May 4, 2012 / 11:00 AM / 6 years ago

Air France-KLM says won't back down on costs

PARIS (Reuters) - Air France-KLM (AIRF.PA) on Friday told both unions and the next French government it would not back down on the need for deep cuts in labor costs as its battles low-cost rivals and record fuel.

Finance Director Philippe Calavia said he was confident whoever won Sunday’s French presidential elections would grasp the need to “dramatically transform” the airline’s labor costs and staked the management’s future on seeing the cuts through.

“We need higher productivity and flexibility... That is an absolute necessity and we won’t back down -- personally I won‘t,” he told financial analysts in a conference call.

So far Air France-KLM has said it would try to avoid forced redundancies among its 103,000 staff but is calling for 20 percent efficiency gains at the Air France network by 2014.

“The stakes for the group are too important and we will convince the potential new team in France, I am confident of that,” he said, asked to comment on the potential impact on union negotiations of Sunday’s presidential run-off.

The Franco-Dutch airline is negotiating the second and most difficult stage of a restructuring plan that aims to shed 2 billion euros ($2.6 billion) of both debt and operating costs over three years.

It says its long-running labor contracts stand in the way of heading off growing competition from low-cost carriers led by Britain’s easyJet (EZJ.L) and a historic fuel bill which is set to rise by 1 billion euros in 2012.

French unions have warned of job cuts, while several financial analysts speculate opposition to cuts could harden if Socialist front-runner Francois Hollande wins Sunday’s ballot.

Air France-KLM, formed in 2004 from French and Dutch flag carriers, is 15.8 percent owned by the French government.

In April, Hollande told Le Parisien a Socialist victory would not provoke lay-offs. “We must tell these companies that we will not accept them without reacting.”

Final polls published on Friday gave Hollande a five-point lead, although this has narrowed since a tv debate on Wednesday.

With unemployment claims already at a 12-year high, lay-offs have been a sensitive topic ahead of Sunday’s decisive presidential vote, prompting speculation that many companies are holding out until after the election to carry out big cuts.

“I think a deep re-foundation of our labor agreements especially at Air France is a huge necessity for the future development of the group,” Calavia said.

Air France-KLM and Europe’s other leading legacy carriers are confronting losses in their short-haul operations, leading to a wave of painful contract negotiations and strikes.

Willie Walsh, the head of British Airways and Iberia owner IAG (ICAG.L) told striking Spanish pilots last week he would not back down over cheaper labor contracts.

Germany’s Lufthansa (LHAG.DE), which has overtaken Air France-KLM as Europe’s largest airline group by revenue, said on Thursday it planned to slash 3,500 jobs of its 17,000 workforce.

CHALLENGING QUARTER

Air France-KLM’s problems were highlighted as first-quarter figures published on Friday showed that higher passenger traffic failed to compensate for weak cargo trade and record fuel costs.

    Operating losses grew to 597 million euros ($785 million)from 403 million a year ago on revenue which grew 6 percent to 5.645 billion. Net losses were flat at 368 million.

    “The first quarter was challenging and up to a point may appear disappointing, but we had expected this performance which is in line with our roadmap for the full year,” Calavia said.

    Air France-KLM’s shares eased 0.6 percent to 3.49 euros, performing fractionally better than the French market.

    The group maintained its objectives for the full year.

    Investors had largely written off the prospect of narrower losses in the first quarter as the uncertain outcome of union talks overshadow short-term financial performance. The airline has said any improvement should come in the second half.

    Analysts on average expected a first-quarter operating loss of 560 million euros on sales of 5.53 billion and a net loss of 409 million, according to Thomson Reuters I/B/E/S data.

    Group net debt stood at 6.432 billion euros at end-March. The group is targeting a maximum 6.5 billion euros of net debt and lower unit costs at constant fuel prices by year-end and 4.5 billion euros by the end of 2014 under the cost-cutting drive.

    France’s political context will only be fully established after parliamentary elections in June, a month during which Air France-KLM also hopes to finalize new collective labor pacts.

    Air France-KLM has set an end-June deadline to reach a union deal so that plans can be adjusted from the end of the year, but that leaves little margin for negotiations to take place free of campaigning for two-round legislative elections on June 10-17.

    ($1=0.7603 euros)

    Reporting by Tim Hepher and Cyril Altmeyer; Editing by James Regan and Mike Nesbit

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