Air France plans to fight budget rivals on costs

Bloomberg

Air France pilots approved the carrier’s plan to carve out a new, lower-cost business to counter increasing pressure from rivals, marking a rare agreement with workers after years of contentious labor relations at the carrier.
Flight-deck employees represented by the SNPL union, who account for two-thirds of pilots at the French arm of Air France-KLM Group, voted 58.1 percent in favour of the proposal to create the unit, provisionally dubbed Boost, the labour group said in a statement. Further talks are needed to refine the plan, it said.
The approval bolsters Air France-KLM Chief Executive Officer Jean-Marc Janaillac’s strategy to generate consistent earnings in the face of industrywide competition in Europe from both discount regional airlines and high-end Gulf carriers. He has taken a more conciliatory approach toward labor than his predecessor, Alexandre de Juniac, who once proposed forming a new low-cost airline without asking pilots first. In contrast, Janaillac modified a pay-reduction plan to gain employee backing.
Air France-KLM shares jumped as much as 5.6 percent and were trading up 2.6 percent at 6.64 euros as of 9:53 a.m. Tuesday in Paris, where the group is based. The stock has gained 29 percent this year, after losing 28 percent in 2016.
The Air France brand is unprofitable on 35 percent of its routes, with 10 percent involving ‘heavy’ losses, Janaillac said in November while unveiling the Boost project. His announced goal was 20 percent lower costs at Boost than at Air France’s mainline operations. Still, it’s unclear exactly how Boost, which is focused on boosting margins, will woo customers. The CEO said at the time that any spending reductions wouldn’t
be passed on to consumers, so the unit wouldn’t be a “low-fare” carrier competing on price.
“Certainly the yes vote is better than the alternative, though given how much management had already compromised on the initial plan, it’s not a huge surprise,” said Gerald Khoo, an analyst at Liberum Capital with a sell recommendation on the airline’s shares. The Boost project doesn’t go far enough to “immediately transform the fortunes of Air France,” he said.
Boost is looking at hiring new flight attendants who’d be paid 40 percent less than cabin crews at Air France’s main network. That could still set the stage for a conflict after flight attendants’ representatives called the proposal “scandalous.”
The cockpit crews’ approval follows Air France’s climbdown on an earlier proposal to cut pilot compensation by 15 percent at the Boost unit. Earlier this month, management said it would instead ask pilots across all of Air France to shoulder the burden by taking a 1.5 percent wage reduction. Employees have yet to vote on that plan. The SNPL’s leadership is set to ratify the pilots’ vote on February 22. Participation in the ballot was
almost 74 percent, the union said.