Air­lines feel strain of higher wages and fuel prices

The Globe and Mail (Ottawa/Quebec Edition) - - OPINION & ANALYSIS - VIC­TO­RIA BRYAN BER­LIN

De­spite sev­eral years of record prof­its, car­ri­ers across the globe are un­der pres­sure to limit costs as spend­ing on labour out­paces fuel

With in­fla­tion para­mount in in­vestors’ minds at a time of ris­ing wages and oil prices, the line sep­a­rat­ing win­ners and losers in the global air­line in­dus­try this year looks likely to be drawn on how well they man­age costs, es­pe­cially on the labour side.

In­dus­try body IATA in De­cem­ber flagged higher spend­ing on labour and fuel – which make up about half of air­lines’ op­er­at­ing ex­penses – as their mem­bers’ big­gest chal­lenge in 2018, es­pe­cially after sev­eral years of record prof­its.

Labour costs sur­passed fuel as global air­lines’ big­gest sin­gle ex­pense in 2016, at 22 per cent of costs against just less than 21 per cent for fuel. That is ex­pected to jump this year to 30.9 per cent ver­sus 20.5 per cent for fuel.

Back in 2013, when oil prices were much higher than now, fuel was 33 per cent of ex­penses against 18 per cent for labour.

Staff costs are typ­i­cally higher in North Amer­ica and Europe than in Asia, where fuel re­mains the big­gest ex­pense.

The crux of the is­sue is that amid signs of a global short­age of work­ers gen­er­ally, in some re­gions there’s also a scarcity of qual­i­fied pi­lots at a time of ex­pand­ing fleets.

“As air­lines have been mak­ing profit, the work force has got mar­ket power, so that is push­ing up the cost of labour,” IATA chief econ­o­mist Brian Pearce said.

Over all, unit costs – the mea­sure of how much it costs an air­line to op­er­ate each kilo­me­tre and seat flown – will rise 4.3 per cent this year ver­sus 1.7 per cent in 2017, IATA fore­casts.

In the high­est profile ex­am­ple of the pres­sures, bud­get car­rier Ryanair was com­pelled last year by pi­lot short­ages to can­cel thou­sands of flights, and in De­cem­ber rec­og­nized trade unions for the first time.

The bat­tle that forced Ryanair’s hand could put wage pres­sures on other Euro­pean bud­get car­ri­ers such as Wizz, in­dus­try ex­perts say. The big­ger car­ri­ers feel it, too. At Air France, 10 unions rep­re­sent­ing pi­lots, cabin and ground staff have called for a strike on Feb. 22 to push a de­mand for a 6-per-cent pay rise.

“After three years of strong prof­itabil­ity im­prove­ments in the sec­tor, we be­lieve per­son­nel and sup­pli­ers are ask­ing for wage/ price in­creases and thus keeping non-fuel costs un­der con­trol will re­main a chal­lenge for the sec­tor,” Ke­pler Cheuvreux an­a­lyst Ruxan­dra Haradau-Doser wrote.

The wage is­sue has even ex­tended to the United Arab Emi­rates,

the Mid­dle East trade and fi­nan­cial hub where labour dis­putes are rare and unions and in­dus­trial ac­tion are banned.

The re­gion’s largest air­line, Dubai-based Emi­rates, is fac­ing calls from cabin crew to im­prove con­di­tions and ben­e­fits. Em­ploy­ees say man­age­ment is con­sid­er­ing their re­quests.

Last week, bro­ker­age Ke­pler Cheuvreux cut its rat­ing on Ger­man flag­ship car­rier Lufthansa – al­ready on its lists of stocks to avoid and least pre­ferred in the sec­tor – to “re­duce” from “hold.”

In the United States, in­vestors are wor­ried that the three largest car­ri­ers – Amer­i­can, Delta and United – are head­ing for a price war just as higher costs from pay in­creases agreed last year start to bite.

Lufthansa, Bri­tish Air­ways par­ent IAG and Air France-KLM are all ex­pected to re­port im­proved 2017 prof­its when they pub­lish re­sults over the next few weeks.

All air­lines will need to look at

ar­eas where they can save, how­ever.

“The most suc­cess­ful air­line man­age­ments are the ones that have been very cost-fo­cused ev­ery day – not just on staff costs, but on air­craft costs, air­port charges, dis­tri­bu­tion costs and so on,” avi­a­tion con­sul­tant John Strick­land said.

The suc­cess of Ryanair, which boasts of hav­ing the low­est costs in Europe, is partly down to hard ne­go­ti­at­ing with man­u­fac­tur­ers and air­ports to get good deals on or­ders and fees, those in the in­dus­try say.

Mr. Strick­land said that while pi­lot costs would rise, Ryanair was unique in hav­ing much lower over­all costs than ri­vals. “If they can con­tinue to keep other items such as air­port and air­craft costs down, then they will still be in a very strong po­si­tion.”

Lufthansa has been tak­ing a tougher stand lately both with staff and air­ports.

Un­like in pre­vi­ous ne­go­ti­a­tions for its main brand in Ger­many, Lufthansa stayed firm dur­ing a se­ries of pi­lot strikes from 2014 to 2016 and has now struck a deal to cut its cock­pit-staff costs by 15 per cent, while an in­crease in ground staff’s wages will be partly linked to com­pany prof­its.

Last year, it also put pres­sure on Frankfurt Air­port op­er­a­tor Fra­port by mov­ing planes to Mu­nich. It pre­dicts unit costs will fall be­tween 1 per cent to 2 per cent this year.

An­a­lysts at Bar­clays say while such mea­sures should help Lufthansa, the rate of im­prove­ment is not sus­tain­able and progress still needs to be made at bud­get unit Eurow­ings, which earns less than half the mar­gin of its near­est peer.

“There is a sig­nif­i­cant amount more work for the com­pany to do on its cost base,” they wrote in a note.

Along with strong travel de­mand owing to ro­bust economies and low oil prices last year, Euro­pean air­lines have also ben­e­fited from some con­sol­i­da­tion fol­low­ing the in­sol­ven­cies of Air Ber­lin and Monarch, which helped lead to higher ticket prices.

In ad­di­tion, many Euro­pean car­ri­ers hedged on jet fuel – un­like their U.S. coun­ter­parts who got burned mak­ing the wrong bets when the oil price started tum­bling in mid-2014 – mean­ing the im­pact of higher fuel prices will come through for Euro­pean air­lines later than U.S. ones.

Easy­Jet’s rev­enue per seat rose 6.6 per cent at con­stant cur­ren­cies in the quar­ter to end-De­cem­ber, the no-frills air­line said, cit­ing the strug­gles of ri­vals in­clud­ing Air Ber­lin, Monarch, Ryanair and Al­i­talia. It fore­cast a rise of 5 per cent to 9 per cent for the six months to March.

“Air­lines need to be care­ful they don’t lock them­selves into cost struc­tures that are too high for weaker eco­nomic con­di­tions,” IATA’s Mr. Pearce warned. “At the mo­ment, they’re not do­ing that, but it’s al­ways a risk.”

CHRISTOPHE MORIN/BLOOMBERG

An Air France pas­sen­ger air­liner taxis along a run­way at Charles de Gaulle Air­port in Paris on Mon­day. Ten unions rep­re­sent­ing pi­lots, cabin and ground staff at the air­line have called for a strike on Feb. 22 in an effort to push for a 6-per-cent pay in­crease.

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