Devastated by pilot power: Air France's shares have lost nearly half their value in three months.
STEPHANE DE SAKUTIN/AFP--Getty Images
By Geoffrey Smith
September 25, 2014

Air France’s management finally caved in and cancelled plans to expand its low-cost unit Transavia Europe, after a punishing 10-day strike by pilots.

The company said it would instead beef up the French arm of Transavia, in attempt to mollify pilots who feared that they would be replaced by foreign ones on less luxurious contracts.

“Our Transavia project is a 100% pro-France project. It is about developing Transavia to encourage growth in France and quickly create more than 1,000 jobs in France (including 250 pilot jobs),” Air France-KLM chief executive Alexandre de Juniac said in a statement issued late Wednesday. “This balanced proposal answers the labor unions’ concerns by bringing a renewed guarantee there won’t be any relocation,”

The company’s management had tried to face down the pilots knowing that the bulk of public opinion, as well as the majority of Air France’s non-flying staff, supported it.

However, management finally cracked after coming under pressure from another direction–the French government, its biggest shareholder. Prime Minister Manuel Valls and Transport Minister Alain Vidalies both insisted that the Transavia plan had been abandoned, rather than just suspended for three months, making it clear that they preferred an end to the chaos of the strike, to what would have been–for France–a rare and powerfully symbolic victory over a powerful lobby of vested interests.

The strike had already cost the company an estimated €150 million in operating profits as well as more in terms of damage to its reputation, threatening to wreck the company’s plans to turn a net profit this year.

The airline group, which also includes the Dutch-based carrier KLM, has over €16 billion in debt which, together with a heavy depreciation bill, consumes almost all the cash that the company can generate. In the second quarter it made a net loss of €6 million despite making an operating profit of €254 million.

In the meantime, the threat from other low-cost airlines is hardly going away. Ryanair Holdings, Europe’s most successful budget airline, raised its forecast for this year’s passenger numbers Thursday to 87 million from 86 million and said full-year profit would be “toward the upper end” of a previously stated range of €620-€650 million.

Chief executive Michael O’Leary said the improvement was due in part to its increased focus on consumer service and a “strong early uptake” of its new service aimed at business class fliers–two areas where it has historically compared badly to Europe’s established flag carriers.

Note: This story has been updated to include information about Ryanair’s updated outlook.

 

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