Between them, British Airways and Air France-KLM lost nearly £2bn [€2.36bn] in the financial year to March – £531m for the former and £1.3bn for the latter – on the back of a free-fall in revenue.

Nor was this caused by the havoc wrought by Iceland’s volcano, which happened after the financial year. The red ink flowed from a Gordian knot of a collapse in passenger numbers and especially in the lucrative front section of the planes because of the financial crisis, from company-wide downsizing programmes, from high fuel prices, from unruly splinter groups in their enormous workforces, and – probably most worryingly – from the damage inflicted from low-cost competition.

For BA and Air France-KLM, they were the worst results either airline has ever posted. For BA, they were particularly grave because they follow last year’s pre-tax loss of £401m for a grand total of nearly £2bn in red ink spilt in the last two years.

It’s not that the eruption won’t hurt the bottom line. Air France-KLM attributes £220m [€260m] loss to it and British Airways £100m. However it’s clear that both airlines are fighting for their future in Europe’s increasingly crowded skies in their present, traditional, full-service form, even if only one of the bosses has admitted it so far. The way things are heading, suggest some aviation » analysts, there may not be room for both of their enormous fleets.

In short, if the future of the stronger Germany’s Lufthansa, which has mopped up the struggling national airlines of Belgium and Switzerland, seems assured, that’s not the case for its two rivals. The crisis has only exposed the flaws in the full-service airlines’ basic business model.

“With increasing competition, both from short-haul ‘budget’ airlines and from increasingly attractive long-haul competitors, the ‘fly the flag’ premium has faced a good few years of erosion,” argues analyst Alan Oscroft of Motley Fool. “But on top of that, the belt-tightening recession has greatly accelerated the problems – you can’t really sell a premium brand when people can only afford budget prices.”

In other words, what have BA and its Paris/Amsterdam-based rival got that competing airlines haven’t and that ordinary passengers are prepared to pay for? As aviation experts point out, the crisis-driven migration of passengers away from full-service aircraft to cheaper options may never reverse. There’s also the mounting threat on terra firma because of the resurgence of rail through the deregulation of the European network.

Even before the recession the global airline industry, and the flag-carriers in particular, was barely profitable. Many of them have failed year after year to achieve a return on capital invested that covered even the cost of obtaining that capital in the first place. The flag-carriers were the biggest contributors to the total US$11bn the industry lost last year, according to official body IATA, and they face another US$5.6bn in red ink this year.

BA’s chief executive Willie Walsh, a hard-negotiating Irishman and former pilot who got the job five years ago at the remarkably young age of 43 after saving his native country’s Aer Lingus from extinction, appears to acknowledge the fundamental problem faced by his kind of airline. “Returning the business to profitability requires permanent change across the company,” he said in May in response to the threat of yet another strike by a militant branch of the cabin stewards’ union.”

In private briefings with staff he’s been much more candid, insisting that the airline either changes its ways or it crash lands. “The airline’s survival is at stake,” he is reputed to have said.

Combined with the losses, that’s one reason why BA will not pay a dividend this year and probably not next year either. Worried by the long-term prospects, institutional investors are rapidly losing interest in the airline. “I reckon buying BA shares would make about as much sense as turkeys buying shares in Bernard Matthews,” adds Oscroft.
Meantime in Air France-KLM’s head office at Roissy, Paris – or more accurately in one of their offices because the two airlines run separate headquarters under a merger of equals, there doesn’t appear to be the same sense of urgency. Relatively new boss Pierre-Henri Gourgeon dismisses last year as his company’s “annus horribilus” and does not appear to fear for the airline’s long-term profitability.

And to be fair, industry-watchers aren’t predicting an imminent collapse either. They point out that the losses, massive as they are, were Air France’s first in a decade. As a columnist in business journal Les Echos points out, “Unlike in 1993, the Franco-Dutch group is not on the brink of bankruptcy.” (At that time the wholly-owned French company posted a loss equivalent to 15 percent of total revenue.) Air France’s second-in-command, Schipol-based Peter Hartmann, insists the financial position remains “satisfying, with a good level of liquidity.”

Beneath the rhetoric though, both airlines are fighting for survival. At BA, Walsh attacked the airline’s bloated overheads very early in the financial crisis. By the end of the financial year, BA had shed a further 3,800 full-time staff – a tenth of its global workforce – on top of the more than 6,000 it made redundant in 2008.

But, as Walsh acknowledges, there’s still a long way to go. BA has 13,400 cabin crew alone and they are reputedly the highest-paid in the industry, collecting up to £1,000 each in travel and other costs on top of salary for every overseas trip they make. By contrast, Virgin Atlantic cabin staff earn about half that rate. Cabin staff are the thorn in Walsh’s side; pilots and engineers long ago agreed deals that recognised the parlous position of the airline.

Analysts generally give BA good marks for doing what it can. “[It was] a Herculean effort to control costs,” summarises Douglas McNeill, transport analyst at Charles Stanley Securities. But the flag-carrier also needs those savings. At 75 percent of revenue, BA’s operating costs are higher than most of its peers. Singapore Airline’s are 65 percent, for instance.

Meantime at Air France, Gourgeon is moving at about half Walsh’s rate to reduce the head count in his workforce of 105,000. Between now and the end of 2012, staff cuts of 4,500 are planned.

Meantime the low-cost operators remain the bête noire of Gourgeon, as they do of Walsh. Even before its merger with KLM, Air France was doing its best to make life tough for low-cost airlines. Its management has long claimed that low-costs are not subject to the same rules as the full-service carriers, for instance in the quality of airports, the range of services and the provision of passenger rights. All are demonstrably much lower than those that full-service carriers are obliged to provide, often by EU law.

But the main complaint of full-service carriers is that the low-costs get away with murder with their staff in terms of salaries, perks and other rewards stitched up in better times. “We are burdened with huge social costs”, complained Air France-KLM’s chairman and former chief executive Jean-Cyril Spinetta in a recent interview with Nouvel Economiste magazine.

As both airlines fly into the flak, they hope that savings delivered by their respective mergers will protect them from the enemy. BA, for instance, will soon become the dominant partner in a merger with Iberia that has been delayed by the gaping £3.7bn hole in BA’s pension plan, but is set to be signed off later this year.

And eventually, Air France-KLM hopes to add Alitalia, the perpetually struggling Italian flag-carrier, to the stable.

But don’t wait up. Air France has been cultivating the chronically bureaucratic, highly politicised airline for 13 years.

There is some good news. Revenue for both airlines is forecast to improve over the rest of the year with rising occupancy rates in both airlines, although less so in Europe where bookings remain subdued. The big question is whether those premium passengers will return in the same numbers as before the crisis? BA depends on them for nearly 45 percent of total passenger revenue while Air France under Gourgeon is determined not to budge from its business-class offering. Indeed, controversially, the Air France chief executive will retain business-class on domestic flights.

For his part, Air France veteran Jean-Cyril Spinetta thinks blue skies are on the horizon, citing earlier cycles and crises that happened during his 11-year watch.

“After a crisis, there’s an extraordinary rebound. On a six or seven-year time scale, that growth averages around six percent,” he explains. “When the cycle is negative, we pay heavily for the consequences. But when it’s positive, air transport recovers on the back of extremely dynamic demand. We’ve got to be ready for the moment when it takes off.”

The £2bn question of course is whether that moment will come at all.