Grounded Giant: Reforms at Air France Stall Despite Soaring Debt Problems

AirFrance YannickIn early October, images of an Air France executive climbing a fence with his shirt in tatters made headlines across the world. The executive, Xavier Broseta, deputy human resources director at the airline, was fleeing from a crowd of workers after talks collapsed between Air France management and French pilots’ union, the Syndicat National des Pilotes de Ligne (SNPL). The occurrence was just one of the many recent flare-ups after the large French company tried to cut costs at the expense of worker benefits. The airline’s crisis has also ensnared the French President François Hollande due to the government’s 16 percent stake in the company. Although French companies are lagging in competitiveness compared to other EU countries, its government has failed to convince unions, like Air France’s, to do their part in modernizing the French labor market. The airline’s tumult is indicative of how public firms privatized by the French state have struggled to adapt to a liberalized European market.

The Air France dispute itself centers on the company’s efforts to cut costs and reduce its crippling debt. In the first half of 2015 alone, Air France accumulated €619 million in debt, adding to a toxic total of €5.4 billion. The company has struggled to compete in a changing airline industry better served by low-cost options in the regional market and airlines based out of the Persian Gulf States for wealthier business flyers. The company’s biggest liability, as with many French companies, is its workforce.

Air France employees boast shorter work hours and higher wages than other traditional flag-carrier airlines in Europe. Labor costs, which the airline industry measures as a percentage of revenue, equal 32 percent of Air France revenue, compared to 25 percent for its Dutch partner KLM and 21 percent for British Airways. A logical solution would be to reduce the company’s headcount, but EU labor laws dissuade employers from using layoffs to improve profitability, and French regulations make this maneuver especially difficult. So far, the airline managed to negotiate voluntary layoffs with unions, eliminating 10,600 jobs between 2009 and 2014. Some other measures currently in progress, such as exiting highly competitive intercontinental routes to Asia, could actually reduce productivity further by diminishing its more lucrative long-haul business. In an agreement with its partner airline KLM – whose workforce is still half the size of Air France’s – the company pledged to take sole responsibility for further workforce reductions. A need to reduce headcount further made a battle with unions unavoidable.

French pilots’ unions SNPL and the Syndicat des Pilotes d’Air France (SPAF) alone have managed to ground the airline’s planes and cost the airline tens of millions of euros in strikes. Last year, a management plan that would have allowed Air France to assign pilots to flights operated by its low-cost subsidiary Transavia prompted the unions to declare a strike for more than ten day, driving the company further into the red. To better compete with budget airlines like EasyJet and Ryanair, Air France management wanted to use Air France pilots to expand Transavia’s flight web by creating hubs outside of France. SPAF rejected Air France’s Transavia strategy as a “social dumping” scheme that sought the “delocalization of jobs for [French] pilots.” The pilots’ stance was widely criticized. Le Monde found, through confidential interviews, that pilots were actually hostile to the Transavia business model because its focus on fast boarding times meant they would spend more of their work hours flying as opposed to being idle. Other Air France employees, who as a whole are paid significantly less than pilots, were also deeply unimpressed by the their stance.

SNPL, the largest pilots’ union at Air France, has also faced criticism for defending pilots’ benefits at the expense of the company’s future. The union instead blames management hostility and accuses Air France’s CEO of “declaring war” against the group. Its accusations are partly due to Air France’s legal showdown with SNPL in which the company won a court case after accusing SNPL of breaking a contract agreement. The pilots’ complaints have garnered little pity from their colleagues at KLM, who have long cooperated with management to improve company results. The Dutch airline’s pilots’ union equivalent to France’s SNPL appealed to Air France workers to “to forge ahead” in negotiations with the state, underlining the contrast between France and some of its EU counterparts when it comes to labor-management cooperation.

Relations with management aside, the web of unions representing the more than 60,000 employees at Air France is rife with intrigue. Pilots have categorically refused management’s reform proposals, but some of the unions protecting Air France employees support the company’s cost-cutting strategy. When a 2015 plan asked ground staff and flight attendants to accept less lucrative contracts and layoffs to increase productivity, they agreed to negotiate terms with Air France management.

