Air France Tells Unions to Forget Profit in Race With Giants

  • First positive result since 2010 was spurred by low oil price
  • CEO says one year changes nothing, with rivals also gaining

Air France-KLM Group told its unions to look beyond a profit surge that ended four years of operating losses and accept that painful cost cuts are still needed if it’s to survive an onslaught from stronger opponents.

While earnings of 816 million euros ($908 million) in 2015 stemmed partly from restructuring measures, they also reflected lower fuel prices that have been equally beneficial to the company’s competitors, Chief Executive Officer Alexandre de Juniac said at an earnings briefing Thursday.

“Our position relative to our main rivals hasn’t changed,” De Juniac said in Paris. “We still need to ask for additional reforms if we want to bridge the gap in competitiveness, if we want to lower costs and be able to buy planes, hire workers and grow in a sustainable manner.”

Air France-KLM is seeking to re-base its costs as it’s squeezed by low-cost specialists led by Ryanair Holdings Plc in Europe and fast-expanding Persian Gulf carriers including Dubai-based Emirates on long-haul routes. At the same time it remains under pressure from traditional rivals British Airways, which has already slashed employee costs, and Deutsche Lufthansa AG, where CEO Carsten Spohr is edging forward with his own restructuring plan.

Greater Uncertainty

“We benchmark against our rivals to show unions, and there’s still a gap there,” De Juniac said. “Their financial means are much greater than ours. We have to lower our costs, because we are in a race led by giants.”

The CEO said he’s especially concerned because the aviation market has never been so unpredictable since he joined Air France-KLM four years ago, with the direction of oil tough to call and rivals piling on capacity to take advantage of the situation. The extra seats could in turn create a glut, sparking a price war.

“This period is marked by greater uncertainty than I’ve experienced,” he said. “We remain very cautious about the economic environment, particularly the absence of visibility on the evolution of fuel prices, and on unit revenues.”

Aided by a 22 percent like-for-like drop in the fuel bill, Air France-KLM’s 2015 earnings beat the 706 million euros predicted by analysts and rebounded from a 129 million-euro loss in 2014, when pilot strikes cost it 330 million euros.

Talks Scheduled

November’s terrorist attacks in Paris failed to hold back earnings, with the company reporting a fourth-quarter operating profit of 150 million euros, despite losing about 120 million euros in revenue.

While the positive figures were enough to spur Air France-KLM stock to a 7.3 percent gain in early trading, the biggest since Sept. 3, the carrier’s market value of 2.5 billion euros is less than one-seventh that of Ryanair and one-fifth that of BA owner International Consolidated Airlines Group SA.

Unit costs fell only 0.6 percent in 2015, and the company said it anticipates a profit in 2016 without providing a specific target. Fuel savings will be significantly offset by negative currency impacts and pressure on fares.

Management aims to revive employee talks in coming months, with pilots yet to sign off on final terms for savings agreed under the old Transform plan that expired last year, let alone the Perform 2020 strategy that De Juniac says is key to the company’s future.

Unions have made no secret of their willingness to fight change, made amply clear last year when senior managers were forced to scale a fence, leaving their clothes in tatters, after a works council meeting with management descended into violence.

The CEO has pledged that in the absence of a breakthrough he’ll pare jobs, planes and weaker routes to shrink the airline to a size where it can be sustainably profitable. He has already announced a reduction of 1,000 posts after the failure of earlier talks.

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