Air France joins the club class

28th July 2003, Comments 0 comments

France's state-run airline Air France is to be the first of the 'cash cow' major privatisations rushed through by the new centre-right government this year. Hugh Dent reports on the history of a pig which now flies.

The French government signalled in September that it is pushing ahead with the full privatisation of Air France in order to raise much needed cash to fund the budget and help solve a crisis at France Telecom.

An un-named government source dropped a heavy hint that the recently elected conservative government would present a draft privatisation bill to parliament in the next few months - even though investor sentiment towards stocks is very weak.

Trades unions at the airline have called a strike for October 3, against privatisation and to back actions the same day in the French state-controlled gas and electricity industries in support of public services.

Air France, once a lame duck but now flying high, is showing commercial confidence at a time when many airlines, particularly in Europe, and its main European rival BA (British Airways), are struggling - partly because of competition from low-cost carriers.

The French airline, which continues to benefit from high brand loyalty on its home market, is trying to extend a network of alliances. This contrasts with the crisis 10 years ago which began with the amalgamation of French state-owned airlines.

 It culminated in near bankruptcy for Air France, not to mention strikes, a state rescue totalling about FF 20 billion between 1994 and 1997, and finally an order from EU authorities that it be privatised and refrain for a period from aggressive fare pricing abroad.

Many airlines, including BA, protested against the rescue, which involved 8,000 job cuts.

In February 1999, the state privatised 20 percent at EUR 14.2 per share to raise EUR 610 million (at the then rate) - a fifth of the company and a fifth of the rescue total. The state was then left with 62.6 percent. Staff and pilots also own part of the company. In mid September, shares traded at EUR 10.3.

The bill, unveiled to the airline's works council on September 11 when company president Jean-Cyril Spinetta gave assurances on jobs, is expected to reduce the state's holding from 54.4 percent to less than 20 percent.

The government is still counting on funds from a privatisation programme, albeit delayed, to fund its election promises to cut taxes and social charges.

It is using the former lame duck as a form of "cash cow" - in business jargon - because its need for such income has risen in the three months since it was elected. This is because prospects for growth and tax revenue have slowed and liabilities have risen, notably with a likely charge of about EUR 9 billion to rescue France Telecom.

The source said: "The file is moving along. Details have not yet been worked out but the government intends to present a draft bill this fall."

On September 4 the airline reported an 18.5-percent fall in first-quarter net profit to EUR 159 million (USD 157.7 million), from EUR 195 million in the same period in its last fiscal year.

But the carrier said it had held up well in a "particularly difficult" market, raising its market share in Europe to 17.5 percent in the April to June period to become the region's number one operator.

The company said first-quarter operating profit fell 34.8 percent to EUR 165 million from EUR 253 million last year, derived from sales of EUR 3.315 billion compared with EUR 3.374 billion posted in the first quarter 2001/2002.

Junior Transport Minister Dominique Bussereau said that Air France was seeking a commercial relationship with Dutch KLM, and was in contact with Alitalia of Italy. "If we can build a large European network around Air France, based on cross-held stakes among airlines, it would be a gain for Air France personnel, France and the French people."

The leader of the opposition Socialist Party, François Hollande, said that his party would oppose privatisation, rejecting the principle and the timing. "Air France is a company which has carried through its recovery and has balanced its finances with the established statutes. It is one of the rare (airline) companies in the world to have succeeded in doing this after the events of September 11 2001".

Air transportation, he added, was "essential for the nation". Therefore the Socialists would oppose privatisation.

September 2002

Copyright AFP

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