Unions are Killing Air France

For those of us who remember Midwest Express, this is a somewhat familiar tale.

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.

The problem is that the market is shifting/has shifted. Most consumers are not willing to pay more for the “extras” in air travel. As a frequent flier, I miss the days of bigger seats, better food, and more room. But the market has spoken. And, frankly, I’m willing to pay a little more for the extras, but not a lot.

The the case of Air France, the market won’t allow them to increase their prices to a level to keep up with the costs that the unions are demanding. Fuel prices will continue to fluctuate, but the labor costs are relatively fixed. Air France is attempting to fight their competitors by asking the government to protect Air France, but that’s not working. Air France’s management have limited options and the unions aren’t willing to recognize that the market won’t allow what they are asking for.

Absent a government bailout, I wouldn’t be shocked to see Air France go bankrupt by the end of next year. Their union issues make them unattractive for acquisition or merger, so their competitors will just wait for them to fold and then pick up the pieces.