Air France-KLM Can Afford to End Strikes

(Bloomberg) -- If one believes the headlines, Air France-KLM, Europe’s second biggest airline by revenue, might soon “disappear” (that’s the word used by French Economy Minister Bruno Le Maire). But the company’s painful labor problems need not lead to such a dire outcome.

Air France’s problems have been cast as part of the traditional airline industry’s predicament: Old flag carriers are squeezed, on the one hand, by low-cost rivals such as Ryanair and EasyJet and, on the other hand, by heavily subsidized Middle Eastern airlines competing for long-haul routes. In the face of such competition, the traditional airlines have been forced to cut costs, slow down pay increases and demand higher productivity from staff.

That’s what Air France-KLM was attempting to do with a series of harsh restructuring plans in 2014 and 2015, to employees’ well-articulated displeasure, culminating in the highly publicized October 2015 incident when workers violently ripped the shirts off the backs of top managers. Soon, the company canceled a round of layoffs, backed off its productivity demands and brought in a new chief executive officer, Jean-Marc Janaillac, who made an effort to calm the labor force with a plan of his own, “Trust Together.” It didn’t mention staff cuts or new productivity targets but dwelled instead on strategic moves to counter both low-cost and Middle Eastern competition without trying to undercut anyone on price. 

The 2017 launch of Joon, a “boutique airline” that serves organic food and craft beer and offers passengers virtual reality entertainment, provides the clearest example of the strategy: Instead of joining the price fray, Air France-KLM attempted to preserve its premium positioning, even to move upmarket. 

Given a favorable environment for airlines – lower fuel prices and a pick-up in travel as the effects of the global economic crisis wore off – the strategy has worked reasonably well. After seven years of back-to-back losses, Air France-KLM returned to profitability in 2016. This wasn’t the result of painful cost-cutting. The airline’s operating costs were 94 percent of revenue last year – about as much as in 2007; Easyjet held its operating costs to 91.5 percent of revenue. 

In recent months, however, Janaillac has failed to get anywhere with employees, who have been demanding better pay. They want a 5.1 percent raise now; the management put a 7 percent increase over four years to the vote among company staff. Last Friday, Janaillac resigned after the vote went against that proposal. That’s when Le Maire warned workers demanding “unjustified pay increases” to “take responsibility” because the airline’s “survival” was at stake.

That’s not strictly true, and the management knows it. So should Le Maire, who speaks for a large shareholder (the French government owns 14.3 percent of Air France-KLM). In 2016, according to the company, staff productivity increased by 2.3 percent at Air France and 4.2 percent at the Dutch unit, KLM, while staff costs stayed constant. In 2017, Air France saw a 3.7 percent productivity increase and KLM a 2.9 percent one; staff costs increased by 2 percent.

A pay rise to catch up with the productivity growth – which, for pilots and crews, means spending more time in the air – isn’t therefore “unjustified.” Nor would it drive Air France into the red. The company’s staff cost it 7.6 billion euros ($9.1 billion) last year. Increasing that by 5.1 percent would add 388 million euros to the annual cost base; last year’s net income topped 1 billion euros.

One can understand why management fights the workers’ demands so tenaciously: This year, ticket prices are under strong downward pressure because low-cost airlines have added a lot of new capacity, and fuel costs have gone up. But strikes have already cost Air France KLM some 300 million euros, and something has to give. 

Last year, Lufthansa ended its similarly crippling battle with its main pilot union after hammering out a major deal to cut pension contributions and make hours more flexible in exchange for a 10.3 percent pay rise by 2022 plus a one-time payment of up to 1.8 monthly salaries. In another deal agreed this year, the German airline’s ground staff are getting a 6 percent pay increase in two stages by the end of 2019 (the 2019 round of increases depends on the company’s units reaching profit targets). These are more generous terms than Air France-KLM has been offering. 

Ryanair, for its part, this year agreed to raise its U.K. pilots’ pay by 20 percent to stop the strikes that undermined its reputation last year. After resisting unionization throughout its history, the low-cost carrier now recognizes that its pilots are represented by a union.

Granted, with operating expenses at 73 percent of revenue last year, Ryanair has more space for compromises with staff than Air France-KLM. But, as Lufthansa’s example shows, a traditional airline can also be persuaded to invest in better labor relations. The German carrier expects a solid profit this year.

For years, the airline industry has been experimenting with making employment more precarious – putting pilots and crew on zero-hours contracts (in which they only work when called upon and hours can vary), even trying to use them as independent contractors. This has already undermined the industry’s prestige as an employer and reduced the flow of top flying talent to airlines. Perhaps it’s time for a cautious turn toward more generosity until declining service quality – and, who knows, perhaps even a drop in safety, though statistics don’t indicate one yet – starts scaring off passengers.

The French government is focused on making the country’s labor market more flexible, and President Emmanuel Macron must be tough on unions and all kinds of strikers for his reforms to work. He’s understandably concerned that the appearance of appeasement to one union will encourage others; that is the price the government pays for its continued involvement in the industry. And yet the case of Air France-KLM isn’t one on which to take an uncompromising stand against reasonable labor demands. 

©2018 Bloomberg L.P.

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