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IAG and Air France – KLM : World’s Apart

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IAG and Air France – KLM : World’s Apart

IAG and Air France – KLM : World’s Apart
March 05
12:42 2016

LONDON — International Airlines Group (IAG), comprising British Airways (BA), Iberia, Spanish low-cost carrier Vueling – and, from the middle of last year, Irish flag-carrier Aer Lingus – is racking up profit levels that have become commonplace in the U.S. over the past couple of years.

Air France-KLM, however, is still struggling to reach consistent profitability, and the French component of the Franco-Dutch group at times seems to be at war with itself rather than fighting external competitors.
The most extraordinary example of this discord came last October when two senior Air France executives had their jackets and shirts literally ripped to pieces by an irate mob of employees after redundancy plans affecting almost 3,000 staff were announced. One executive had to climb over a tall fence to escape his pursuers.
This is not to say that IAG has not seen unrest among union members in recent years. BA had taken many of the hard decisions on retrenchment and modernisation some years before Iberia. The latter found itself facing redundancies and salary cuts, pushed through by IAG’s pugnacious CEO Willie Walsh. However, one batch of strikes in 2013 was followed by successful mediation, with improvements in productivity resulting.
BA has used changes in employees’ contracts to win synergies between Iberia and itself, making cost savings more visible and reducing long-term labor discord.
“AF-KLM hasn’t done this – and if it has, it’s evident that it’s not working,” said Saj Ahmad, chief analyst at the UK consultancy Strategic Aero Research. “We seldom, if ever, see KLM unions raising the tempo, but last year’s revolt by Air France union staff show just how toxic they are.”
While IAG has managed to instil reform into Iberia, Air France has been unable to do the same. One factor behind this may be influence from the French State, which holds an 18% stake in the national carrier. “The State may not want jobs culls, even if Air France management does – this diametric difference between company and stakeholder is choking Air France and neither party seems to know, or want to know, of a cohesive way out,” said Ahmad.
IAG has a successful low-cost carrier (LCC) in the shape of Vueling and a short-haul subsidiary, Iberia Express. However, said Ahmad, “Air France was so wrapped up in merging with KLM, that they missed the boat when it comes to LCC competition. The expansion of Ryanair, Easyjet, Wizz Air, Vueling and others means that while AF-KLM was too busy looking inwards, they have been unable to effectively compete with more nimble airlines with lower operating costs.
“Had they seen what IAG did with Iberia Express and Vueling, AF-KLM would have had at least one proper LCC thriving by now.” They have so far failed to grow regional subsidiary HOP or LCC subsidiary Transavia into substantial players.
KLM has been the quieter, and more successful, partner in the group. There have been persistent rumors that the Dutch part of the consortium wants to cut its links with its French partners, but Ahmad believes this is unlikely to happen.
“In the same way that I suspect managers from the former Continental Airlines wished they’d never merged with United, I am sure that KLM senior executives feel the same about its get-together with Air France.
“The musings about KLM wanting to split aren’t new. That it hasn’t happened means that there probably isn’t as much support for it as we believe because they have been afford a large degree of autonomy by Air France, but it’s a pity that Air France can’t replicate the same strategic goals and successes that KLM is having.
“Air France’s biggest two problems are the French State stake, which no doubt influences corporate strategy to secure jobs that are costly and unneeded Secondly, the toxicity of unions has to be either neutralised or extricated.
“Air France simply has to stop striking staff from choking the airline to a halt each time they do not get their way.
“It needs a radical overhaul of its union contracts that stymie strikes in the way that Willie Walsh has done for BA and Iberia.”
Ahmad believes it is too simplistic to portray IAG as having a more freebooting, US style of management compared to a corporatist, European structure at AF-KLM, “if only because Europe itself has a slew of different business models that range between full service, low cost and hybrid. Air France falls into none of these categories.
“Its structural deficiencies have hampered its ability to enact change. Management is too frightened to make tough decisions. That is the sole element that differentiates Air France from its US and European peers.”
In mid-January, Air France’s chairman and CEO Frédéric Gagey presented ‘strategic guidelines’ for 2017-20 to the airline’s powerful Central Works Council representing employees, as part of its Perform 2020 turnaround plan.
This included a proposed expansion of Air France’s long-haul network by 2-3% per year from 2017-20, stabilizing its short- and medium-haul networks and expanding Transavia France to ‘upto 40’ aircraft by 2020. It currently operates 21 Boeing 737-800s.
Air France said that “These measures must be the object of renewed social dialogue. Air France management has therefore suggested launching negotiations with pilot and cabin crew unions.”
How successful those negotiations with Air France’s restive unions will be remains to be seen.

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