Published On: Fri, May 11th, 2018

Air France-KLM is being brought to its knees by its unions

AIR FRANCE likes to present itself as a cut above other European airlines. Offering fancy French food and free champagne in economy class on long-haul flights, the company’s strategy is to justify its high ticket prices by offering a premium service. But facing intransigent unions at home and competition from abroad, the airline’s financial fizz is rapidly going flat.

A drawn-out fight with its unions has toppled the boss of its parent group, Air France-KLM, yet again. On May 4th Jean-Marc Janaillac, its chief executive, resigned after its workers voted against a pay rise of 7% over four years. His predecessor, Alexandre de Juniac, left two years ago after two executives had their shirts violently ripped off by a mob of angry workers over a restructuring plan. The latest resignation is more serious because investors are also losing their rag. Air France-KLM’s shares have halved in value since January; over the same period those of rival carriers such as IAG and Ryanair have risen.

Air France’s trade unions are demanding an immediate pay rise of 5.1%. That looks bearable set against profits of €1.5bn ($ 1.8bn) last year. But a decent-looking performance in 2017 owed much to low oil prices. Its finances are weakening fast. Mr Janaillac had warned of a big drop in profits this year. A series of 14 one-day strikes has already cost Air France at least €300m in recent weeks.

The threat of Air France’s inflated cost base swelling further scares investors, says Daniel Roeska of Bernstein, a research firm. Some Air France pilots may earn two to three times as much as those at Europe’s biggest low-cost carrier, Ryanair. Since 2012 Air France has made much less money than its rivals (see chart). Rising fuel costs, only half of which are hedged, and a squeeze on fares caused by airline overcapacity in Europe threaten to plunge Air France into the red sooner than its peers. A huge debt pile also leaves the group looking vulnerable. Ross Harvey of Davy, an investment firm, says its net debt last year (including leases) was 2.4 times gross operating profits, compared with 0.4 for Ryanair and 0.7 for easyJet and Lufthansa.

Other flag-carriers across Europe have also been squeezed, on short-haul routes by the rise of low-cost outfits and on long-haul routes by carriers from the Middle East and China. But their answer has been to slash costs to return to the black. IAG has forced through big cuts to jobs and pay at British Airways and Iberia of Spain, as has Lufthansa in Germany. Facing intransigent unions, Alan Joyce of Qantas in Australia even grounded his airline until they caved in. All have launched their own low-cost carriers to take the fight to their new rivals.

Unable to make much headway against the unions, Air France’s management chose another track. After cancelling Mr de Juniac’s proposed restructuring, Mr Janaillac launched a plan to cover the airline’s costs by improving service and by lobbying in Brussels against low-cost and Middle Eastern competitors.

Neither will save the airline in the long run, says Andrew Charlton of Aviation Advocacy, a consultancy based in Geneva. Most flyers these days choose airlines on price, using comparison websites, and not on service. And competition from other EU carriers is now a greater threat than those from the Gulf. Cheaper carriers such as easyJet, Norwegian and IAG’s low-cost outfits are expanding at Air France’s main hubs in Paris. It is years behind IAG and Lufthansa in building up a low-cost arm.

The need to deal with the unions and revamp the airline’s strategy at the same time means that replacing Mr Janaillac—who was supposedly an expert in dealing with difficult French unions—is like finding the “impossible man”, reckons Mr Roeska. But whoever it is will at least have support from the French state, which owns 14.3% of the airline. The idea that it would always bail out the carrier is changing. On May 6th France’s finance minister, Bruno le Maire, refused to “soak up Air France’s losses” and said the airline “will disappear” if it does not become more competitive.

The group is unlikely to go bust. Air France is propped up by profits at KLM, whose unions have compromised on pay. But the government wants Air France to be firm with its unions, partly to thwart opposition to reforms it is pushing through elsewhere. It is already in a fierce battle with the rail unions over President Emmanuel Macron’s flagship reforms and does not want to budge an inch in this confrontation. Flyers and investors in Air France should brace for more strikes.

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Air France-KLM is being brought to its knees by its unions