Air France: Climbing

By Bruce Crumley / Roissy

Jean-Cyrill Spinetta recalls the dark days of 1997 when he took command of financially strapped Air France, charged with pulling the airline out of a tailspin of labor unrest and a half-decade of losses. A growing number of French customers, long accustomed to work stoppages, viewed the airline with distrust and scorn. "When people start looking at their own flag carrier as unreliable, you've really got a problem," says Spinetta.

It wasn't just labor. Slimmed-down European rivals like British Airways had been aggressively exploiting deregulation to fuel growth, while ferocious American cost cutters like Delta were wooing ever larger numbers of passengers with lower transatlantic fares. "We got to a point where in order to survive, we simply had to assure our clients and own business a degree of stability by breaking the cycle of strikes, disruption and losses," he says.

To do that he needed to convince some of France's most wildly militant workers and their unions that they had everything to gain as partners with management and everything to lose as adversaries. In France? Bonne chance. Yet Air France employees are less grumpy campers (they're still French), and the company is reaping the rewards of labor peace and French elan in the skies. The notoriously dysfunctional bad boy of air transport earned $1.2 billion in the fiscal year that ended in March 2006, on sales of $28.2 billion, and $1.62 billion for the first three-quarters of the current one, an increase of 31%. Those results have been built on regained passenger confidence, the allure of Paris as an international hub and an increasingly rare commitment to high-quality, free in-flight service, which have boosted ticket sales enough to lift Air France--KLM to the top of Europe's airlines, with a 25% market share. And it might make a run at ailing Alitalia, whose fractious workforce resembles that of Air France in its dark days.

With global travel in its best shape in years, Air France is enjoying the fruits of its 2003 merger with Dutch airline KLM, creating a dual-hub network with considerable global reach. Skeptics predicted the marriage would founder on Dutch resentment of notoriously overbearing French handling of past binational mergers. Yet the partnership has not only functioned better than management or labor had hoped, but has also established the sector's standard for future linkups. "Everyone else is now trying to follow. Some airlines are actually seeking to replicate it to the smallest details," says Yan Derocles, an analyst with Paris brokerage Oddo Securities. "It's got virtually the entire world covered and has the size and reach to be able to shift aircraft to fast-growing routes wherever they are. That leaves Air France--KLM in a pretty commanding position for the coming years."

Quite a turnaround for an airline that lost nearly $1 billion in 1993--the same year marauding workers shocked the travel world by occupying runways and halting traffic at both Paris airports to protest proposed cost cutting. Still bleeding cash the following year, Air France needed a $3.9 billion injection from the government to stay afloat. And despite a considerable restructuring and divestment plan put into place as part of that bailout, by 1998 the airline was back to its bad old tricks. A strike on the eve of the 1998 World Cup, to which France played host, cost the company $160 million. But the publicity beating that the unions took finally convinced many employees that they were on a one-way flight to oblivion.

Spinetta recognized an inflection point. "It was vital we let employees see how this opening of markets and increased competition imposing all the changes they were resisting also provided enormous opportunities for us all," he says. "It was the moment to really start working together." To do that, Spinetta wrought a minor miracle: finding the elusive "third way" between the protective, paternalist policies of welfare-state systems and the dog-eat-dog free-market approaches of U.S. and British firms that send French workers running to the barricades. Spinetta managed that with a mix of wage restrictions in exchange for equity in the newly privatized company

He also regularly consulted Air France employees so that they began to feel involved in the airline's management (staff opinions are sought on cabin uniforms from Christian Lacroix), and he struck labor agreements that would leave American managers gobsmacked. "We found a right balance of effort and reward, of commitment to plan and profit sharing via salaries and benefits," Spinetta explains. "Since then, the success of the company has depended on employees understanding our strategy, getting fully behind it and feeling secure knowing that if it all works out, profits from it will be redistributed to them." It's also allowing Spinetta to continue a program to reduce costs 3% to 4% annually.

Spinetta was well positioned to handle the labor battle. A career civil servant as opposed to a market-hardened manager, he joined the transport ministry in 1988. He was picked to head the state-owned domestic airline Air Inter in 1990. It was fully merged into Air France in 1997, when Spinetta was tapped to run the whole airline. He immediately appealed to employees to become partners in the company. "If we're all still here today, it's because Spinetta convinced workers that he was serious about negotiating and that the sacrifices we had to make were just," says Gilles Nicoli, secretary-general of the Democratic Confederation of French Labor union representing Air France workers.

The truce has held solid with very few exceptions, affording Air France the stability needed to close the gap with competitors that had been restructuring and modernizing since the early 1990s. Ironically, Air France began its overhaul just as business began to pick up. So the company is in the midst of a renewal of its fleet of 254 aircraft--including cabin overhauls--without taking on massive debt. It has spent $5.2 billion to put 85 new aircraft into service in the past five years, with an additional 22 on order, including 10 Airbus 380s.

Air France's other good fortune is to have Paris as a hub. Charles de Gaulle Airport is one of the few in Europe that has the ability to expand traffic. This summer, for instance, it is increasing capacity 5.4%, even adding a Seattle-Paris nonstop flight. Analyst Derocles says C.D.G., the main airport serving Paris, has increased traffic 18%--or by 9 million passengers--since 2004. "London and Frankfurt don't have that advantage," he says, "and it has let Air France--KLM develop sales by 7% to 8% per year."

Flying isn't so smooth at Alitalia, the wobbly Italian flagship carrier now being sold by the state that could fit nicely into Air France--KLM. Although several other companies have made bids for Alitalia, a stake in the airline would give Air France a dominant position in the lucrative Italian market and more heft and coverage of its international network. Air France scarcely hides its interest in the strategic allure of linking up with Alitalia, but last month it refused to make a bid for a 49.9% stake the Italian government put on the market, which by law would later become a full buyout.

To make the deal viable, considerable changes would be inevitable. Indeed, most observers feel Alitalia will require a massive overhaul, including significant job eliminations. Although the left-leaning Spinetta is no fan of job cuts (and avoided them in turning Air France around), he's not likely to propose any deal until politicians in Rome clearly signal they'll let a new owner do what's necessary to halt Alitalia's descent. "Air France has already had to battle politicians and unions to survive once. It's not going to get itself into the same situation again," says Derocles.

While Alitalia represents a final chapter in the consolidation of European flag carriers, Spinetta insists that the next big development in the sector--transatlantic deregulation--will send shock waves around the globe. The U.S. and E.U. recently agreed on a long-sought open-skies accord. "And things change considerably from there. That won't just lead to reinforced partnerships between airlines but will also encourage other open-skies treaties between the U.S. and Asia, and Asia and the E.U." In other words, the real battle of the world's skies is only starting--just as Air France can feel confident knowing its people are fighting the competition rather than the company. AIR FRANCE--KLM GROUP (FY 2006) Once beset by labor trouble and red ink, the company has soared into profitability. Sales $28.2 billion Profits $1.2 billion Employees 103, 127 Passenger planes AF 254 KLM 190 Destinations 225 in 109 countries Stock Ownership French state: 18.6% Employees: 14.1%