assessments

Germany: Lufthansa and the Significance of a Labor Strike

5 MINS READJul 30, 2008 | 19:43 GMT
ROLAND MAGUNIA/AFP/Getty Images
Summary
Germany's Lufthansa, Europe's second-largest airline, canceled flights for the second day on July 30 as a strike led by the Verdi union gained momentum on its third day. Among other airports, the strike hits one of Europe's biggest air travel hubs — Frankfurt — at the height of the continent's holiday season. With employees struggling under high commodity prices and the airline suffering from rising operational costs, the fear of an inflation-driven upward spiral of costs and wages has hit the airline sector.
Germany's Lufthansa, the second-largest airline in Europe, canceled flights for the second day on July 30 as pilots, cabin staff and employees on the ground continued their strike in demand of a 9.8 percent wage increase. The 78 scrubbed long-haul flights would have served Central and Western Europe, India, Canada and the United States. Lufthansa also plans to ground 10 percent of its intra-European flights in the next five days. The Verdi union-led strike compounds a protest by pilots the week of July 20 that forced a total of 900 cancellations. As commodity inflation rages and economic growth slows in Europe's biggest economies, various labor groups — from fishermen to dairy farmers and truckers — are resorting to industrial action, demanding higher wages to deal with the higher prices of daily necessities. Meanwhile, businesses' profit margins are shrinking, forcing them to take cost-reducing measures — such as implementing hiring freezes, as Lufthansa has done. Economic growth has slowed to a desperate crawl in the second quarter in Germany and Italy, and the collapse of the construction and housing markets in Spain and Ireland have grievously wounded these countries' economies. Tension between employers and labor unions throughout Europe is mounting. Now airline employees have joined in the fray. The Lufthansa strike has forced cancellations at Germany's biggest airport, Frankfurt, which ranks as Europe's greatest air travel hub for cargo and its third-largest for passengers. It is the eighth-largest airport in the world. The Verdi union also targeted Hamburg airport, where Lufthansa performs maintenance checks on its planes. Verdi's timing is impeccable, with 10 percent of cabin staff and 50 percent of technical workers walking off the job during Europe's prime holiday season. Right now, virtually everyone in Europe is either traveling or serving tourists. Flagging economies depend on this tourism to prop them up amid the ongoing economic squeeze. Lufthansa has shuffled around its remaining active employees to keep planes in the air, managing to cut only 5 percent of its 1,800 flights and ground a mere 9 planes out of 500. But the strike has just begun to gain momentum. Talks between the firm and the union have stalled, and the negotiators have not yet scheduled a date to meet again. German magazine Der Spiegel estimated that prolonging the strike could lead to the cancellation of 25 percent of Lufthansa's flights, costing $50 million per day. In the first half of 2008, Lufthansa's profits fell by more than 50 percent from the same period the year before, bringing earnings from January through June down to $623 million, though sales and operating profits rose during the same time. (The sale of a large share in the company boosted last year's first-half profits.) However, the company's fuel costs have risen from about $3.86 billion in 2007 to a predicted $8.7 billion in 2008. Obviously, the prospect of chronic interruptions and further flight cancellations bodes ill for the German airline. Moreover, the Lufthansa strike could herald a spate of strikes at other European airlines. There have already been grumblings among unions at other major air travel firms this year. An Air France strike in January led to cancellations of short- to medium-length flights, as did a five-day air traffic control strike at the Paris-Orly Airport, which mainly serves domestic locations. British Airways only narrowly averted pilot strikes on two separate occasions in January and February, and the carrier lost millions of dollars during a strike by other employees in March. Globally, the airline industry is hurting. Jet fuel's 40 percent price increase and other operational costs have forced 25 of the world's airlines to stop flying or to go bankrupt in 2008. In general, Europe's airlines have entered a consolidation phase; larger firms, some of which are booming, are swallowing up smaller ones. Lufthansa is eyeballing Austria's main carrier, Austrian Airlines Group, while British Airways has pitched an $8 billion bid for Spain's Iberia. Small carriers that are racked with debt and cannot find a buyer face financial ruin. The current financial performance of Europe's air travel companies is mixed. Air France's profits in late 2007 fell almost 40 percent from 2006. Its passenger traffic has risen by 2 percent in the past year, but stocks have dropped by the same amount in recent months. British Airways is in far better shape. It has increased profits by 22 percent in the past nine months, offsetting higher jet fuel costs. Popular Irish airline Ryanair is in the doldrums because high costs have erased its already bare-bones profit margins. On July 29, the firm reported a heavy first-quarter loss of roughly $90 million — about a fourth of last year's total profits — and stocks slid 5 percent in response. Italy's Alitalia, however, is approaching its demise. Rumors abound that the government will administer the company when it declares bankruptcy, but Italian President Silvio Berlusconi has denied them. The airline's problems stem from massive debt, irresolvable labor issues and overbearing government regulation. Air France withdrew its bid to take over Alitalia in April because of union demands, and only Russia's Aeroflot remains interested in snatching up the firm. This consolidation phase among Europe's airlines could continue in the long term, with only the biggest and most powerful airlines surviving the energy crunch. Meanwhile, high operating costs could spell the death of cheap flights. In the short term, Europe's businesses already fear the possibility of a self-perpetuating spiral of rising operating costs, prices and wages. The Lufthansa strike reveals the growing presence of this danger, and the increased risk of labor protests and strikes, for the far-reaching European airline industry.

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview

OUR COMMITMENT

To empower members to confidently understand and navigate a continuously changing and complex global environment.

GET THE MOBILE APPGoogle Play