Two European giants—International Airlines Group (IAG), parent company of British Airways, Iberia and Vueling, and Lufthansa—have experienced management/union showdowns in the past year.

In April Lufthansa was forced to cancel hundreds of flights when union Verdi, which represents 33,000 Lufthansa workers, staged a walkout demanding a 5.2% pay increase and job security. Lufthansa chief negotiator Stefan Lauer described the action as excessive, causing havoc for passengers and the company.

“The frequency and severity with which the various trade unions are inflicting massive damage at ever-shorter intervals on the air transport industry and thus also on Lufthansa have created an intolerable situation,” Lauer said. “It is high time that policymakers address the need for new rules with regard to industrial conflict in those areas which are essential for the industry infrastructure.”

Germanwings, a wholly owned low-cost carrier subsidiary of Lufthansa, was not affected by the walkout, illustrating why some network carriers have created budget operations with separate collective labor agreements or outsourced their mainline flight operations to regional subsidiaries.

 “We surely will see more of that,” said Philip von Schoppenthau, secretary general at the European Cockpit Association (ECA) that brings together a number of European pilots’ bodies. He pointed to Iberia’s creation of budget carrier Iberia Express and the transfer of Austrian’s flight operations to regional unit Tyrolean as examples. “With Austrian and Tyrolean everyone was shifted on to a much lower collective labor agreement with major implications for crews. Was this good for Austrian? We’ll see. What is clear is that many pilots are leaving the company.”

Iberia, meanwhile, is burning €1.7 million ($2.2 million) each day and must “adapt to survive,” IAG CEO Willie Walsh has warned. Iberia turned in a €351 million operating loss in 2012.

When details of 4,500 jobs cuts at Iberia—equivalent to nearly a quarter of the workforce—were released, the unions said there was a “real risk” that the plans were tantamount to dismantling the airline and they would not be “complicit in a plan that would destroy Iberia.” Job cuts have been pared down to 3,141 positions, but this was achieved only after strike action that followed a series of walkouts in 2012 over the creation of low-cost carrier Iberia Express.

As the dispute intensified, IAG’s negotiating stance remained tough. Employees were warned that failure to accept the changes by deadlines would lead to “deeper cuts and a more radical reduction in the size and scale of Iberia’s operations.” When talks over pay cuts and productivity improvements collapsed, Iberia immediately cut a further 4% from the wages of pilots, cabin crew and ground staff, which will be reinstated if an agreement is reached. Further strikes are banned for six months under the arbitration process.

Von Schoppenthau told ATWthat the drawing of a hard line by airline management has become more commonplace and that executives “use the media to show their shareholders they are tough guys.” He added that legal action against unions is also on the rise. “There is definitely a very clear trend towards [airlines pursuing] damages and legal action. They threaten to sue both before and after. This is an attempt to intimidate and bankrupt unions and de facto prevent them from going on strike. This is a very worrying trend.”

Von Schoppenthau also said there have been several examples where unions have proposed alternative cost-saving ideas, mitigating the labor impact of cost cuts, but these are often ignored by management. “We see situations where pilots try to be constructive, but management just push through their vision of how to run the business. This regretfully results in severe confrontation.”

However, Lee Moak, president of the US-based Airline Pilots Association, International (ALPA) believes European unions do not understand the scale of the problems airlines in the region are facing. Speaking as a panelist on labor issues during the Phoenix International Aviation Symposium in April, Moak said, “Look at Iberia. This strike showed that they [the unions] have no outlook for the future and don’t recognize the changes which are taking place in global aviation,” he said.

In the absence of US-style Chapter 11 bankruptcy protection, European network carriers are being forced to embark on restructuring programs and labor costs are among the first targets. “Airlines have only limited possibilities to influence fuel prices or aircraft costs, leaving labor expenditure as the category management can control,” David Seligson, an International Labour Organization expert for the civil aviation industry, said.

The scale of the problem is demonstrated by Austrian Airlines CEO Jaan Albrecht, who estimated that European airlines lost 33,000 jobs in 2012. Some of these jobs, Albrecht said, will be “transferred to airlines in Turkey or the Gulf region.”

Von Schoppenthau acknowledged that competition from Gulf carriers is “certainly a threat” and that these airlines, which do not have union representation, are hiring European pilots who have retired or lost their jobs.