The disagreements between pilots’ unions and other unions at Air France embody a rift in opinions toward how workers should represent themselves. One aeronautics expert argues that at Air France — as in many large French companies — “the dialogue is a patchwork where each union, very corporatist, defends its base.” Corporatism is a term used to define a system whereby workers of different professions represent themselves as individual groups in company negotiations. This system of representation is a French tradition historically rooted in the late 18th century, and its supporters call it a “third way between wild capitalism and socialism.” It is in stark contrast with the more modern conception of the interprofessional unions common in Italy and Germany. Many opponents of SNPL have called the union corporatist to characterize it as uncooperative and self-serving. Representatives of interprofessional unions harshly criticized SNPL, calling it “a coterie that protects its own privileges,” whose “indecent” actions “put in danger the entirety of Air France employees.” Finance Minister Michel Sapin has also criticized the situation, whereby “dialogue is blocked by a minority with visions that are purely individual and corporatist, where this could endanger the collective [company].”

Air France may have been privatized years ago, but its performance is still bogged down by excessive worker benefits that the government had instituted. The French government only privatized the airline in 1999, leaving its new owners to deal with the generous benefits, high wages, and extensive retirement plans the state allowed airline employees. The problem is hardly limited to Air France, however — union presence is strong in the more than 1300 companies with significant government stakes, allowing workers disproportionately better work contracts at taxpayer expense. Only 7 percent of French workers belong to unions, but their prominent status in French labor laws mean they are largely immune to reform. The legacy of tough unions has made French workers the most expensive in Europe in terms of benefits and other nonwage costs for which a company on average has to set aside €47 for every €100 in salaries. The French reality is far removed from that of EU countries like Denmark and Luxembourg, where companies pay much lower nonwage costs on labor even as workers enjoy similar state benefits, pay the same in taxes, and receive higher wages.

France’s problem with unions is even worse with state-owned companies, where the government has a majority stake. Unlike Air France, though, the financial woes of public companies are disguised by generous state subsidies. State workers enjoy higher wage increases than those in the private sector, and their monthly pension payments have increased since 1990 at a rate almost 70 percent faster than in the private sector — well above the rate of inflation. State rail behemoth SNCF, the twentieth-largest company in France, usually publishes passable financial results largely because the company receives upward of €10 billion in state subsidies a year meant to support unprofitable routes for commuters. Despite this generosity, the company has accumulated €44 billion in debt, representing 2 percent of France’s total public debt. SNCF finances are also hindered by how retirement ages in the company start as early as 50, leading the company to have 1.8 times as many retirees as employees.

These sorts of unrealistic benefits are endemic in state companies. According to a Telegraph article, employees in the national electricity company “enjoy subsidized meals, holidays, cultural events, housing, as well as huge discounts on their power bills, lifetime employment, and early retirement provided for by a pension fund separate from the cash-strapped national system.” Such policies may be well-intentioned, but they represent a serious drag on the competitiveness of French state companies, and, by extension, the country’s economy as a whole.

No entity has come under so much fire in the handling of the Air France crisis as the French government. Although the airline was privatized in the 1990s and merged with the KLM Royal Dutch Airlines in 2004, the French government still holds a 16 percent stake in the joint company. A French law aggressively defended by the government allows long-term shareholders to exercise double voting rights, meaning the government can veto any Air France decision, which often requires a two-thirds majority, even with its minority share. In May, the government bought an additional five million stocks in the company in order to raise its stake closer to 18 percent and reassert its dominance. This so-called “shareholder activism” aside, French President François Hollande refused to decide on a comprehensive reaction to the Air France dispute. Facing an October approval rating of 16 percent and the chance that his party may not support his reelection, France’s most unpopular president since 1958 is unwilling to take a definitive union stance that may further alienate his few supporters.

