spite of Mr de Juniac's attempts to provoke the group's employees into a reality check, this regional bases plan met with some union opposition. This opposition has now harnessed the French legal system to block the company's approach. Aviation union SUD Aérien recently reported (21-Mar-2014) that the Tribunal de Grande Instance de Bobigny (a court) had ordered Air France to apply the same labour agreement to all cabin crew, regardless of their base of operations.

Mr de Juniac also told the Financial Times (16-Mar-2014) that being more cost efficient was a key focus in battling with LCCs: "What we have to do now is to compete directly against them with the same weapons, with the same cost base." It seems that France's courts have now sided with its unions in hindering its leading airline from having anything like the same weapons as the LCCs.

Aer Lingus suffers from pension dispute fall-out

Aer Lingus, an airline that has been much more successful than many of its larger peers in adapting to the new world, has been engaged in a long-running dispute with its employees over the funding of the pension scheme that it shares with the Dublin Airport Authority. Members of the SIPTU union have voted in favour of industrial action related to this issue, planning a "relentless series of industrial action running through the summer and right into the autumn".

The union appealed to the Irish Transport Minister Leo Varadkar after Aer Lingus took legal action to avert a strike in Mar-2014. Mr Varadkar said: "I don't think Aer Lingus suing SIPTU or anyone is helpful. An expert group has now been appointed to help find a solution to the problem at the airport. At this stage I don't think there should be any strike threats, any strike ballots and nobody should be suing anyone." (RTE.ie, 20-Mar-2014).

The difficult industrial relations background resulting from the pension dispute also seems to be colouring the union's stance on other issues. SIPTU condemned (28-Mar-2014) Aer Lingus CEO Christoph Mueller's EUR1.52 million 2013 remuneration package.

The union's pension policy advisor Dermot O'Loughlin said that its members were "outraged". He added: "Obviously rules of fair play don't apply to the chief executive as his income has increased by a massive 18% in the last year alone. It is also ironic that Aer Lingus has chosen to increase its pension contribution to the chief executive from 25% to 40% at a time when it has continually failed to resolve the pension debacle for employees of the company."

While union rhetoric is often passionate and colourful, the current industrial relations backdrop is less than ideal for the recent launch by Aer Lingus of its new CORE profit improvement programme. It has no alternative than to proceed with restructuring in order to give itself the opportunity of improved levels of profitability, but it will be harder to achieve this while labour relations remain challenging.

SAS's union talks are suspended

The principal Nordic carriers are also facing difficult human resources issues as they pursue headcount reductions, or, in the case of Norwegian, long-haul expansion using lower cost labour based outside its home nation.

SAS' Danish cabin crew began voting on a mediator's proposed settlement to a labour dispute after a break-down in negotiations between unions and the carrier (Check-in.dk, 26-Mar-2014). In addition, the union HK Privat said on 15-Mar-2014 that negotiations with SAS over terms and conditions had been suspended and that the parties would now enter mediation.

The union's spokesperson Helle Lindgreen said: "It is a shame because we were willing to negotiate more flexibility, but the management of the SAS would have it for free and was not going to budge on wages."

Finnair attempts to increase its negotiating power by creating an alternative

Finnair said on 27-Mar-2014 that it had commenced consultations with cabin crew as part of its EUR60 million cost savings programme, following a new collective labour agreement signed in 2013. Finnair currently employs 1500 cabin crew in Finland and is seeking to lower this by 540.

Finnair has attempted to increase its negotiating power by creating an alternative "fail-safe" path. According to Finnair, its "priority and preference" is to reach a negotiated agreement with personnel, but "it is now obliged to draft optional plans to increase outsourcing of flight crew." The carrier plans to outsource the cabin staff on a maximum of three long-haul routes this year, increasing this to more than 10 routes in the next stage. It is also considering establishing a subsidiary that would produce cabin services and sell them to Finnair.

