French government seeks to force Air France-KLM to change

In contrast to the situation on the French railways, the French President, Emanuel Macron, is resolutely attempting to ignore the problems at another large French transport business, Air France.

The CEO of Air France-KLM resigned at the end of last week after the pilot’s union rejected his attempts at reforming the salary structures of the airline. A new interim CEO has been appointed but the company is still perceived to be in crisis.  

The financial profile of Air France-KLM is far from perfect. For the first quarter of the year, the company lost money, although not so much on its operations which if measured in terms of EBITDA are in the black, but rather on the cost of servicing debt and the impact of strikes.

The cargo business is far from weak. The last quarter’s numbers showed underlying total cargo revenues increasing by 7.9% year-on-year to €543m, with the company describing demand as “strong, especially on outbound Europe and inbound Asia”. Capacity at Air France-KLM has been heavily rationalised over the past five years, with the management organisation appearing to be more unified and coherent than in other parts of the business, forcing together the jumble of three businesses; Martinair, KLM Cargo and Air France Cargo.

The problems at Air France-KLM appear to be heavily concentrated in the core Air France passenger operations. And at the core of Air France’s structurally higher costs and lower profit margins are labour issues. KLM by contrast has higher profits margins, something which frustrates the minority Dutch shareholders.

The French government is still a major shareholder in Air France-KLM. Indeed, several years ago it moved to increase its voting rights in the company. This may be something the present government now regrets as government ministers seem to think that the workforce at Air France rely on continuing state subsidies. Bruno Le Maire, the French finance minister, commented late last week that “those who think that, whatever happens, the state will come to the rescue of Air France and mop up the losses of Air France are wrong.” He continued that “Air France will disappear” if its commercial position did not improve.

The future of the whole of Air France-KLM is uncertain. Unless management can sort out its French labour issues, the whole group will be threatened.

Source: Transport Intelligence, May 15, 2018

Author: Thomas Cullen


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