Emmanuel Macron Wants to Fly, But Air France Won't Let Him

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(Bloomberg Gadfly) -- Emmanuel Macron wants foreigners to see France as an enterprising and dynamic place. Flag carrier Air France, which helps form many visitors' first impressions of the country, isn't doing the president any favors.

Not to be outdone by fractious students and railway workers, the airline's employees have gone on strike, again. The latest bout of industrial action has cost Air France-KLM about 220 million euros ($270 million) so far -- about 15 percent of estimated operating profit. On Friday, chief executive Jean-Marc Janaillac threatened to quit unless workers backed his plan for more moderate wage increases.

So far Janaillac hasn't had his shirt torn from his back (unlike managers in 2015) but the row has been horrible for morale and a lousy advertisement for a country supposedly En Marche (On the Move). Investors are feeling a familiar sense of deja vu. Despite management's efforts to recast the airline as innovative and growth-orientated, once again it appears hostage to its recalcitrant workers and a high cost-base.  

True, the Franco-Dutch airline, which hasn't paid a dividend for a decade, finally produced a half-decent performance last year, when a spate of terror attacks abated and demand improved. The shares surged 160 percent in 2017, thanks also to some astute strategic moves from Janaillac.

Air France-KLM deepened strategic partnerships and received equity injections from Delta Air Lines Inc. and China Eastern Airlines Corp Ltd. It also launched a new long-haul budget airline, Joon, targeted at cash-strapped hipsters.

Better cash flows have left the balance sheet in better shape. Net debt plus capitalized operating leases is now just 2 times a comparable measure of earnings.

Yet the strikes, combined with rising oil prices and renewed fears of a capacity glut, have made sentiment worse again. The stock has plunged 41 percent this year and languishes on a tiny four times estimated earnings. True, a couple of other big European companies have even weaker valuations, according to Bloomberg data, but Air France-KLM isn't facing U.S. sanctions like EN+ Group Plc nor poised to carry out a rights issue like Capita Plc.

It's natural that workers feel they're owed a 5 percent pay rise in 2018 after years of wage restraint. But Janaillac is right that Air France-KLM can't yet afford such largess. Aviation is a cyclical industry with huge capital demands and ever fiercer competition. Even when things went in its favor last year, the group achieved only a 6 percent operating margin. Ryanair Holdings Plc managed 23 percent. That's partly because French labor costs are high and workers aren't as productive as those at some rivals.

Air France-KLM has tried to address that performance gap via its European low-cost subsidiary Transavia but the unit only serves France and the Netherlands and isn't very profitable.

The company can no longer fall back on the excuse that as a legacy carrier with a big unionized workforce, it's doomed to struggle. Deutsche Lufthansa AG CEO Carsten Spohr has won concessions from trade unions on pay and pensions and has turned his Eurowings budget subsidiary into a more plausible challenger to Ryanair and Easyjet Plc.

The collapse of Air Berlin Plc, Alitalia Spa and Monarch Airlines Ltd. was a reminder that uncompetitive carriers can live on borrowed time only for so long. Janaillac has been more sensitive to worker demands than his predecessor. If even he's forced to resign, employees' catharsis would surely be temporary.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

©2018 Bloomberg L.P.

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