Finnair Oyj's Chief Executive Pekka Vauramo, locked in a showdown with pilots and cabin crew over compensation, said Finland's legacy carrier needs to position itself for a strategic partnership with a bigger carrier in the event of consolidation in the Nordic airline industry.
Mr. Vauramo joined Finnair last year, taking the helm of a company that has posted EUR185 million ($254.23 million) in cumulative net losses since 2009. Finnair, 56% state-owned, has leveraged the geography of its Helsinki hub to become a sizable player in traffic between Asia and Europe.
The personnel cost structure, however, "has destroyed our profitability, " Mr. Vauramo said in an interview at the company's new Helsinki headquarters. "It is critical that we bring it down to levels that prevail in the market."
Since taking over in June 2013, the airline's share price posted steady but modest growth. At the end of March it shot up by 13% after accelerating its cost-saving plan.
Finnair is trying to cut personnel costs by EUR55 million, or 14% compared with annual expenditure of EUR384 million in 2013. The moves comes as the threat of consolidation in the Nordic market looms.
Stockholm-based SAS Group AB last year avoided bankruptcy by implementing a deep restructuring plan. Oslo-based Norwegian Air Shuttle ASA is a relatively-young budget carrier implementing an aggressive international expansion.
"Achieving the cost cuts won't secure our profitability, but it will put us cost-wise on par with our competitors," Mr. Vauramo says. In March, he announced a plan to shed 540 positions among its 1,500-strong cabin crew if negotiations fail to yield results by the end of April.
"The threat scenario is that airline consolidation in the Nordics gets under way," Mr. Vauramo said. "The worst option in that situation would be that Finnair would be left alone."
He is open to a strategic partnership with a bigger airline, he said. Mr. Vauramo said bringing in a strategic partner would also open Finnair to new financing options as new capital is needed as it prepares to renew its widebody fleet.
Finnair has ordered 11 A350 XWB large airliners from Airbus Group with options for eight more.
To date, Finnair has preserved independence without a bankruptcy restructuring even as similar-sized European legacy carriers have either merged with bigger groups or vanished.
To prepare for the future, the 56-year-old executive must revamp a structure designed for another era. Pay and working conditions for flight crew at Finnair are set by labor agreements originally adopted decades ago when flag carriers' profitability was guaranteed by international regulation.
That leaves the company with median annual pilot wages of EUR121,100 ($166,700) and for cabin crew EUR50,400 ($69,400), as of 2012. Comparable figures for American airline pilots and cabin crew $114,200 and $37,240, respectively, according to data by the U.S. Department of Labor.
The CEO said Finnair isn't only negotiating over salaries but also other terms of employment such as the hotels in which pilots are accommodated.
Wringing concessions is a critical exercise for Finnair, said Jonathan Wober, an analyst at the Centre for Aviation. "It has no chance without bringing down its employee costs drastically."
Mr. Wober said Finnair has been shielded from consolidation by the patience of its majority owner, the state of Finland, and the difficulty in executing cross-border mergers in airline business.
Geography has played a key role in Finnair survival because Helsinki lies on a sweet spot on the airline route between East Asia and Western Europe, it can operate a round trip to an East Asian destination with a large passenger aircraft within 24 hours, thereby maximizing utilization.
This is something its bigger European rivals such as Deutsche Lufthansa AG or SAS cannot do because their hubs lie further west. Last year Finnair carried close to two million passengers on its flights to and from Asia giving it a 6% share of the total traffic between Asia and Europe, Mr. Vauramo said.
In Europe, Finnair targets second-tier major cities such as Hamburg or Manchester which have no direct flights to East Asia. Travelers from these cities to East Asia have to change planes at least once, and for them Finnair's selling point is convenience.
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