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Airlines in Europe Find Profits in the Friendly Skies; European Nations Haven't Embraced Free-Market Approach

Posted on: Thursday, 5 January 2006, 09:00 CST

By Aude Lagorce

While four major U.S. airlines have filed for bankruptcy since the 2001 terrorist attacks, their European rivals have largely managed to elude turbulence.

Despite high fuel prices and growing competition from low-cost carriers, Europe's three largest airlines, Air France-KLM, British Airways PLC and Deutsche Lufthansa, are all in the black.

They are reaping the rewards of better choices, but also fewer burdens, analysts say.

"There's no surefire recipe that could be exported from Europe that would solve the U.S. airlines' problems," said Arran Aerospace's Doug McVitie.

European airlines' sturdier health stems in part from the reluctance of governments to completely embrace the U.S. free- market approach.

Even as the Continent has slowly opened the door to consolidation, letting several national carriers vanish from the radar and welcoming transnational mergers, governments have used their control of airport slots, for instance, to discourage new entrants to the market.

Binny Prabhakar, a London-based project manager for the commercial aerospace practice of consulting firm Frost & Sullivan, said choices made in the 1990s have also impacted the airline sector today.

"U.S. airlines have much higher debt-to-equity," she said.

Prabhakar said that in the late 1990s, U.S. carriers had no trouble living with high levels of debt. Their European rivals, however, were forced to shave debt as they were being privatized.

European airlines also benefit from fewer pension obligations than their U.S. counterparts.

"The magnitude of pension burdens is much larger in the U.S. than in Europe, where pensions are mostly the responsibility of governments," said Donald Schenk, president of New-York-based consultancy Airline Capital Associates.

Before it filed for bankruptcy protection, Delta Airlines estimated it was facing about $3.1 billion in pension costs between 2006 and 2008.

United Airlines last year turned over its pension plans to government insurers, which pay benefits at a reduced rate. Pension plans at United, which has been in Chapter 11 protection since 2002, are underfunded by nearly $10 billion.

British Airways' pension deficit, in comparison, stands at $2.5 billion, and its deficit is considered one of the larger ones of European airlines.

Bankruptcy protection, which doesn't exist in Europe, has hindered more than it has helped the U.S. carriers, some added.

"Chapter 11 has come to mean that you can ignore the demands of pension-fund people, for instance, and still stay in business without a fundamental rethink of your strategy," said Richard Aboulafia, vice president of U.S.-based consultancy the Teal Group.

There's no such thing as Chapter 11 in Europe, and that's led to the demise of major carriers such as Belgian carrier Sabena and Swissair, the latter being swallowed up by Lufthansa. It has also spurred much-needed consolidation, as seen in the recent successful merger of Air France and KLM.

Airline Capital Associates' Schenk said European carriers have been successful in restructuring their operations. In contrast, in the United States, "the extraordinary profitability the carriers were used to means management was totally unprepared to deal with the magnitude and the rapidity of the change."

Despite the restructurings, the U.S. airlines haven't gotten themselves the cost base of the better European airlines such as Air France-KLM, BA or Lufthansa, said Tim Coombs of London-based consultancy Aviation Economics.

Cutthroat domestic competition has long been a thorn in the U.S. carriers' side. European airlines, meanwhile, benefit from international flights, where competition isn't so fierce, representing a larger part of their revenue.

"The lid has been kept on a little more tightly in Europe. The pace of opening the market to competition has been slower, which has benefited the established carriers. Regulation on airport slots also means the government can control access to the sector and influence the fate of new entrants," said McVitie.

Source: Buffalo News

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