Industrials

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

It's hard to blame Air France-KLM CEO Alexandre de Juniac for taking a cushy job as head of IATA, the airline lobby group, rather than endure yet more wearying cost-cutting talks with strike-prone and sometimes violent workers.

Still, he's leaving the Franco-Dutch carrier with his promised turnaround only half complete.

Middling Legacy
Air France-KLM has outperformed Lufthansa but IAG, owner of British Airways, did better
Source: Bloomberg

Since taking over as CEO of Air France in 2011 and then the whole group in mid-2013 De Juniac has had some success in addressing the airline's bloated cost base, under trying circumstances. These include a workforce that's willing to strike for a fortnight and is not averse to ripping the shirts off the backs of executives who propose unpalatable but needed cost-savings.

Under his watch, Air France has shifted more short-haul services to its low-cost unit Transavia, where total passenger numbers have increased 70 percent since 2011. Improved cash flow helped the group cut net debt by 1.1 billion euros to a more manageable 4.3 billion euros last year (1.8 times Ebitda).

Debt Reduction
Air France-KLM has reduced net debt by 2.2 billion euros since 2011
Source: Company presentation

But investors are kidding themselves if they think February's return to profit marks the completion of De Juniac's mission. As Gadfly noted, that 118 million euro ($134 million) profit -- the first since 2010 -- came chiefly from 450 million euros in fuel savings.

Such savings have a nasty habit of being competed away as airlines add capacity and are then obliged to cut prices. Air France's 3 percent operating margin is leagues behind Ryanair's 18 percent and is no cushion if fuel prices rise again.

About 60 percent of the company's non-fuel costs relate to personnel, notes Kepler Cheuvreux analyst Ruxandra Haradau-Doser. Progress there has been less impressive.

De Juniac has been forced to back down on his plan for a significant expansion of Transavia outside France. He's also yet to reach agreement with workers on other details of his Perform 2020 restructuring plan, which would let it compete better with budget rivals in Europe and state-backed long-haul carriers from the Gulf.

De Juniac isn't taking up his new role until August 1st but it's hard to imagine much progress with the unions before then. By announcing his departure he has much less leverage in labor talks and workers have much to gain from holding out for the successor. That person will probably need time to build any kind of rapport with France's fractious unions.

Investors who drove the shares up more than 10 percent after the full-year results in February face a reality check.

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

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net