In "Worst Possible Outcome", Air France Plummets Most In 16 Years After CEO Unexpectedly Resigns


Shares of Air France-KLM crashed as much as 14% on Monday – the company’s biggest drop since 2002 – after CEO Jean-Marc Janaillac, announced his resignation as company workers rejected a pay proposal that would’ve ended a crippling strike.


The company’s shares have slipped 40% since the beginning of the year, making it the worst performer in the 26-stock Bloomberg Airlines Index. Analysts at Bernstein warned that Janaillac’s departure is the “worst possible outcome” for the company’s stock, leaving Air France-KLM with no CEO, no labor contract, an ongoing dispute and “emboldened” unions.

Air France

As Bloomberg reported, while the airline had maintained almost all long-haul flights during the latest walkout, it was forced to cancel 20% of its medium-haul services on Monday. Last week, the company warned that the strengthening euro and rising wages would only compound the pressures from the company’s walkouts.

Janaillac, who held a press conference to announce his departure on Friday, launched a massive gamble by holding an online consultation on the pay offer with the company’s workers. He lost the gamble when 55% of staff unexpectedly rejected the proposal, which was for a 7% increase over four years. Janaillac held a short press conference late Friday to announce his planned resignation. While it has slid under the US news radar, Air France workers have hosted 13 days of labor action, joined by pilots, cabin crew, and ground staff since February, on several occasions paralyzing transit across Europe.

Meanwhile, the rejection of Janaillac’s proposal, and his resignation, has only strengthened the strikers’ position. A majority of labor representatives need to approve a compensation package for a deal to take effect.

Meanwhile, the European travel chaos is set to get worse as travelers with Air France tickets whose flights are delayed or cancelled can rebook at no additional cost. Travelers should expect last-minute delays and cancellations.

Janaillac’s struggle with the airline’s unions is in many ways emblematic of Emmanuel Macron’s broader push to liberalize France’s restrictive labor laws and cut taxes on investment, which he believes will help boost growth in one of Europe’s most anti-business economic climates.

Not surprisingly, most of the French government has backed Janaillac in his struggle to keep wages contained. To that end, French Finance Minister Bruno Le Maire on Sunday expressed his concerns about the company’s future and said that its workers need to show “responsibility” and accept that they can’t demand unrealistic wages, because the French government – which owns 14% of the company – won’t bail out the airline if it sinks into bankruptcy.

“If it doesn’t make the necessary efforts to be at the same competitive level of Lufthansa and other major airlines, it will disappear,” Le Maire said on BFM TV. “I am not taking the money of the French and putting it in a company that isn’t at the required competitive level.”

Transport Minister Elisabeth Borne also applauded Janaillac for trying to solve the company’s myriad problems.

The former CEO had put his job on the line, taking a tremendous gamble by holding a vote on the company’s pay offer. He lost his gamble when 55 percent of staff unexpectedly rejected the proposal, which would’ve offered a 2% wage hike in 2018 and a further 5% hike over the following three years, Reuters reported. Janaillac held a short press conference late Friday to announce his planned resignation.

Other large European airlines like Deutsche Lufthansa AG and British Airways, and even low-cost specialist Ryanair Holdings Plc, have all had their share of corporate dysfunction brought on by strikes – though none have suffered like Air France.

A simmering conflict exploded in late 2015 when two of the airline’s executives were physically assaulted by enraged workers, forcing them to flee and scale an industrial fence as their business suits were ripped to shreds – a poignant image of the burgeoning struggle between labor and management.

French unions have accused the company of not being serious about negotiations.

“The absence of any dialogue is clear. No one has called me this weekend. There are still no meetings planned for further negotiations,” Philippe Evain, leader of the SNPL pilots union told RTL radio.

The company’s board will decide on a management transition plan on May 15.

Finally, courtesy of Bloomberg, here are some analyst reactions to the CEO’s departure and the price action:

KEPLER CHEUVREUX (rating, PT under review)

  • CEO to leave co. this month is “sad news,” given strong track record; sees risk of months of uncertainty ahead; can’t rule out more short-term disappointments
  • Medium-term cost-saving targets could be at risk if co. agrees to higher compensation than offered so far
  • Current strikes likely to further increase reputational damage, affect yield and profitability performance in coming months

BERNSTEIN (underperform)

  • This result is “worst possible outcome,” leaves co. with no CEO, no labor contract, an ongoing dispute and likely “emboldened” unions

ING (hold)

  • Co. has entered period of uncertainty, is “probably without clear direction”
  • Notes Janaillac was strong manager, experienced in negotiating with unions without losing his focus
  • For investors the “no” vote should be a step in the wrong direction for AF KLM’s future

RAYMOND JAMES (market perform)

  • Uncertainty looms with change in leadership and potential for further strikes, following “shortsighted ‘no’ vote”
  • Shares already reflect a negative scenario; co. likely “to remain more of a trading stock,” reflecting relatively high earnings leverage/volatility

The bottom line: Air France is the poster child of what happens – and will happen – as companies in the new normal, accustomed to artificially high wages, are confronted by their workers with demands for higher pay.  Expect many more “Air Frances” in the coming months.


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Author: HEDGE

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