Employee costs go sky high
The controversy created by the imminent court procedures over British Airways’ attempt to merge its two pension schemes is indicative of a competitive industry where the bottom line business margin is paramount.
Germany, Italy and Austria are shown by the employee benefits table below, sourced from the latest available annual accounts, to fit the traditional European pattern of high social security and low company pension provision. This has a significant bearing on the overall personnel costs of the country’s airlines.
Lufthansa, Alitalia and Austrian Airlines are the only companies in the table paying more than an average of e50,000 per employee a year in personnel costs. Such an effect can be significant on a company’s competitive ability.
Comparison of the salary costs per employee of BA and Lufthansa, for example, shows them to be fairly evenly matched.
Compare their overall personnel costs, however, and the extra average cost to Lufthansa per employee each year can be as much as e5,000 – the difference between e49,000 and e54,600.
Disparity of social security costs among European countries ranges from single figure sums paid at Ryanair in Ireland and SAir in Switzerland to the heavyweight payments of between 16%–24% made in Germany, Austria, Spain and Italy.
SAir is a prime case of an airline company where defined contribution (DC) makes up the preponderance of its retirement benefits, and where company input is relatively high – 10.6% of wages – to offset lower general social charges.
Around 90% of SAir staff covered by pension plans are members of a DC plan, with the remainder covered by DB arrangements.
Spain’s Iberia appears to be subject to both high social costs and a high pension benefit. The company says this is due to collective labour agreements in force in Spain, whereby Iberia must pay full compensation to flight personnel taking early retirement, and supplement social security benefits for ground personnel retiring early.
Significantly, Ryanair’s figures show a disproportionately low level of company cost for pensions and employee benefits compared with its European rivals. This reflects its status as both a fledgling company with a younger staff and the accent firmly on cost in its business as it makes a play for the cut-price air market seen in Europe.
Overall, however, average annual salaries within the airline groups are remarkably uniform for such a diverse range of countries. This indicates that companies are taking more notice of their peers within the industry in terms of how they price themselves in the European market.
Geoffrey Furlonger, head of the European benefits team at consultant William M Mercer in Brussels, says: “There is a perceived trend among airline companies towards DC schemes as they try to keep costs down. For some smaller companies it is a flexibility issue because there some have gone bust at an alarming speed.” He adds that airlines generally do not account for a huge amount of business among consultants.
Overall, Furlonger says corporations in Europe are gradually looking at employee benefits as a single package. “Companies in general are thinking more pan-European or globally, and there is a slight increase in mobility and benefit portability. The euro has made an impact here for ease of payments, and companies are more aware of paying benefits from country to country.”
BA has been running a pensions surplus on its original Airways Pensions Scheme (APS) for a number of years. The move to merge APS with the New Airways Pension Scheme (NAPS) would enable a single fund to increase its investment/risk focus.
Jenny Rosser, BA’s pensions manager and secretary, says: “We are generally perceived in the UK and probably in the rest of Europe to be at the vanguard of pension provision. The New Airways Pension Scheme (NAPS), although it does have an abatement on basic pay, does not impact on flying staff very much and the benefits such as widow’s pension, price indexation, three-times death benefit and ill-health cover are fairly generous.” Hugh Wheelan