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To lose one CEO may be regarded as a misfortune; to lose two looks like carelessness. The resignation of Jean-Marc Janaillac on Friday after less than two years in the job is likely to do lasting damage to the Franco-Dutch carrier’s image with customers and investors.
Janaillac’s refusal to bow to employees’ unreasonable pay demands is admirable—see here for more on why I think the carrier can’t afford big pay rises—but his departure leaves morale in tatters and the company’s strategic path forward uncertain. “Trust Together,” Janaillac’s plan to rebuild the airline’s competitiveness and labor relations through consensus, has been exposed as wishful thinking. Shareholders will be inclined to think that “Distrust, Forever” is much the better approach.
It’s probable some employees are upset that Janaillac is stepping aside, but a big chunk of the workforce has evidently lost touch with financial reality. So as Air France-KLM’s board starts its search for a new leader—one who will need both a deft political touch as well as a good tailor, lest somebody tries to rip the shirt from their back—fractious staff might do well to reflect on a few home truths.
Air France-KLM employees are already pretty well paid.
Making comparisons between different airlines’ pay is always tricky. Some have lots of ground staff on modest pay, whereas others have proportionally more well-paid pilots. Still, my back of the envelope calculations show Air-France KLM employees aren’t doing too badly.
Even in good years, Air France doesn’t make much money.
2017 was a year in which a lot went right for airlines as fuel costs remained pretty low. Even through Air France-KLM’s performance improved, it still wasn’t that profitable.
With jet fuel prices rising again, the environment has become tougher, so this isn’t the best time to ask for a pay increase.
Air France’s performance still trails KLM.
It also seems a bit rich for Air France staff to seek a raise because the KLM part of the business is more profitable. That performance gap has reinforced tensions between Air France and KLM since their 2004 merger.
The company’s valuation is sending you a warning.
Air France-KLM stock had a great 2017 but the shares, which don’t pay a dividend, have given up almost half their value so far this year. If the anticipated net income for 2018 remains the same in subsequent years, the company would earn its entire current market capitalization by 2021. That dismal valuation suggests investors have almost no confidence in the sustainability of Air France-KLM’s earnings. Among European companies with a market capitalization of more than one billion euros, only EN+ Group Plc has a lower forward earnings multiple—and it’s facing U.S. sanctions.
Why should employees care about this? Air France-KLM’s balance sheet isn’t the strongest and last year it sought a 750 million-euro ($894 million) capital injection from Delta Air Lines Inc. and China Eastern Airlines Corp., which both now own a 9 percent stake. Next time Air France-KLM asks for money, expect investors to be more circumspect.
©2018 Bloomberg L.P.