Can Flag Carriers Ever Hope to Make Profits?

rtemagicc_finnair_logo_und_schrift_01 lufthansa-logo

 

This week in passenger aviation witnessed two discouraging moments. First, Finnair, Finland’s flag carrier recorded  first-quarter underlying losses of EUR€17.7 million (USD$23 million), compared with a EUR€24 million loss in the same period the year before. CEO of Finnair, Pekka Vauramo, has emphasized (unoriginally) that further cost reductions are required for Finnair to return to profitability. Finnair has spent the last few years cutting back on their European flights and focusing on their “North Pole to Asia” strategy in the hope of convincing long-haul travellers of the advantage of the shorter flights from Helsinki to China, Japan and Korea.

The second piece of bad news was the Lufthansa strike. Striking workers included cabin crew and ground staff at Lufthansa Cargo, Lufthansa Technik, Lufthansa Systems, catering unit LSG Sky Chefs and ground crews. In all, Lufthansa cancelled 1,700 flights, with a mere 30 operating, after strike action was announced at Germany’s biggest airports, including Frankfurt, Munich and Hamburg.

Stefan Lauer, head of HR at Lufthansa declared: “We want to call on the union to end this madness. Germany’s transport sector is becoming the laughing stock of Europe.” The Verdi union, which has 33,000 workers signed up, is pushing for a 5 percent increase in pay and job guarantees for its members. It hopes the strikes will put pressure on management to improve an offer it has described as “scandalous”. It has also threatened further strikes if Lufthansa Group do not meed their demands. To add more misery to Lufthansa management, the pilots’ union Vereinigung Cockpit (VC) indicated that it had requested of Lufthansa this week for a 4.6 percent pay increase for the 2013/2014 period.

From the management side, Lufthansa aim to cut 3,500 jobs worldwide as part of a programme to boost operating profit to EUR€2.3 billion by 2015. Seeing is believing.

With US carriers routinely going in and out of bankruptcy and many flag carriers living off government subsidy, it appears that only a handful of flag carriers can make money. Airline executives at flag carriers have pretty much tried everything they can to stave off poor performance: mergers and acquisitions; forming and enlarging alliances; trimming inflight service to reduce cost; charging for additional services such as luggage; reducing benefits in their frequent flyer programmes and using “fuel surcharge” to increase fares by stealth. Despite all these efforts, poor results continue.

It begs an important question: is it viable to have flag carriers who are profitable?

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4 thoughts on “Can Flag Carriers Ever Hope to Make Profits?

  1. Flag carriers are often viewed as strategic national assets. Hisorically they have been very useful to some countries is this regard. For example SAA during the 70s and 80s was used as a tool of the state at times to bring in vital sanctions-busting imports. El Al during the various Israeli-Arab conflicts became effectively a stratgic airlift arm of the Israeli Air Force. Some countries might not prepared to give up this resource. And then there is always the national prestigue of having your own airline…

    1. Adrian – thanks for the note! Much appreciated. All of the arguments you gave are not the basis for commercial evaluation. In the case of Apartheid SA, the airline was used to break international law (rightly or wrongly). In the case of El Al, it is a “national security” argument. As for prestige, states can spend money in other ways to generate national prestige. All in all, the case for profitably is pretty weak.

  2. I used to work at LH and wrote a thesis on the profitability of airlines, and so I believe I have the right to go as far as calling this industry insane. It has a cost base of a pharmaceutical industry (large fixed costs ratio, licenses, etc.) while earning a margin of a grocery retail industry. My view is that we’re going to see quite some airline bankruptcies here in Europe in the 5-10-year perspective – it will be those bureaucracy airlines losing the battle to seemingly better-performing privately owned and profit+passenger turnover-oriented carriers with a publicly recognized strategy (Ryanair-type, Etihad-type, etc.)

    1. Hello Ilya – thanks for the comment! Always nice to get feedback. If I send you my email address via. FB, could you send me your thesis? In return, I’ll send you a copy of a paper that I have just completed a paper with two colleagues in Germany on “the Permanently Failing Organization” with an application to the Airline sector. Looking forward to reading your thesis!

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