Eyeing its impasse with unions, Air France has repeatedly asked the government to help guarantee the airline’s future. Although the airline cannot truly move forward without comprehensive changes to its labor contracts, it argues that there are stopgap measures the government can use to stem the stratospheric growth in the airline’s debt. In order to improve profitability, it could intervene to cancel out unfair competition from Gulf State airlines buoyed by oil money. The French government could block Gulf airlines’ requests to use regional airports like Lyon and Nice, as approval for such requests could further erode Air France’s competitive advantage. Air France has also called upon the French government to repeal a tax levied on flight tickets meant to fund global pandemic relief. The tax’s noble effort aside, it was implemented in only a few of the 30 countries that ratified it, costing Air France an annual €90 million while most of the airline’s competitors shirked the responsibility. Finally, the government has a majority stake in Aéroports de Paris (ADP), which handles the city’s massive air traffic and lucrative airports. Freezing the 1.75 percent yearly increase in fees charged to Air France could save it €150 million. Nevertheless, the proposal failed to gain support when it was presented to the French Parliament in 2014, and ADP only reduced the fee increase to 1 percent annually. Here, countervailing government interests clashed together, and the majority-owned company came out on top. Air France has rarely turned a profit, and aiding it could jeopardize companies like ADP, not to mention sizable Airbus jet sales to Gulf airlines. The only probable sphere for state intervention is labor union negotiations, even if union conflicts remain an open wound for the Hollande administration.

Exasperation is rife when it comes to the government’s position on Air France’s unions. In one instance, reform-friendly Economy Minister Emmanuel Macron sided with Air France management, calling the workers involved in the scuffle with Air France Executive Broseta “stupid” but “isolated.” Ségolène Royal, a crucial figure in the prime minister’s cabinet, publicly chided Macron for using “hurtful words that don’t help move towards a resolution.” Meanwhile, the government’s representative on Air France’s board sided with unions. The presidency has avoided a central role in the dispute, and Prime Minister Manuel Valls has insisted that “the state assumes and will continue assuming its responsibilities. But a solution for Air France comes first from the company itself.” The mixed government messages have earned the presidency ample derision from the press. Newspaper Le Parisien judged that the airline’s calls to the government for help had been “in vain.” Newspaper L’Express criticized the numerous “errors of the state as [Air France] shareholder,” and newspaper Le Figaro dissected the “great malaise” of the French government in dealing with unions. The government’s intransigence has come to a point where even SNPL president Eric Derivry has asked the French presidency to be more “coherent in their decisions.”

Ushered back to the negotiating table by the government, Air France unions and management restarted negotiations in mid-October. The company’s so-called “Plan A” in which pilots would work more hours for the same salary to better match European counterparts was categorically refused. “Plan B,” equally daunting, proposed 2900 forced layoffs and is the course of action Air France threatens if a deal cannot be reached. Some sources believe the government is rallying for a new “Plan C” behind closed doors, mirroring the recent KLM deal between the airline and a Dutch pilots’ union. Although positive Air France-KLM results this quarter have cooled the debate somewhat, the improvement is due to a sharp drop in oil prices and is only temporary relief. If Hollande’s government does not step up its role in negotiations to bring unions closer to their EU counterparts, some say Dutch authorities may push for a breakup of Air France-KLM. This would likely shatter the future of what remains one of the world’s largest airlines.

Air France’s predicament is indicative of a government struggling to reconcile the interests of workers and a need to hold companies with state stakes accountable for their financial results. Although the French state, unions, and companies all want to revive France’s stagnating economy, the strength of French unions has frozen the country into an archaic labor market system that other EU economies have already abandoned. In an epoch of airline turnarounds despite volatile market conditions, from Spain’s Iberia to the Netherlands’ KLM, there are plenty of well-trodden paths for France to follow with its flag-carrier. In its airlines, like its economy, though, it is yet unclear whether the country can finally take the necessary steps to catch up with the rest of Europe.

Art by Yannick Alphonso-Gibbs