The privatisation of Air France may now be delayed until late 1999 as a result of weak market conditions, political opposition and investor fears of further labour troubles.

Originally scheduled for summer 1998, the sale of a 20% stake in the company on the Paris bourse has been delayed by a pilot strike and the ensuing four-month long labour negotiations. The government now says a share issue will take place in February or March, but according to some airline analysts and investors, it will need more time.

Air France concluded an agreement with the majority pilots union, SNPL, in October which aims to bring cockpit costs down to that of its main European competitors, British Airways, KLM and Lufthansa. This is to be achieved through a seven-year pay freeze and a "shares for pay cuts" deal. After years of volatile, strike-ridden management-employee relations, the deal promises to bring labour peace. Three months notice must be given before strike action.

The company still believes it can achieve FFr500 million in annual savings, although this depends on how many pilots opt to take up company shares - up to 12% of equity - in return for a 15% pay cut. If pilots take more than 4%, they will gain a non-voting seat on the management board. Air France has also agreed to hire 640 pilots, and a further 100 annually, and will limit subcontracting, according to SNPL.

While management waited for pilots to agree to the accord - the results of a ballot were due in mid-December - it was also faced with demands from flight attendant and ground staff unions for the pilots' pay deal to be extended to them. Some unions are opposed to any opening up of the company to capital and they have a powerful ally in government, the communist transport minister Jean-Claude Gayssot.

According to a Paris-based airline analyst, the spring float date is "too early". The pilot deal is a "-leap forward, but the market now needs time to see if the unions do what they have been saying they will do," he says. Other analysts, such as Chris Avery at London-based Paribas, point to the postponement of the IPOs of Austrian Airlines, and the computer reservation system company Amadeus (owned by four major airlines), and question whether the downturn in the airline cycle will further delay Air France's market debut.

Some analysts are more optimistic, pointing to the French government's determination to push ahead with the sale of France Telecom, despite faltering stock markets.

Air France is considered an attractive investment, being Europe's third largest carrier and dominant in its home market, while its Paris hub offers great potential for growth. It has a high proportion of point-to-point traffic, but transfer traffic is relatively low compared to other European hubs. Air France has transatlantic codeshares with Continental and Delta, but has yet to join a global alliance.

Finding a strategic partner and alliance before going to the market, as Iberia has done, would be the most astute move for the French flag carrier.

Source: Airline Business