Bad day for European airlines

Image source: HADI_TRESNANTAN - Shutterstock, A.B.G. - Shutterstock

What's going on?

UK airline British Airways (BA) was mired in the worst industrial action of its 95-year history on Monday – while European rival Air France-KLM saw its share price fall 9% after it warned flyers had been less frequent than hoped.

What does this mean?

BA is part of IAG, a group of carriers that includes Spain’s Iberia. A few years back, money was tight, but cost-cutting measures led IAG to pocket a $3 billion profit last year. BA’s pilots have now followed other employees in demanding a greater share of that cash. Almost all 4,700 of them are staging an initial two-day walkout, leading to 1,700 canceled flights and further besmirching BA’s once-impeccable reputation.

IAG’s share price has fallen over 30% this year, and competitor Air France-KLM may be heading the same way. It presaged a profit warning on Monday with weak booking woes and the announcement – possibly under pressure from the French government, which owns 14% of the company – that it was looking to buy bankrupt Parisian carrier Aigle Azur.

Why should I care?

For markets: Flying the flag.
The UK government, itself no stranger to walkouts, has called for BA’s pilots and paymasters to get around the negotiating table. Official data out Monday showed the British economy unexpectedly grew 0.3% last month, suggesting it could avoid recession this quarter after all (tweet this). With tourism representing 9% of that economy, the last thing the UK needs is travel chaos trampling any green shoots.

The bigger picture: Rising costs could engulf profits.
Fuel and wages are airlines’ two biggest costs. In-demand pilots have significant leverage when it comes to pay rises: growing demand for air travel means perhaps 800,000 more will be needed in the next two decades. And if Saudi Arabia has its way, the price of jet fuel may be about to go up too. The Gulf kingdom is shaking up the leadership of its all-important oil industry in another attempt to raise the price of oil by $20 a barrel.

Originally posted as part of the Finimize daily email.

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