PARIS/AMSTERDAM Air France-KLM announced a pay freeze for French staff and cutbacks in its fleet as part of a three-year plan to end financial rot at Europe's largest airline by revenues.
The belt-tightening, coming in the wake of a series of staff strikes, is the first stage of a politically sensitive turnaround plan expected to be completed after French presidential elections, now 100 days away.
The Franco-Dutch group pledged to cut debt by 2 billion euros $2.56 billion (1.66 billion pounds) by the end of 2014 and said it would shrink its fleet by shedding more than a billion euros from a planned expansion project.
The plan will also involve a combination of immediate and longer-term cost reduction measures, Air France-KLM said in a statement on Thursday.
"We needed to take these measures because our debt position and costs per unit were running too high, and because of losses on our domestic and European routes ... We do this to avoid getting into trouble later," said Peter Hartman, chief executive of KLM, the group's Dutch subsidiary.
Shares of the group rose over 7 percent to a five-week high earlier, ahead of the plan from Jean-Cyril Spinetta, who was restored as chief executive in addition to his chairman role last November, following months of underperformance compared to its rivals.
Unions expressed concerns over the impact on jobs of the restructuring plan, whose measures also include a general pay freeze at Air France during 2012 and 2013 combined with "wage moderation" at the Dutch sister airline KLM.
"We are angry because this is just a cost-cutting plan and we were looking for something more strategic," said CGT union representative David Ricatte.
Investors, however, may push for more information on redundancy plans. The airline is not expected to outline the employment impact until June, after the April/May elections.
The wage measures are part of a 1 billion euro package of immediate cost cuts that also include a continued hiring freeze.
Air France-KLM scaled down plans to grow capacity over the three years from 2012 to 2014 in an effort to improve the demand per available seat, a method of pushing up average revenue.
"Given the uncertain economic environment and the ongoing imbalance between transport supply and demand, the board deemed it necessary to opt for quasi stable capacity for the Air France-KLM Group in both passenger and cargo," a statement said.
To shrink its fleet and keep capacity in line with its more modest forecasts, Air France-KLM said it would defer deliveries of several Airbus and Boeing (BA.N) aircraft including two Airbus A380 superjumbos.
It pledged to cut planned investments in 2009-2011 from 6 billion euros to less than 5 billion euros by deferring deliveries and scrapping some purchase options.
But it reassured European planemaker Airbus EAD.PA that it would maintain an order for 25 of its latest model, the carbon-fibre A350. The future jet competes with the Boeing 787 for which Air France-KLM confirmed a similar-sized order last week.
A longer-term transformation plan will generate an additional 1 billion euros in free cash flow over three years, the airline said.
Air France-KLM set the pattern for a series of European airline mergers in 2004 with a tie-up between French and Dutch flag carriers. While keeping separate brands to take advantage of national access rights, they combined a wide range of functions behind the scenes including fuel and plane purchasing.
But despite a series of bitter labour battles the French arm fell behind KLM in reducing costs, leading to the ouster of CEO and French divisional head Pierre-Henri Gourgeon in November.
Alexandre de Juniac, a former defence industry executive and senior French finance minister official, was brought in to run the strike-prone French division and is tipped to replace Spinetta as chief executive within a couple of years.
(Additional reporting by Tim Hepher, Editing by Jon Loades-Carter, Bernard Orr)