Air France-KLM Drops as CEO Exit Puts Carrier at Mercy of Unions

  • De Juniac's short tenure was punctuated by labor strife
  • Analysts say departure will postpone vital restructuring

Air France-KLM Group shares fell the most since 2014 as the surprise exit of Chief Executive Officer Alexandre de Juniac after just three years in the top job created a power vacuum that puts Europe’s biggest carrier at the mercy of unions implacably opposed to cost-cutting plans.

The stock slumped 8.6 percent as the announcement of De Juniac’s departure a year after he secured a new contract leaves Air France-KLM rudderless while it fights to remain a leading carrier amid an onslaught from low-cost rivals in Europe and Persian Gulf operators on long-haul routes.

De Juniac, who will leave by Aug. 1 to run the International Air Transport Association, said his successor must press on with restructuring plans while finding a way to win pilot backing. Analysts say the CEO’s exit at just 53 comes as a blow after he helped Air France-KLM snap four years of losses in 2015.

“We expect no more progress with unions in 2016,” Kepler Chevreux analyst Ruxandra Haradau-Doser said in a note, adding that De Juniac’s departure is “clearly negative news” that derails transformation efforts. Yan Derocles at Oddo Securities said the move was a “brutal” surprise and cut his rating.

Transavia Wrangle

Shares of Air France-KLM fell as much as 70 cents to 7.47 euros, the most since Dec. 19. 2014, before trading 3 percent lower at 7.92 euros as of 11:11 a.m. in Paris, where the company is based. That pares gains this year to 13 percent and reduces the group’s market value to 2.38 billion euros ($2.7 billion).

The share price had previously advanced 18 percent since De Juniac took over on July 1, 2013. Arch-rival IAG SA, parent of British Airways, more than doubled in value over the same period, though Germany’s Deutsche Lufthansa, which faces similar labor woes, declined 12 percent.

De Juniac had sought to build his strategy around shifting short-haul Air France flights that don’t connect with lucrative long-haul trips to lower-cost units Transavia and Hop!, providing room to cut fares and compete more effectively with discount specialists Ryanair Holdings Plc and EasyJet Plc.

Negative Headlines

Union opposition left that plan in tatters, with a 10-day strike in 2014 over proposals to base Transavia planes outside France, side-stepping pilot opposition, prompting the government to intervene and enforce a climb-down from which De Juniac struggled to recover.

Labor grief culminated in violence last October, when senior managers fled a works council meeting over a fence with their clothing in shreds, leading to negative headlines on French employee relations around the world.

Air France set a January deadline for its latest bid to secure savings from pilots, before pushing back the targeted date for a deal later into the year.

Air France-KLM has also surrendered market share on inter-continental routes as Gulf carriers led by Dubai-based Emirates feed more and more Asia-bound traffic through their home hubs using mammoth fleets of new wide-body jets.

De Juniac nevertheless put Air France-KLM on a “clearly better fundamental footing,” said Johannes Braun, an analyst at Commerzbank AG, posting an operating profit of 816 million euros for 2015 and successfully de-leveraging the company. He also helped restore Air France’s image with upgraded cabins.

‘Free Decision’

The CEO himself delivered a stark assessment of Air France-KLM’s position in the industry in an interview on RTL radio.

“We were the largest in Europe in 2004 in terms of passengers; there are now three ahead of us,” he said, referring to Air France-KLM’s ranking behind Lufthansa, IAG and Ryanair. “We need to stay in the race.” The company remains the European No. 1 by traffic, or passengers times the distance flown.

Discussions with pilots are still far from a conclusion, De Juniac said, adding that he was leaving of his own volition and that the government had always stood “directly behind the company.” Michel Sapin, France’s finance minister, said on Europe1 radio that the departure was “a free decision of a free man.”

De Juniac, whose mandate as CEO had been extended for a further four years last May, said that while lobby group IATA, which has 260 airline members, may not be that well known in France, his role there will be “a huge challenge.”

Safety Concerns

The group has recently had to cope with tensions between fast-growing Gulf carriers and their rivals -- including Air France -- in Europe and the U.S., as well as safety concerns over the loss of a Malaysian jet in the Indian Ocean, the shooting down of another over a Ukrainian battlefield and the suicide of a pilot at Lufthansa’s Germanwings arm that killed everyone on board.

At Air France-KLM, attention will turn to the recruitment of a new CEO, with the company saying that it has engaged a specialist agency to help with the task.

Frederic Gagey, who heads the Air France unit from which De Juniac himself was promoted, may be the strongest internal candidate, though the state’s 15.9 percent stake means that the carrier has usually been run by someone with direct civil service experience.

De Juniac himself was chief of staff to International Monetary Fund Managing Director Christine Lagarde when she was French finance minister, and advised her successor Francois Baroin.

The suspicion remains, though, that the CEO quit because he was prevented by the government from enforcing his strategy, Oddo’s Derocles said, so that the company will struggle to lure the kind of “charismatic leader” it needs.

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