AIR FRANCE likes to present itself as a cut above other European airlines. Offering fancy French cuisine and free champagne in economy class on long-haul flights, the company’s strategy is to justify high ticket prices by offering premium service. But faced with fleeting mergers at home and competition from abroad, the airline’s financial fizz is quickly flattening out.
A drawn-out fight with his unions has once again overshadowed the boss of his parent group, Air France-KLM. On May 4 Jean-Marc Janaillac, its chief executive, resigned after his employees voted against a 7% pay increase over four years. His predecessor, Alexandre de Juniac, left two years ago after two officers had their shirts violently ripped off by a mob of angry workers over a restructuring plan. The latest resignation is more dangerous as investors are also losing their grip. Air France-KLM shares have halved since January; over the same period those of rival carriers such as IAG and Ryanair have increased.
Air France trade unions are demanding an immediate 5.1% pay rise. Portable looks set against profits of €1.5bn ($1.8bn) last year. But the good performance in 2017 was largely due to low oil prices. His finances are weakening fast. Mr Janaillac had warned of a significant drop in profits this year. A series of 14 one-day strikes has cost Air France at least €300m in recent weeks.
The threat of Air France’s increased cost increases further scares investors, says Daniel Roeska of Bernstein, a research firm. Some Air France pilots may earn two or three times more than those of Europe’s largest low-cost carrier, Ryanair. Since 2012 Air France has made significantly less money than its competitors (see chart). Fuel costs are rising, with only half hedged, and pressure on fares caused by excess air capacity in Europe threatens to plunge Air France into the red faster than its peers. A large amount of debt also makes the group look vulnerable. Ross Harvey of Davy, an investment firm, says last year its net debt (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 are also being 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 response is to cut costs to return to the black. IAG has forced through major job and pay cuts at British Airways and Spain’s Iberia, as has Germany’s Lufthansa. Opposing temporary unions, Alan Joyce of Qantas in Australia even put his airline on hold until they got in.
Since it was not possible to make much progress against the unions, Air France management chose another path. After canceling Mr de Juniac’s 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 rivals. .
That will not save the airline in the long run, says Andrew Charlton from Aviation Advocacy, a consultancy based in Geneva. Most travelers today choose airlines on price, using comparison websites, and not on service. And competition from other EU carriers is now a bigger threat than those from the Gulf. Cheaper carriers such as low-cost outfit easyJet, Norwegian and IAG are expanding at Air France’s main hubs in Paris. IAG and Lufthansa are years behind in building a low-cost arm.
The need to deal with the unions and reform the airline’s strategy at the same time means that replacing Mr Janaillac – who was supposed to be an expert on dealing with difficult French unions – like finding the “impossible person”, reckons Mr Roeska. But whoever it is will at least have the support of the French state, which owns 14.3% of the airline. The idea that it would always stop the carrier is changing. On May 6, the French finance minister, Bruno le Maire, refused to “wake up the losses of Air France” and said that the airline will “disappear” if it does not become more competitive.
It is unlikely that the group will go bankrupt. Air France is bolstered by profits at KLM, whose unions have hurt pay. But the government wants Air France to stick with its unions, in part to prevent reforms it is pushing through elsewhere. He is already in a fierce battle with the railway unions over the flagship reforms of President Emmanuel Macron and he does not want to put an inch in this conflict. Passengers and investors in Air France should prepare for more strikes.
