September 23, 2014 / 7:14 AM / in 3 years

Air France CEO faces pressure to axe European low-cost project

Chairman and CEO of Air France-KLM Alexandre de Juniac gestures during a news conference in Paris on the second week of a strike by Air France pilots September 22, 2014.John Schults

PARIS/BERLIN (Reuters) - A strike over Air France-KLM's plans to launch its Transavia low-cost airline in Europe could prevent it from getting off the ground, chief executive Alexandre de Juniac said on Tuesday, while a government minister criticized the project.

The strike is costing the group up to 20 million euros ($25.7 million) daily and entered a ninth day despite a promise by de Juniac on Monday to postpone the project until the end of the year.

De Juniac said he was reluctant to abandon it altogether, saying it was crucial to fight competition from other low-cost players. But he added that he might have to if unions did not back down.

"We are suspending, and if we cannot reach an agreement we will be obliged, sick at heart, to abandon the project," he told France Inter radio.

De Juniac has said he is determined to press ahead with building Transavia in France with or without union backing. But on Monday he said he would suspend the European arm of the expansion until December, along with further talks with pilots' leaders. The unions, however, have stuck to their strike plan.

The French state has a 16 percent stake in Air France-KLM. Prime Minister Manuel Valls renewed calls for the end to a strike he fears will damage France's image abroad.

"There is no sense in the strike," Valls told Europe 1 Radio. "French people do not understand it."

But a statement from his Transport Minister Alain Vidalies was critical of the way talks had been handled.

He also told reporters the project had been rushed into existence, "grafted on" to the Transavia France scheme as something the government "had discovered more or less at the same time as the unions."

"It seems to me this (Transavia Europe) question is not mature, and is of a different nature, posing other problems, and that it should be separated from the debate," he said on the margins of a transport fair in Berlin.

HIGH LABOR COSTS

Air France-KLM wants to develop Transavia beyond France in an attempt to maintain market share for Europe's second-largest carrier by revenue in the face of fierce competition.

However, Air France pilots fear that the move - particularly for those hubs that will hire pilots outside France in countries such as Portugal - will end up eroding their pay and conditions.

"They are taking our flights and giving them to Transavia," Christophe Pesenti, a pilot with 18 years experience who flies Airbus A320s for Air France.

"We refuse to let Mr. De Juniac deliver his 11 percent return at the expense of employees. We are saying stop," he told Reuters at a demonstration by pilots in Paris on Tuesday.

Presenting the Transavia project earlier in September, Air France-KLM said it was targeting a 9-11 percent return on capital employed (ROCE) in 2017 and beyond.

French pilot's salaries are among the best in Europe. According to analysts at Barclays, Air France-KLM is the only traditional European carrier apart from Scandinavian Airlines System (SAS) where labor costs exceed fuel costs, accounting for almost a third of total outgoings compared with around a quarter or less for the other main players.

Yet some analysts are critical of the Transavia expansion plan, saying the existing French unit has not succeeded in becoming low-cost and that expansion may not help margins.

Airline operating margins worldwide stand below 2 percent. Traditional carriers across Europe are under particular pressure due to competition on regional flights from low-cost carriers like easyJet (EZJ.L) and Ryanair (RYA.I), and on long-haul flights to Asia from Middle Eastern airlines like Emirates.

Air France-KLM has suffered particularly from low economic growth in its two home markets, and because low-cost players have targeted France along with Italy more aggressively than other markets, analysts say.

The strike has grounded up to 60 percent of Air France flights on most days since the strike began. Air France said it would run about half its flights on Tuesday and Wednesday.

Shares in Air-France KLM fell 5 percent on Monday as the dispute deepen and have lost 20 percent of their value in the past three months. On Tuesday the stock was little changed.

Some industry experts fear permanent damage on the market share front as a result of the strike.

"This throws the door open wide for low cost," said Jean-Pierre Mas, head of France's travel agency organization SNAV. "Air France clients who use easyJet won't just come back."

Reporting by Sophie Louet, Leigh Thomas, and Gwenaelle Barzic, Emmanuel Jarry, Natalie Huet, Victoria Bryan; Writing by Andrew Callus, Editing by Keith Weir

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