AIR FRANCE likes to present itself as a cut above other European airlines. Offering fancy French food and free champagne in economy class on long-haul flights, the company’s strategy is to justify its high ticket prices by offering a premium service. But facing intransigent unions at home and competition from abroad, the airline’s financial fizz is rapidly going flat.
A drawn-out fight with its unions has toppled the boss of its parent group, Air France-KLM, yet again. On May 4th Jean-Marc Janaillac, its chief executive, resigned after its workers voted against a pay rise of 7% over four years. His predecessor, Alexandre de Juniac, left two years ago after two executives had their shirts violently ripped off by a mob of angry workers over a restructuring plan. The latest resignation is more serious because investors are also losing their rag. Air France-KLM’s shares have halved in value since January; over the same period those of rival carriers such as IAG and Ryanair have risen.
Air France’s trade unions are demanding an immediate pay rise of 5.1%. That looks bearable set against profits of €1.5bn ($1.8bn) last year. But a decent-looking performance in 2017 owed much to low oil prices. Its finances are weakening fast. Mr Janaillac had warned of a big drop in profits this year. A series of 14 one-day strikes has already cost Air France at least €300m in recent weeks.
The threat of Air France’s inflated cost base swelling further scares investors, says Daniel Roeska of Bernstein, a research firm. Some Air France pilots may earn two to three times as much as those at Europe’s biggest low-cost carrier, Ryanair. Since 2012 Air France has made much less money than its rivals (see chart). Rising fuel costs, only half of which are hedged, and a squeeze on fares caused by airline overcapacity in Europe threaten to plunge Air France into the red sooner than its peers. A huge debt pile also leaves the group looking vulnerable. Ross Harvey of Davy, an investment firm, says its net debt last year (including leases) was 2.4 times gross operating profits, compared with 0.4 for Ryanair and 0.7 for easyJet and Lufthansa.
Other flag-carriers across Europe have also been squeezed, on short-haul routes by the rise of low-cost outfits and on long-haul routes by carriers from the Middle East and China. But their answer has been to slash costs to return to the black. IAG has forced through big cuts to jobs and pay at British Airways and Iberia of Spain, as has Lufthansa in Germany. Facing intransigent unions, Alan Joyce of Qantas in Australia even grounded his airline until they caved in. All have launched their own low-cost carriers to take the fight to their new rivals.
Unable to make much headway against the unions, Air France’s management chose another track. After cancelling Mr de Juniac’s proposed restructuring, Mr Janaillac launched a plan to cover the airline’s costs by improving service and by lobbying in Brussels against low-cost and Middle Eastern competitors.
Neither will save the airline in the long run, says Andrew Charlton of Aviation Advocacy, a consultancy based in Geneva. Most flyers these days choose airlines on price, using comparison websites, and not on service. And competition from other EU carriers is now a greater threat than those from the Gulf. Cheaper carriers such as easyJet, Norwegian and IAG’s low-cost outfits are expanding at Air France’s main hubs in Paris. It is years behind IAG and Lufthansa in building up a low-cost arm.
The need to deal with the unions and revamp the airline’s strategy at the same time means that replacing Mr Janaillac—who was supposedly an expert in dealing with difficult French unions—is like finding the “impossible man”, reckons Mr Roeska. But whoever it is will at least have support from the French state, which owns 14.3% of the airline. The idea that it would always bail out the carrier is changing. On May 6th France’s finance minister, Bruno le Maire, refused to “soak up Air France’s losses” and said the airline “will disappear” if it does not become more competitive.
The group is unlikely to go bust. Air France is propped up by profits at KLM, whose unions have compromised on pay. But the government wants Air France to be firm with its unions, partly to thwart opposition to reforms it is pushing through elsewhere. It is already in a fierce battle with the rail unions over President Emmanuel Macron’s flagship reforms and does not want to budge an inch in this confrontation. Flyers and investors in Air France should brace for more strikes.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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