It was another frustrating day at Brussels' Zaventem Airport. On Feb. 7, a wildcat strike by 140 Sabena pilots canceled 57 flights, creating chaos. More than 4,800 passengers could not fly out of or into the Belgian capital. And the situation soon could get much worse: The Belgian flag carrier lost $192 million last year, and its owners, the Belgian government and Switzerland's SAirGroup, are threatening to close down the airline on Feb. 23 unless unions agree to almost $50 million worth of cost-saving measures.
Sabena isn't alone: Many of Europe's money-losing flag carriers are hitting heavy turbulence. The Continent's ever more powerful single market, combined with the transatlantic threat of even bigger U.S. carriers as a result of mergers, is upping the pressure on airlines to privatize and consolidate. Regulatory and political obstacles to necessary restructuring soon may crumble. The best-run airlines with the largest home markets, Lufthansa, Air France, and British Airways, look set to prosper, while the second-tier lines seem doomed to a life of hard struggle or secondary roles in alliances. Half a dozen may soon go bankrupt. Caught in the middle, long-suffering European passengers can expect poorer service and higher prices.
More than 130 airlines operate in Europe, about two-thirds more than in the U.S. Lufthansa, the European airline that carried the most passengers last year, is only half the size of the largest American carrier, United Airlines Inc. Meanwhile, the number of major U.S. airlines is fast dwindling to a few giants, a process that could take a great leap forward if American Airlines Inc. is allowed to swallow Trans World Airlines Inc. Those American carriers want European partners, but they are going to be mighty picky. "If there are three or four big American companies, there will be only three or four European pillars allied with them," says Jean-Cyril Spinetta, CEO of Air France.
Nationalism has prolonged the endgame. Europe's airlines long were considered extensions of foreign ministries, responsible for flying the flag, not running a business. During the first half of the 1990s, European governments handed out $9 billion to prop up money-losing carriers from Air France to Greece's Olympic Airways. Even private companies have not escaped political complications. BA's attempt last year to buy KLM Royal Dutch Airlines collapsed partly because of fear that if the Dutch airline came under British ownership, it would lose international treaty rights to fly to places outside of Europe such as Japan and the U.S. And European Union rules prohibited Swiss-air, based outside of the EU, from taking over Belgium's landing rights within the EU if it bought a controlling stake in Sabena. So Swissair settled on a 49.5% stake.
HAVES AND HAVE-NOTS. Despite all the protections, the division between the big profitable airlines and the smaller, struggling ones is widening. BA, Air France, and Lufthansa all are reporting rising profits, which have pulled the European airline industry out of its slump in 1999. But Swissair is expected to report a net loss of as much as $530 million if it takes provisions to extract itself from weak alliances with partners such as Sabena and TAP, the Portuguese national carrier. And Alitalia expects an operating loss of $384 million in 2000.
The European Commission, meanwhile, is finally getting tough. On Feb. 12, European Transport Commissioner Loyola de Palacio rejected a Portuguese request to pour more money into TAP. "State aid is a thing of the past," says Karl-Heinz Neumeister, secretary general of the Association of European Airlines in Brussels. Without government protection, the most vulnerable airlines, TAP and Sabena, soon could be shut down, setting an important precedent. The Belgian government is willing to add about $95 million to Sabena's recapitalization effort, but only on the condition that the plan goes through. The new chief executive of Swissair's airline division, Moritz Suter, says he hopes the unions oppose the rescue plan so he can pull the plug on Sabena, and industry experts don't think he's bluffing. "Once one domino falls, the others will go fast," predicts Chris Tarry, an airline analyst at Commerzbank in London.
SWISS RETREAT. The survivors may not be in much better shape. Swissair, for example, gambled by trying to build up a fourth independent European network to take on British Air, Air France, and Lufthansa. The Swiss picked up stakes in regional French airlines, plus Sabena, TAP, and Poland's LOT. But the Swiss never got effective management control. Losses spiraled, and Swissair CEO Philippe Bruggisser was dumped last month. When it announces annual results on Apr. 2, the airline is expected to pull out of its French partnerships.
Of the major remaining carriers, Alitalia faces the worst squeeze of all: It has no alliance, a major reason Managing Director Domenico Cempella resigned on Feb. 2. By the end of the year, analysts expect Alitalia, like Swissair, to be forced into accepting minority roles. "Swissair and Alitalia have to take their place within the large European alliances," says Air France's Spinetta, who says he is negotiating a linkup with Alitalia.
For consumers, all this upheaval promises pain. As in the U.S., many direct routes will vanish as the airlines reshape themselves. Even worse, airfares already rose 3% on average last year and look set to continue heading north. European air traffic was up 8% in 2000, to 201 million passengers, and there's little room for expansion. BA is slashing its seats by 12% over three years, allowing it to concentrate on high-paying business passengers, pushing profits up from about $7 million for fiscal 2000 ending on Mar. 31 to $300 million for the three quarters ending on Dec. 31. Good for BA, but bad for consumers looking for reasonably priced seats. And while Air France and Lufthansa are adding some flights, alliances mean "airlines aren't going to add capacity," says Corne Zandbergen, an analyst at Amsterdam's Fortis Bank.
An alternative for price-conscious passengers are the low-cost, Southwest-style carriers making inroads such as Ryanair and easyJet Airline. Ryanair, which made $58 million in 2000 aftertax profits, plans to add five planes and an average of seven new destinations annually for the next five years. But the budget airlines don't offer long-haul flights. They're strong only in the British Isles and usually fly from secondary airports. Most probably, they will complement, not compete, against the big boys. The big get stronger, the small get weaker, and this industry is in for a year of turmoil.
By William Echikson in Brussels, with Christine Tierney in Frankfurt, Kate Carlisle in Rome, and bureau reports
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