Energy in Europe: The gasman cutteth

NAPOLEON and Hitler both succumbed to the bitter Russian winter in their efforts at territorial expansion in Europe. Now, Vladimir Putin seems to be exporting a bit of Russian chill as part of his strategy to shift Europe’s borders in his favour. In recent days there have been ill-explained reductions in the flow of gas that Gazprom, a Russian state firm, supplies to Poland, Austria and Slovakia—possibly to warn them off re-exporting any of it to Ukraine.

Russia provides one-third of the gas that other European countries rely on to heat their homes, generate electricity and feed industry. So far the assumption among western European governments and industrial gas users is that even if relations with Russia worsen further, there is little danger of a complete and long-term cut in supplies, since Russia’s government is so dependent on the revenues from gas exports.

However, a short-term interruption in the coming months, as winter descends, is not so unthinkable. Fortunately, most European countries would be able to struggle through. Their gas-storage facilities are about 90% full, since last winter was mild and they did a bit of further topping-up over the summer. Last year Europe imported 155 billion cubic metres (bcm) of Russian gas; stocks currently stand at 75bcm. So European energy distributors would have a few months’ grace to find alternative supplies.

Norway, a big producer, could pump a bit more. China’s slowing economy and Japan’s reopening of some nuclear plants will mean more liquefied natural gas (LNG) is available on spot markets, though it is costly. Europe has the capacity to import more than 200bcm of LNG a year, of which just 20% is in use. Contingency plans being drawn up by the EU are also said to include cutting gas to industry to preserve supplies for heating homes and generating power.

Half of Europe’s imports of gas come down pipes that traverse Ukraine, and Russia has cut their flow several times since 2006 over price disputes with the Ukrainians. If it did so again, it might pump more gas down pipelines that bypass Ukraine. Trouble is, these do not reach those countries most dependent on Russian gas, such as Hungary, Bulgaria, the Baltic states and Finland. The Finnish coalition government is at risk of falling because the Green party is threatening to quit over plans to buy a Russian nuclear reactor, which it says would increase, not reduce, dependence on Russia.

EU countries are making some preparations for short-term cut-offs but almost nothing has been done to reduce long-term reliance on Russia. There is much that could be done: governments could encourage the building of more cross-border pipelines to connect customers to sources of supply, including the underused LNG import terminals; more storage capacity could be provided; and those countries with shale reserves could get fracking. So far all that has been produced is hot air, and not the useful kind.

Air France: Strikers against reality

THE good news is that Air France has an idea for getting back into the black: building up Transavia, the low-cost, short-haul carrier it shares with its partner, the Dutch flag-carrier, KLM. The bad news is that its pilots won’t allow it; they want Transavia’s pilots to be on the same pay and conditions as they enjoy. The fear is that an expanded Transavia will cut into Air France’s own short-haul services and that its pilots will be fired or forced to accept pay cuts. They have gone on strike in protest. The strike, in its fourth day as we went to press on September 18th, may be the worst at the airline since a particularly confrontational 1998. Around half of all flights were being grounded, with daily losses the company puts at €15m ($19m).

Air France-KLM, Lufthansa and International Airlines Group (IAG, which owns British Airways and Iberia), are all in the same fix. Low-cost rivals such as EasyJet and Ryanair now dominate short-haul services. Europe’s national flag-carriers are struggling to stay in short-haul, to ensure they have passengers to feed into their more profitable long-haul routes. They have tried slashing fares but are hitting the limits of this, because of entrenched working conditions and determined unions. All three are plumping for new solutions.

Last year IAG took over Vueling, a budget airline based in Barcelona that serves mainly Spain and the Mediterranean basin. Lufthansa plans to fly more low-cost services in Europe through its subsidiaries, Germanwings and Eurowings, and is starting a budget long-haul airline. It is an uphill struggle: Lufthansa’s pilots have gone on strike three times in the past month, over proposals to raise the retirement age. A threatened fourth strike on September 16th was called off at the last minute.

What put the match to the tinder in France was the launch on September 11th of Air France-KLM’s latest five-year strategic plan, for 2015-20. The group will invest €1 billion in Transavia. Its fleet of aircraft is to be doubled to around 100, and three new bases are to be set up outside France and the Netherlands.

Air France-KLM does have a measure of credibility where cost-cutting is concerned. The group’s previous plan, for 2012-15, scrapped thousands of jobs and returned it to operating (though not net) profit in 2013. Analysts at Credit Suisse, a bank, calculate that the group drove down its unit costs by 5% in three years, not counting fuel-price and currency swings. The goal now is to push the black ink through to the bottom line. Will it work?

“I’m not persuaded that full-service airlines can ever truly compete with low-cost carriers,” says Andrew Charlton of Aviation Advocacy, a consulting firm. “They don’t have the mentality, their business model depends on a hub and they are too handicapped by legacy work practices.” Nor are their leaner rivals standing still. EasyJet’s profits in 2013 were boosted by its expanding business-class sales. In August even Ryanair, hitherto defiantly downmarket, launched a business fare.

Competition of all kinds keeps building for Europe’s flag-carriers, and not just in short-haul. Carriers from the Gulf are extending their networks in Europe, to attract transfer traffic to their own hubs. Etihad, with stakes in a host of airlines including Airberlin of Germany, has recently rescued Alitalia of Italy (in which Air France too is a shareholder). Qatar Airways joined IAG’s OneWorld Alliance last year. Another rising contender, Turkish Airlines, is enjoying double-digit annual growth in traffic, much of it to or from the rest of Europe. Strikes by Air France’s pilots are not going to change these harsh realities.

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