Among some of Europe’s largest and most-established low-cost carriers, however, labor action has largely been avoided. Ryanair and easyJet have succeeded in keeping costs low and operations uninterrupted. The trick, said one airline CEO speaking on the condition of anonymity, is to manage the balance between tension and innovation, finding alternative ways to engage with labor and to diffuse the situation.

The LCC advantage

“It is necessary to have ongoing points of tension to keep costs low and maximize flexibility. Traditional airlines don’t have that; they have conflict, noise and demonstrations. Then they negotiate and things quiet down. The bottom line is Ryanair doesn’t give a hoot about managing people from an innovation perspective, but it is a master at creating tension. It simply will not pay and if you don’t like it, you can lump it. Traditional airlines have neither innovation nor tension. With traditional airlines it is always resolved, then pilots’ salaries and fares go up,” the source said.

Another factor weighing against legacy carriers is that they generally employ older staff with financial commitments, more to lose and the confidence to fight for it. “If you are 20 years old and you lose your job, you go and get another job. If you are 47 and they fire you, what are you going to do? Age, history, experience and the age of company means traditional airlines do not foster innovation or continuous tension when manag[ing] labor,” the source said.

One exception is when the airline hits a crisis point, leaving unions with very little choice but to accept drastic changes to their labor agreements. SAS secured a huge package of union concessions as it teetered on the verge of bankruptcy in November. SAS needed union buy-in for 1,000 redundancies and the outsourcing of 5,000 more positions, along with lower pay, increased productivity and changes to its final salary pensions or it would not have qualified for the SEK3.5 billion ($544 million) credit line it needed to survive. “If we didn’t reach an agreement, the board was prepared to wind down the company,” SAS CEO Rickard Gustafson said. Just before deadline, the last of the eight unions came onboard.

Gustafson said this was not “stage drama” to leverage a deal with the unions. “The situation was pretty basic. Either we adapted, or the company could not continue to operate,” he explained. However, Von Schoppenthau does not fully subscribe to this. “I wouldn’t say the SAS crisis was artificially manufactured, but there was certainly a willingness to come to a crisis situation. The company pushed it to a point where there was an impasse, where the only way out of the situation was to strip down everything. Luckily the company was saved after all the unions made major concessions, but this situation could have been handled differently.”

Transparency & dialogue

While most European network carriers have been forced to make cuts, not all airlines have suffered the same levels of labor unrest. “I think we can say we have a peaceful social climate,” Air France-KLM CEO Jean-Cyril Spinetta said, noting that the Franco-Dutch carrier managed to secure new collective labor agreements without any strikes. “This reflects the maturity of our employees and their willingness to support our companies. The commitment taken by both Air France and KLM is that there will be no forced layoffs until after 2014. What happens after 2014 depends on many factors that we can’t anticipate at this point in time.”

Through 2,700 voluntary departures, wage freezes, increased productivity, natural attrition and strict control over temporary staff and new hires, Air France-KLM planned to cut employee costs from €7.8 billion ($10.2 billion) last year to €7.6 billion in 2012. By 2013, it wants to further reduce labor costs to €7.4 billion. “This is going to make a significant contribution to the competitiveness of Air France-KLM with respect to our major competitors,” Spinetta said. But he acknowledged that securing the new labor agreements was the most difficult and uncertain part of the airline’s Transform 2015 plan.

 “It was a question of awareness of the situation among our employees and unions,” Air France-KLM Group EVP finance Philippe Calavia said. “We were transparent and put the figures on the table. It was clear to everyone that the situation was not sustainable. We had long discussions with the unions and they accepted that we need to deeply increase the productivity of the group.”

Gustafson agrees transparency is essential. “I don’t think there is any silver bullet solution. I was brutally honest and transparent and took a lot of personal time and effort to explain the situation so the unions had the same picture as the board of directors. This open book policy helps unions understand that we need to change to survive.”

Von Schoppenthau urges management to resolve their concerns in partnership with their staff. “It all comes down to one word: dialogue. You need to start discussions very early on in the process and try to find a common solution rather than trying to grab media headlines and impress shareholders by being tough with the unions to show you are serious about restructuring.

 “Management needs to do a good job. Too often their decisions don’t make sense, resulting in a poor performance. They focus too much on costs and too little on good commercial strategy,” he said.

Ultimately, however, the changes in Europe and the competitive landscape come down to one stark lesson. In the words of Chris Tarry from consultancy firm CTAIRA: “Sustaining the unsustainable is no longer an option.”
—Kurt Hofmann contributed to this article.