Legacy airlines struggle amid competition Willie Walsh, chief executive of International Airlines Group, signalled he was ready for a bruising confrontation with trade unions when he presented a sweeping restructuring plan this month for Iberia, IAG's lossmaking Spanish subsidiary. The pugnacious Mr Walsh expressed disappointment that only some people in the European aviation industry found him "unreasonable." "I firmly believe part of the problem with our industry is there have been far too many reasonable people who have accepted legacy thinking . . . and have left it unchallenged," he said after unveiling plans to cut 4,500 jobs at Iberia. Mr Walsh's comments highlight how many of Europe's so-called legacy airlines - the former state-controlled flag carriers - have repeatedly failed to put their companies on a competitive footing with the newer breed of lower-cost rivals, ranging from Ryanair to Emirates Airline. Some are now being pushed to the brink of collapse - SAS, the medium-sized Scandinavian airline, warned last week it could go bust unless unions agreed to staff pay cuts of up to 15 per cent. There are signs that the big groups - Lufthansa, Air France-KLM and IAG - are belatedly attacking their unwieldy cost bases. As Europe's economic downturn has deepened, managers have outlined significant restructuring programmes - exemplified by IAG's plan to cut 22 per cent of the workforce at Iberia. But even if union opposition can be overcome, will these turnround plans provide a significant boost to earnings, or are the big carriers simply running to stand still? The case for a radical restructuring at Iberia is overwhelming - it has been running up operating losses for the past three years, and this weak performance is threatening to sour last year's merger with British Airways, which is profitable. IAG, the parent group, expects to report a €120m operating loss this year, as Iberia struggles with savage competition - notably on short-haul routes. Iberia is seeking to return to profit in 2014 by shrinking. In addition to the staff reductions, it is cutting aircraft capacity by 15 per cent, as unprofitable routes are abandoned. Neil Glynn, analyst at Credit Suisse, says the severity of the problems at Iberia stems from how its long-haul business is "structurally challenged" because it is a niche operation focused on Latin America - by contrast, Lufthansa, Air France and British Airways have large global networks. His statement highlights the vulnerability at the heart of the flag carriers" business model. The companies rely on their long-haul flights - and particularly the passengers travelling first and business class - for the majority of their revenue and profit, but these businesses are inextricably linked to the carriers" weaker short-haul operations. Many of the passengers on the long-haul flights have previously transferred from the carriers" short-haul operations, and these are widely believed to be lossmaking because of pressure from the budget airlines. This is borne out at Air France-KLM - its short-haul operations made an operating loss of €700m in 2011, and this more than wiped out the profit at its long-haul business. The group plunged to a net loss of €809m last year. Andrew Lobbenberg, analyst at HSBC, says that while Air France-KLM has been a trailblazer for consolidation - Air France's combination with KLM in 2004 was Europe's first big cross-border airline merger - the group's cost base "has not been effectively managed," particularly in France. Air France-KLM is the most highly leveraged of the three big European flag carriers, and Jean-Cyril Spinetta, appointed chief executive for a second time last year after his predecessor was ousted, is seeking to cut net debt by €2bn by 2015. His broader restructuring plan involves ending the losses at the group's short-haul operations in 2014, partly through the removal of 5,100 jobs at Air France, or 10 per cent of the French subsidiary's workforce. But the compromises that managers deem necessary to avoid crippling strike action with their restructuring plans were laid bare at Lufthansa last week. Lufthansa is seeking to end the losses at its short-haul, point-to-point operations in Germany by shunting these operations into Germanwings, the group's budget carrier, where staff are paid less compared with the main airline. A deal with unions representing cabin crew was only reached last week after the company agreed that Lufthansa staff who transfer to Germanwings can do so on the same pay and benefits as they currently enjoy. Overall, however, most analysts welcome the restructuring plan of Christoph Franz, Lufthansa's chief executive, because he has set the group an ambitious operating profit target of €2.3bn for 2014 - which would be a €1.5bn improvement on 2011. This helps explain why some analysts say the flag carriers" restructuring plans should boost earnings over the coming years - and their confidence is bolstered by how the big companies have a new-found willingness not to flood the market with more aircraft, which is usually followed by cuts in ticket prices. Other analysts are far less impressed, saying the restructuring plans are likely to suffer the same fate as previous ones - they fear any cost savings will get passed back to passengers in the form of lower fares, or be offset by high fuel prices. One analyst, who declines to be named, says that airports and aircraft makers - which can report much higher levels of profitability than many airlines - will continue to "eat the airlines" lunch."