LONDON: Staff chaos at Air France-KLM has allowed rival IAG to fly ahead. The Franco-Dutch airline warned on Friday that much of its 2018 operating profit will be wiped out by French strikes. Higher fuel charges and increased competition are creating headwinds for all carriers. But British Airways owner IAG's success in slashing costs helps protect its bottom line.
Thirteen days of industrial action this year plunged Air France-KLM into the red for the first three months of the year, even though it carried 22 million passengers, a 5 percent increase on the same period in 2017. Staff walkouts accounted for most of the 2.1 percent increase in costs per seat and kilometre flown. By contrast, IAG reported an operating profit of 280 million euros for the quarter, a 75 percent increase year-on-year. CEO Willie Walsh impressed investors with a near 6 percent cut in non-fuel costs.
Cutting expenses is even more crucial as airlines grapple with rising oil prices. In the past year, Europe's five biggest carriers spent 17 billion euros on fuel, compared with operating profit 9 billion euros, according to analysts at Bernstein.
That drag is going to increase. Air France now expects this year's fuel bill to rise by 350 million euros - up from a projected 150 million euro increase three months ago. Hedging contracts will help IAG absorb some of the ups and downs, but it cannot escape the rising trend.
Air France-KLM's ability to stop strikes and get a handle on its costs rests on a pay vote, the results of which are due Friday evening. Chairman and CEO Jean-Marc Janaillac has threatened to quit if staff reject his offer of a 7 percent pay rise over four years.
The diverging fortunes are reflected in the two airlines' valuations: after a 4 percent share price uplift on Friday morning, IAG's enterprise value is more than 5 times its historical EBITDA. Air France-KLM, which saw its shares drop 7 percent, trades on a multiple of just 2 times. Unless French labour relations improve, the two will continue to fly at different altitudes.
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