• Strategy
  • CFO Europe Magazine

Midair Maneuvers

CFOs of Europe's mid-tier flag carriers are leading radical strategy overhauls.

Lasse Heinonen, CFO of Finnair, is well aware of the €2 billion airline’s competitive advantage: from its hub in Helsinki, Finnair offers a travel time to northeast Asia faster than any other European airline. But like most medium-sized European flag carriers, old obstacles had prevented him from exploiting its asset. In his efforts to encourage passengers bound for northeast Asia to connect via Helsinki, Heinonen ran up against powerful labour unions. They had negotiated a collective agreement limiting the number of long-haul flights that cabin crews could work to just two a month. There was no way Finnair could operate the Europe-Asia route effectively with these terms.

The situation changed after profits slumped from €12.2m in the first quarter of 2005 to a net loss of €3.8m a year later. Heinonen then launched an €80m cost-cutting programme that included 670 job losses. Under such pressure, he was able to renegotiate the agreement to bring the maximum number of long-haul flights for each crew member to five a month. Today the strategy is winning plaudits from both investors and analysts.

“The issue for any medium-sized airline is to know where they have strength and to develop that area of the business — that’s something that Finnair is doing superbly,” says Andrew Lobbenberg, an analyst at ABN Amro in London.

Heinonen isn’t alone in having to chart a new course back to profitability. Squeezed between the bigger, more successful flag carriers at one end and the pan-European budget airlines at the other, rethinking the business strategy has been a priority for every CFO of a medium-sized European flag carrier. Ulrich Schulte-Strathaus, secretary general of the Association of European Airlines (AEA), reckons Europe is seeing a convergence of business models between the full-service and no-frills carriers.

As a result, many are following the lead of budget airlines by stripping away operating costs to allow for discounted ticket prices. Others are focusing on the most profitable parts of their business while selling or outsourcing the rest. All CFOs are having to counter the power of the trade unions, often by turning them into partners rather than adversaries — and persuading interfering government owners to allow management to make sensible commercial decisions. Another challenge is the long rise in oil prices; and while some CFOs have attempted to deal with that through hedging or surcharging, few have managed to avoid taking a hit on profits.

Heinonen is fairly typical of the CFOs coping with these challenges, though more successful than most. While growth in its European and domestic business has been fairly flat, Finnair’s Asia business is now growing at 30% a year. In the first quarter of 2007, Finnair reported an operating profit of €13.7m, far exceeding analysts’ expectations.

Others are not doing so well. The futures of Alitalia, Italy’s flag carrier, and Greece’s Olympic Airlines look uncertain. Gabriele Spazzadeschi, Alitalia’s CFO, quit unexpectedly in April and local press reported rumours that he didn’t want to sign off the 2006 full-year results, which eventually revealed a net loss of €625.6m. Alitalia puts this down to strikes and high fuel costs. Analysts add poor productivity to that list. The Italian government, which owns 49.9%, is currently looking to sell all but 10% of its share.


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