This article from NYTimes.com has been sent to you by psa188@xxxxxxxxx Europe Aid to Airlines Unlikely April 4, 2003 By CHRISTINE WHITEHOUSE LONDON, April 3 - Airlines are suffering all over, from the slump in travel brought on by the war in Iraq and now by worries about the outbreak of severe acute respiratory syndrome. Many have looked to governments for help, as they did after the Sept. 11, 2001, attacks. The good news for the European carriers may be that they are not getting it. Unlike their American rivals, who are looking to Washington again for help in remaining airborne, the European airlines that survived the post-Sept. 11 shake-out did so with only very tightly constrained state aid, analysts said. That forced them to prepare to revamp their operations in ways that will help them ride out the new downturn. The Association of European Airlines, a 30-airline trade group based in Brussels, said that its members' passenger traffic fell 12 percent on international routes during the first week of the war. It estimates that the conflict in Iraq could add $2.5 billion to their combined losses. But appeals for a new rescue package are likely to fall on deaf ears in Europe. "It was made very clear after Sept. 11 that the European Union wouldn't look kindly on any bailout," says Dominic Eldridge, transport analyst at Commerzbank. So to cope with the present crisis, most large European carriers are announcing layoffs and service cutbacks, measures that they once were highly reluctant to use. KLM said on Wednesday that it would lay off "several thousand" of its 33,000 employees and reduce capacity by 20 percent on routes to the United States and the Middle East and 5 percent within Europe. Lufthansa has less freedom to shed staff because of German labor laws, but it is talking to its unions about reducing flight attendants' work hours and pay. It has grounded 31 aircraft and cut $200 million from its capital spending plans. British Airways, which has already eliminated 10,000 jobs in the last year, said it would speed plans for another 3,000 layoffs. Service to the Middle East has been cut by one-fourth, including all flights to Kuwait, while flights elsewhere has been cut more modestly - 6 percent on its vital routes to the United States and 4 percent elsewhere. Flights to the Middle East, which ordinarily are among the European airlines' most lucrative, are being slashed. Alitalia has suspended flights to Amman, Beirut, Damascus and Dubai; Lufthansa has stopped flying to Kuwait; KLM, to Kuwait and Amman. As a result, many airlines are lowering earnings forecasts, as are the analysts who follow them. Chris Avery of J. P. Morgan said he now expected British Airways to lose £100 million ($157 million) over the next year, not earn £25 million. Alitalia has given up hoping for a profit in 2003. Air France said it was no longer confident that it would be able to beat last year's operating income. Air France also plans to cut capacity by 7 percent and has put off buying seven aircraft. Yet European Union leaders do not deem the situation grave enough to warrant handouts of taxpayer cash. After Sept. 11, the European Commission, the union's executive body, only grudgingly allowed airlines whose planes had been stranded by the closing of American airspace to seek compensation from member governments, and insisted that the payments be tied exactly to the time the aircraft spent idle; little other aid was allowed. Now, the most the commission seems ready to permit would be a relaxation of rules that require airlines to surrender underserved routes to rivals. It may also allow member governments to defray the airlines' added costs for security measures and insurance premiums. One member nation has called for a common financial aid package for all European airlines: Greece, whose current aid to its ailing national carrier, Olympic Airways, already runs afoul of regulators in Brussels. Yet the large carriers welcome the European Union's parsimonious approach, saying it will hasten a long-overdue consolidation. "They were forced to pull down capacity and cut costs after Sept. 11," Mr. Avery of J. P. Morgan said. "In the main, European airlines returned to profitability pretty quickly." Most of the bigger players - British Air, Air France, Lufthansa, Alitalia - had sufficiently strong balance sheets to withstand a protracted crisis, he said, adding that "while global tensions were building up, they were busy putting a lot of cash together." Analysts say that the leading European airlines were in better shape before Sept. 11 than their American rivals, whose struggles with excess capacity, wage settlements and high costs were more acute. Cut-price competition on the Southwest Airlines model also came later to Europe, though Ryanair of Ireland and Easyjet of Britain are making deep inroads now. Ryanair has been an exception to the slump in the industry; its passenger traffic was up 39 percent in March, it said, and it is continuing to add aircraft and new routes. But its success has also helped some of the leading carriers indirectly by obliging them to cut back on a kind of service that was largely unprofitable for them anyway, short-haul flights. Many analysts say that once the war is over, American travelers will be slower to return to the skies than Europeans, as was true after the 1991 gulf war. Still, a recovery in the airlines' results is unlikely before 2004. "The next two quarters will be very difficult," said Mr. Edridge of Commerzbank. "We may see some recovery in quarters three and four, if all goes well." But even with a sharp rebound in traffic, analysts said, it is hard to forecast strong profits. "In the long term they have to look at their cost base and revenue base and ask themselves, Why are we not making the returns we should be making?" Mr. Eldridge said. "Airlines don't add much shareholder value in terms of the returns on capital employed. That's why share prices are so volatile." He welcomed KLM's plans for changes that it hopes will reduce costs by 10 percent. "This crisis, if anything, is showing people that the industry can't go on as it was," he said. http://www.nytimes.com/2003/04/04/business/worldbusiness/04FLY.html?ex=1050466316&ei=1&en=80126a1158021df4 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@xxxxxxxxxxx or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@xxxxxxxxxxxx Copyright 2003 The New York Times Company