November 30, 2018 / 9:29 AM / 13 days ago

Air France weighs Joon closure as new CEO seeks labor deals

PARIS (Reuters) - Air France-KLM (AIRF.PA) is mulling the closure of Joon, its newest airline brand, company sources told Reuters, in an about-face that could help new boss Ben Smith address the chronic underperformance of the main Air France business.

FILE PHOTO: Logos of Air France group airlines companies are projected on a screen during a news conference for the launching of Joon, the new lower-cost airline subsidiary of Air France in Paris, France, September 25, 2017. REUTERS/Charles Platiau

The discussion about scrapping Joon, which has not been decided, may be a sign of the Canadian chief executive’s determination to tackle weak Air France profitability head-on rather than mitigate it with lower-cost secondary offerings, as many of his predecessors have tried and failed to do.

The new CEO “has made clear he doesn’t understand the positioning or identity of Joon,” one Air France source said. “It’s a question he’s raised internally, several times.”

An Air France-KLM spokeswoman said “no decision has been made” on the future of Joon, when contacted by Reuters. She declined further comment.

Smith, hired in August to restore peace and prosperity to the Franco-Dutch group after devastating strikes that led to his predecessor’s resignation, has said Air France must narrow the profitability gap with its more efficient KLM stablemate. The Dutch carrier recorded an 8.8 percent profit margin last year, more than double Air France’s 3.7 percent margin.

The former Air Canada second-in-command is now urging Air France pilots to relinquish some perks if they want more pay rises, two people familiar with the matter said. That may include giving up downtown hotels and sleeping at the airport on long-haul layovers, as their KLM colleagues already do.

Layover accommodation is just one aspect of the complex accords now up for renegotiation with pilots’ unions - who are pressing for a 4.7 percent pay increase in addition to the 4 percent company-wide raise negotiated last month to offset real-income erosion during earlier pay freezes.

“We’ve always had downtown hotels as part of our package,” one pilot union official said. “It’s not really our job to hang around at airports for two days, as nice as they are.”

By winding down Joon, created a year ago, Smith could actually foster staff goodwill and help reach cost-saving agreements for Air France and its other two brands - low-cost operator Transavia and domestic short-haul Hop. Strikes earlier this year wiped 335 million euros ($381 million) off earnings.

Created by his predecessor Jean-Marc Janaillac to replace Air France on the least profitable routes, Joon combines standard company pilot contracts with 540 cabin staff on lower-cost terms. But it has proven unpopular with clients, employees and investors alike.

“The intention to get rid of Joon would be understandable,” said HSBC analyst Andrew Lobbenberg. “You’ve got a whole new business created with all the complexity and cost, just to get a handful of cheap cabin crew - that’s not rational.”

Smith “should be negotiating what he can get in terms of productivity and efficiency across the whole Air France group, against which he trades the closure of Joon,” Lobbenberg added.

The decision may be swayed by growing discontent among Joon cabin crew, who recently threatened fresh strike action unless pay and conditions are improved.

“When Ben Smith got here, he said to us, ‘What is this Joon thing?’,” another Air France union official said. “That’s more or less what we’ve been saying all along.”

Reporting by Laurence Frost; Editing by Tom Brown and Adrian Croft

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