The German airline Lufthansa is putting armed sky marshals on its flights. British Airways has abruptly taken away the fancy cutlery from business class so it won’t be used as fancy weaponry. And Sabena, Belgium’s perennially troubled airline, is offering "Fear of Flying" seminars to its nervous clientele. Amid the worst falloff in passenger traffic in a decade, European airlines are all scrambling to convince the traveling public that it’s still safe to fly in the aftermath of the terrorist attacks in the United States.
It will take some convincing. The North American route, once a cash cow for many European airlines, has been the hardest hit in terms of cancellations. "Traffic on North American routes was down 25-30% initially, but we don’t know how much it will be affected going forward," said Nick van den Brul, airline analyst at BNP Paribas in London. The Association of European Airlines figures that Europe’s carriers lost $25 million a day in the aftermath of the Sept. 11 attacks. British Airways says it will scrap or suspend 190 flights, including 30 on the North Atlantic. The International Air Transport Association said a likely scenario is for air traffic to decline 15% in the four months ending in December, costing the world’s airlines an estimated $7 billion in lost business. Once an empty airplane seat takes off, that revenue is lost forever.
While George W. Bush seems to be doing everything he can to get Americans back in the air, European governments gave their airlines at least one piece of good news last week offering third-party liability insurance for aircraft after private insurance companies yanked their coverage. Without state intervention, many carriers would have been grounded. Now the debate has shifted to the question of state aid to airlines that have been pushed to the brink of insolvency by the disruptions in service. "I’m sure four or five airlines are close to being bankrupt and require state aid," said Andy Chu, airline analyst at Merrill Lynch in London. "I don’t believe governments will allow their national airlines to go bankrupt."
It’s not hard to guess which ones he might be talking about. Swissair, Sabena and Alitalia were all in bad financial shape before the attacks in the U.S. Even well-managed, profitable airlines have been flying by the seat of their pants in the months since the economic slump began. Analysts estimate that even a 3% drop in passenger traffic can make the difference between a profitable year and a stinker. Within 14 days of the attacks, at least 16,000 people working for European airlines were told they would soon lose their jobs.
Swissair, $1.7 billion in the red last year, said it lost another $40 million from interruptions in scheduled flights to the U.S. "There was definitely a fear of flying," said Swissair spokesman Jean-Claude Donzel. "We don’t know when we can expect the turnaround." To cope with the crisis Swissair was forced to draft plans for its second restructuring in five months. The airline will now concentrate on higher-margin business travel in Europe and scale back its long hauls by 25%. Swissair said it would cut 3,000 jobs at its catering subsidiary, Gate Gourmet, and merge with its regional airline Crossair into a single carrier, resulting in thousands more job losses. "It’s the beginning of a more realistic time," said Sepp Moser, an industry analyst. A prominent industrialist, Ulrich Bremi, was named to head a panel that is trying to raise an estimated $1.9 billion in fresh capital to keep the airline afloat. The Swiss government said it may contribute to the refinancing but insisted the private sector take the lead.
At Sabena, which is 49% owned by Swissair and has had only one profitable year in its 40-year history, bankruptcy loomed closer last week after management and unions failed to agree on a plan that would cut 550 jobs now and 900 through attrition. "Everybody has to know that the only alternative to the business plan is the closure of the company," said ceo Christoph Müller. Sabena will hold a vote of its workers this week in an effort to win approval for the rescue plan. Swissair agreed earlier this year to give Sabena $227 million, or 60% of a promised cash injection, with the rest provided by the Belgian government. The deal is contingent on employees accepting the rescue plan.
Italy’s national carrier Alitalia called the current situation "the worst crisis commercial airlines have faced since the end of World War II." To meet it, the carrier announced costsaving measures, including a cut of 2,500 jobs, or 12% of the workforce. The package of cuts will let Alitalia bring losses down from an estimated $350 million to $150 million in the half-year ending in March. The government has promised Italian carriers Alitalia and a handful of private lines a bailout of up to $200 million to reduce airport taxes and help pay for heightened security.
Not all European airlines supported the idea of state assistance, though many said they were worried about their competitive strength against U.S. rivals, which are receiving $15 billion in government aid to compensate for lost business during the grounding of U.S. airliners two weeks ago. Germany’s Lufthansa said it was against state intervention. "Subsidies would influence competition and are not what the market requires," said spokesman Thomas Jachnow. Lufthansa had been forecasting earnings as high as $690 million for the year, but CEO Jürgen Weber said "it will require immense efforts on the part of all Lufthansa staff if we are to avoid an operating loss this year." Weber said North Atlantic advance bookings were down 34% in October, 10% in November and 30% in December. "As soon as we recognize that a route in the next six months is not a money earner, we need to remove it immediately," he said. The airline will also raise fares to help pay for added security measures. KLM, the Dutch airline, introduced a $5- per- flight surcharge last week and plans to boost fares to the U.S. and the Middle East by 5% from Oct. 16.
Some of the biggest job losses in Europe came at British Airways, which announced 7,000 layoffs after Sept. 11 as well as the cancellation of 10% of its flights. The North Atlantic normally accounts for 37% of British Airways’ revenue and nearly all its profits. "We face exceptional conditions which have forced us to take very tough decisions," said BA’s chief executive Rod Eddington. Even before the terrorist attack, Merrill Lynch had forecast BA would earn $94 million this year. "Its breakup value is higher than its market capitalization currently," said Colin Hill, managing director of Avmark International, a commercial aviation consultancy. Even Virgin Atlantic said it was cutting 1,200 staff, its first retrenchment ever.
One airline that seems relatively unscathed is Ryanair, Europe’s largest low-fare airline and one that does not fly the Atlantic. After the attacks, Ryanair put a million seats on sale for just $14 each. CEO Michael O’Leary scoffs at other airlines for cutting back operations and says they should slash fares to fill their aircraft. "The important thing is to keep people flying," he says. Analysts have been forecasting around $130 million in profit this year, and O’Leary sees "no reason why we won’t hit that figure." The outspoken chief has taken out newspaper ads railing against government bailouts for his competitors. As O’Leary is fond of saying, even if you give a basket case a subsidy, it will still be a basket case.