• Strategy
  • CFO Europe Magazine

Midair Maneuvers

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

In Greece, government attempts to sell financially troubled Olympic Airlines are being hampered by a demand from the European Commission that the government recover around €700m in “illegal” state aid. A parliamentary bill protecting the airline from its creditors is due to expire this October, adding to its woes.

The Pressure’s On

Both airlines should have seen these problems coming. Competitive pressure on Europe’s mid-tier flag carriers has steadily increased since 1987, when the European Union launched a phased programme to deregulate its aviation market. But it wasn’t until the mid-1990s, when budget airlines entered the market, that the flag carriers really started to suffer. Encumbered by high costs, inflexible labour unions and interfering government owners, they failed to respond quickly enough to low-cost, low-fare airlines that were cutting ticket prices aggressively. Swissair, the former national airline of Switzerland, was the most high-profile casualty. After taking a 49.5% stake in Sabena, the Belgian flag carrier, a slump in demand following the terrorist attacks of September 11th 2001 triggered a cash-flow crisis. In 2002, Swissair collapsed, taking Sabena with it.

It’s about to get even tougher for the industry. An EU-US agreement to liberalise the transatlantic air travel market, known as “Open Skies,” is due to take effect in March 2008. It will allow European airlines to operate flights to the US from any EU country, as opposed to just from their home country, as is now the case.

“Smaller European airlines — all these little flag carriers flying from a protected home market to the United States — now may have a British Airways or Lufthansa march into their market,” warns Phillip Baggaley, Standard & Poor’s managing director of ratings services.

The deal has prompted much talk of consolidation. KLM and Air France have already entered into a quasi-merger, Lufthansa has clearance to take over Swiss — Swissair’s successor — and BA is part of a private equity consortium bidding for Spain’s Iberia. But one barrier to consolidation is the threat that EU airlines could jeopardise lucrative bilateral agreements with non-EU countries other than the US if they merge or are taken over.

Also, most just aren’t that attractive to potential buyers. “No one wants to buy half-baked second-tier carriers, except possibly some of the private equity houses,” says Keith McMullan, managing director of consultancy Aviation Economics. That said, “it’s probably incorrect to group mid-tier national carriers together just because of size…Some have just not adapted to deregulated markets and have relied on government support, either legally or illegally, while others have been very successful and profitable and found good geographical niches for themselves.”

Find Your Niche

One airline on the latter path is Scandinavia’s SAS. Last month, it announced that it was pulling back from its pan-European ambitions to focus purely on northern Europe. The SKr60.8 billion (€6.5 billion) airline, still 50% owned by the governments of Sweden, Denmark and Norway, has struggled to get back to profitability following the downturn in air travel after 2001 and Asia’s bird flu outbreak a year later. A SKr2.8 billion profit in 2000 turned into a pre-tax loss of SKr1.1 billion in 2001. Last year, the carrier reported a pre-tax profit of SKr929m.

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