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Air France KLM can afford to end strikes

Believing the headlines Air France KLM, Europe's second largest airline by revenue, could soon "disappear" (as the French Minister of the Economy Bruno Le Maire puts it). But the painful work problems of the company do not have to lead to such a bad result.

The problems of Air France have arisen in the dilemma of the traditional aviation industry: Old low-cost airlines are on the one hand by low-cost competitors such as Ryanair and EasyJet z and on the other by heavily subsidized Middle East airlines that compete for long-haul. In the face of such competition, traditional airlines have been forced to cut costs, slow wage increases, and demand greater employee productivity.

Exactly what Air France KLM tried to do in 201

4 with a series of tough restructuring plans In 2015, workers' high-profile anger culminated in the much-noticed case of October 2015, when workers forcibly Managers who tore shirts off. Soon, the company launched a layoff, demanded its productivity requirements, and added a new General Manager, Jean-Marc Janaillac, who sought to reassure the workforce with a own plan of "trust." "No staff cuts or new productivity targets were mentioned, but instead pursued strategic measures against low-cost competition and competition in the Middle East, without anyone trying to undercut the price."

The launch of Joon, a "boutique airline", the Offering organic food and craft beer and offering passengers virtual reality entertainment is the best example of the strategy: Air France KLM has been trying to maintain the price premium positioning, even to be lifted.

Given a Favorable environment for airlines – lower fuel prices and increased travel as a result of the effects of the global economic crisis – made the strategy work quite well and after seven years of successive losses, Air France KLM returned to profitability in 2016. This was not the result of painful cost reductions The operating costs of the airline were in ver 94 percent of sales last year – about as much as in 2007; Easyjet kept its operating costs at 91.5 percent of sales.

In recent months, however, Janaillac has failed to cope with employees demanding better pay. They now want an increase of 5.1 percent; Management increased the number of employees by 7 percent within four years. Last Friday, Janaillac resigned after voting against this proposal. At that time, Le Maire warned the workers who demanded "unjustified wage increases" to "take responsibility" because the "survival" of the airline was at stake.

That's not strictly true, and management knows it. So should Le Maire, who speaks for a major shareholder (the French government owns 14.3 percent of Air France KLM). In 2016, employee productivity increased at Air France by 2.3 percent and at KLM in the Netherlands by 4.2 percent, while personnel costs remained constant. In 2017, Air France reported a productivity increase of 3.7 percent and KLM of 2.9 percent; Personnel costs increased by 2 percent.

A wage increase to catch up on productivity growth – which means more time in the air for pilots and crews – is therefore not "unjustified". Also, it would not drive Air France into the red. The company's employees cost $ 7.6 billion ($ 9.1 billion) last year. An increase of 5.1 percent would contribute 388 million euros to the annual cost base; the net result of last year exceeded one billion euros.

One can understand why management is so stubbornly fighting workers' demands: Ticket prices are under heavy pressure this year as low-cost carriers have added a lot of new capacity and fuel, and costs have risen. But strikes have cost Air France KLM already 300 million euros, and something has to give.

Last year, Lufthansa ended its similarly crippling battle with the main pilots union after signing a major deal to cut pension contributions and make working time more flexible in return for a wage increase of 10.3 percent by 2022 and a one-time pay-out 1.8 monthly salaries. In a further agreement that was agreed this year, the German airline's ground crew will receive a two-step pay increase by the end of 2019 (the 2019 round depends on the company's units achieving their profit targets). These are more generous terms than Air France KLM has offered.

Ryanair, for his part, has agreed this year to increase the wages of his British pilots by 20 percent in order to end the strikes that undermined his reputation in the past year. After resisting the union organization throughout its history, the low-cost carrier now recognizes that its pilots are represented by a union. [1965900] Granted, Ryanair has more room for compromise with employees than Air France KLM, with 73 percent of sales last year. But as the Lufthansa example shows, even a traditional airline can be persuaded to invest in better working relationships. The German airline expects a solid profit this year.

For years, the aerospace industry has experimented with making employment more precarious – putting pilots and crew on zero-hour contracts (in which they only work if they are called and the hours can vary), even try them to use as an independent contractor. This has already undermined the prestige of the industry as an employer and reduced the flow of flying top executives to airlines. Maybe it's time for a cautious shift to more generosity and even lower quality of service – and who knows, maybe even a drop in safety, though the stats are not showing – will startle passengers.

The French government is focusing on making the country's labor market more flexible, and President Emmanuel Macron must urge trade unions and all sorts of strikers to make their reforms work. He is understandably concerned that the appearance of union appeasement will encourage others; That's the price the government pays for its continued commitment to the industry. And yet, the case of Air France KLM is not one that is uncompromising against reasonable work requirements.

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

Contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4 @ bloomberg.net

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