Air Strike Flying Through the Storm

Lufthansa pilots are striking again, so management is beefing up a new, discount carrier to undermine their clout.
Not going anywhere: Striking pilots at Lufthansa.

Pilots at Germany’s troubled national carrier Lufthansa went on strike again Thursday, a day after the airline received approval for a radical restructuring that will expand a discount carrier, Eurowings, to ultimately undercut the power of Lufthansa's unions.

The strike, the tenth since April and the second this week, began in the early hours of the morning and will end at midnight. It will hit long haul and cargo flights, but domestic and European routes are not expected to be affected.

The company said in a statement that it was “completely incomprehensible” that the pilots announced the strike on Tuesday evening, while another strike was still ongoing.

Against this backdrop of deteriorating industrial relations, Lufthansa’s chief executive Carsten Spohr had met with the non-executive board on Wednesday to discuss his new plans to overhaul the business by increasingly relying on the company's low-cost subsidiary, Eurowings, which will not be covered by the airline’s current collective bargaining arrangements.

Mr. Spohr said after the meeting that he had received “great support” from the non-executive board, known as a supervisory board in Germany, for his plans. Supervisory boards, which also include employee representatives, have the right to approve or block major management decisions.

Under Mr. Spohr’s plans, one of Lufthansa's budget airlines, Eurowings will absorb its other low-cost airline Germanwings and most of its short-haul routes.

It will also increasingly use SunExpress, a joint venture with Turkish Airlines, for its long-haul business. This airline will lease out several Airbus A330s and Mr. Spohr said he would be looking to hire more pilots for the new aircraft, both internally and externally.

This airline will at first concentrate on tourist destinations including Florida, the Caribbean and the Indian Ocean: The planes are likely to be based in Cologne, the current Germanwings hub.

Lufthansa’s pilots are deeply uneasy about these changes.

The official reason for their walk out was a dispute over their right to keep generous pension allowances, including a right to retire at 55 on 60 percent of their pay before drawing a regular pension at 65. But pilots are also resistant to the airline’s plans for its low-cost business.

Despite Mr. Spohr’s optimism about supervisory board enthusiasm for his plans, the company’s director of human resources Bettina Volkens admitted talks with the pilots union VC over the future of its budget business had failed.

The union worries that Lufthansa’s new strategies will undermine the deals it has secured through collective bargaining. Their fears are justified. If the airline succeeds in its spin-off of its low-cost business, it is likely to pay staff lower wages and focus more on keeping costs low.

Mr. Spohr can legitimately argue that these lower costs should also apply on Lufthansa routes. And if the pilots in the parent airline continue to object, he can transfer several routes over to the low-cost subsidiaries.

Mr. Spohr has already indicated that he is perfectly willing to use the new subsidiaries to undermine collective bargaining. Walking a fine line between diplomacy and aggression, he said that Germanwings pilots will continue to fly under the terms agreed through collective bargaining at Lufthansa, but these agreements will not apply to Eurowings pilots. And while no pilot from Germanwings will be forced to switch to Eurowings, Mr. Spohr said ominously that he had not yet decided which subsidiary would expand more. “That will depend on the market,” he said.

Mr. Spohr also made it clear that in the medium term Eurowings will take over more European routes, including those of Lufthansa’s current subsidiaries Brussels Airlines, Swiss and Austrian Airlines.

All this increases pressure on Lufthansa pilots, who are also becoming increasingly isolated in their stance. Even shareholders now back the Lufthansa board, even though the share price has lost nearly 28 percent of its value since June.

 

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In June, the German airline group lowered its 2014 profit outlook and scrapped its 2015 earnings target, citing overcapacity, falling prices and disappointing sales. Investors all agree that the company needs to cut costs and update its structure to stay competitive.

The company has been squeezed between low-cost airlines such as Ryanair and Easyjet and premium airlines such as Emirates and Etihad.

"Lufthansa has to change its structure. There is simply no other choice. And a modified Germanwings model could work fairly well," said Marc Tüngler, chief executive of the DSW, the private investor association.

There is little shareholder sympathy for the pilots.

Hans-Martin Buhlmann, chairman of the association of institutional investors, warned that the Lufthansa board had to choose its battles.

"Spohr and his team have a choice of being hit by the market or by the pilots," he said.

 

Jens Koenen leads Handelsblatt's coverage of the aviation and IT industry and is bureau chief of the Frankfurt office. Meera Selva is an editor for Handelsblatt Global Edition. To contact the authors: [email protected]com, [email protected]