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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Higher wages turn up cost pressure on airlines

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With inflation paramount in investors’ minds at a time of rising wages and oil prices, the line separating winners and losers in the global airline industry this year looks likely to be drawn on how well they manage costs, especially on the labour side.


Industry body IATA in December flagged higher spending on labour and fuel — which make up about half of airlines’ operating expenses — as their members’ biggest challenge in 2018, especially after several years of record profits.


Labour costs surpassed fuel as global airlines’ biggest single expense in 2016, at 22 per cent of costs against just under 21 per cent for fuel. That is expected to jump this year to 30.9 per cent versus 20.5 per cent for fuel.


Back in 2013, when oil prices were much higher than now, fuel was 33 per cent of expenses against 18 per cent for labour. Staff costs are typically higher in North America and Europe than in Asia, where fuel remains the biggest expense.


The crux of the issue is that amid signs of a global shortage of workers generally, in some regions there’s also a scarcity of qualified pilots at a time of expanding fleets.


“As airlines have been making profit, the workforce has got market power, so that is pushing up the cost of labour,” IATA Chief Economist Brian Pearce said.


Overall, unit costs — the measure of how much it costs an airline to operate each kilometre and seat flown — will rise 4.3 per cent this year versus 1.7 per cent in 2017, IATA forecasts.


In the highest profile example of the pressures, budget carrier Ryanair was compelled last year by pilot shortages to cancel thousands of flights, and in December recognised trade unions for the first time.


The battle that forced Ryanair’s hand could put wage pressures on other European budget carriers such as Wizz, industry experts say.


The bigger carriers feel it too.


At Air France, 10 unions representing pilots, cabin and ground staff have called for a strike on February 22 to push a demand for a 6 per cent pay rise.


“After three years of strong profitability improvements in the sector, we believe personnel and suppliers are asking for wage/price increases and thus keeping non-fuel costs under control will remain a challenge for the sector,” Kepler Cheuvreux analyst Ruxandra Haradau-Doser wrote.


The wage issue has even extended to the United Arab Emirates, the Middle East trade and financial hub where labour disputes are rare and unions and industrial action are banned.


The region’s largest airline, Dubai-based Emirates, is facing calls from cabin crew to improve conditions and benefits. Employees say management is considering their requests.


Last week, brokerage Kepler Cheuvreux cut its rating on German flagship carrier Lufthansa — already on its lists of stocks to avoid and least preferred in the sector —to “reduce” from “hold”.


In the United States, investors are worried that the three largest carriers — American, Delta and United — are heading for a price war just as higher costs from pay increases agreed last year start to bite.


Lufthansa, British Airways parent IAG and Air France-KLM are all expected to report improved 2017 profits when they publish results over the next few weeks.


All airlines will need to look at areas where they can save, however.


“The most successful airline managements are the ones that have been very cost-focused every day - not just on staff costs but on aircraft costs, airport charges, distribution costs and so on,” said aviation consultant John Strickland.


The success of Ryanair, which boasts of having the lowest costs in Europe, is partly down to hard negotiating with manufacturers and airports to get good deals on orders and fees, those in the industry say. — Reuters


Victoria Bryan


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