In an echo of the comments made by Air France-KLM's Mr de Juniac about the power of an existential threat, Finnair CEO Pekka Vauramo said: "Loss-making Finnair, whose financial situation has further weakened during the past years, can no longer wait. The situation calls for quick action to restore our profitability." He added that he still hopes "to reach in the ongoing negotiations the kind of result that would allow us to continue flying with our current crew. The outsourcing of our flight crew is clearly a secondary option for us. … the present-day wage level is not equivalent to the market level. We want all Finnair employees to know the options we have at hand."

Norwegian's Irish long-haul subsidiary gives labour cost flexibility

Norwegian Air Shuttle is a low-cost carrier based in a high wage economy, Norway. It is also a predominantly short/medium-haul carrier that is now developing a long-haul network, for which a cost-competitive labour force is an essential requirement. In order to address this issue, Norwegian established an Irish long-haul subsidiary, Norwegian Air International (NAI).

Labour laws are far more flexible in Ireland than in Norway and this approach effectively allows it to employ crew on contracts in lower wage economies to which it operates such as Thailand (and also the USA).

Norwegian's approach led to complaints by Scandinavian labour unions, almost leading to a pilots strike in Oct-2013, and to strong opposition from the major US airlines and from US pilot representative bodies (which may be softening as Norwegian is advertising for pilots in the US too). Whether or not Norwegian succeeds with its long-haul operations in the long run, it is right to identify labour costs as the main key to unlocking their potential - and an alternative to Norway as a base for labour is essential.

See related reports:

Has IAG found the way forward?

By contrast with many of Europe's leading legacy group's, IAG has been relatively successful in tackling high labour cost and entrenched working practices. British Airways faced down strong and bitter union opposition to terms and conditions for cabin crew that revolved around lower wages and greater flexibility. This provoked a series of strikes in 2010 and 2011, costing BA tens of millions in lost revenues and a serious dent to its reputation. Nevertheless, while there was some negotiation and concession around the edges, BA essentially stuck to its guns and achieved its main aims.

Former BA CEO and current IAG CEO Willie Walsh has also applied his uncompromising approach to BA's sister carrier Iberia. Iberia too was hit by a series of strikes in the earlier part of its restructuring programme, which involved significant headcount reduction and wage cuts. In addition, IAG made it plain to Iberia employees that the airline would not be allowed to grow until it could demonstrate that growth would be profitable.

See related reports:

Again, while a mediator introduced some moderate softening of IAG's initial stance, Mr Walsh has played hard ball, even changing Iberia's senior management to ensure that the group maintained a united front against union opposition. Moreover, in setting up Iberia Express and acquiring LCC Vueling, IAG created alternative paths that concentrated minds at Iberia. In this respect, IAG went much further than any of its peers.

This approach now looks to have worked: IAG has reached a new productivity agreement with unions representing all three main employee groups (pilots, cabin crew and ground staff), although a pilot vote was expected on 31-Mar-2014 to ratify the deal reached with pilot union Sepla.

It pays to be tough - or reality will bite

Labour has long been a crucial factor in the airline industry. Depending on the carrier and on the prevailing price of jet kerosene, it is either the number one or number two cost for airlines.

In addition, in an industry that has traditionally been heavily unionised, labour has often had a strong influence over working practices, schedules, network development and even the choice of aircraft type.

For legacy carriers, the advent of LCC competitors meant that creating a more flexible, productive and cost effective work force is a prerequisite for survival. As a service industry, airlines rely on their work force to deliver their service and to attract and retain passengers.

This means that management must take their staff along with them when effecting major change. Where the arguments are sufficiently convincing (and there would be few observers outside Air France for example who don't believe its situation is drastic), the corollary is that labour and management need to wake up to reality.

The lesson from recent developments in European airline labour relations suggests that a forthright management approach is the only way. Where failure to bite the bullet risks the very future of the airline there can only be losers.

The battle is no longer between managements and staff; the competition is in the battle for survival in a brutally commercial world - where survival is no longer a right. There are no "too big to fail" airlines any more.