Air France primed for privatisation

To the surprise of many observers, the French finance ministry hasselected the national airline as the first of 13 state-owned companies to beput on the market. Lara Marlowe reports

The privatisation of state-owned companies was a key promise in President Jacques Chirac's re-election campaign and the legislative poll that followed.

In his general policy speech at the beginning of July, the new right-wing prime minister, Mr Jean-Pierre Raffarin, said: "The state has a vocation to withdraw from competitive sectors, except where strategic interests are at stake."

In mid-July, the French Treasury issued invitations to tender to investment banks to participate in the privatisation of 13 state-owned companies.

This week, the ministry of the economy, finance and industry announced that Air France - not the gas and electricity company EDF-GDF as many had expected - would be the first to be put on the market.

As the former chairman of the world's largest steel company Arcelor, the Finance Minister Mr Francis Mer is an astute businessman.

He sat on the Air France board for three years and understood that Paris could send a positive signal by starting its privatisation campaign with its most desirable property. The economic daily La Tribune called the airline "a symbol", "a model of recovery" and "a champion of profitability".

Like other airlines, Air France has suffered since September 11th. But it weathered the crisis better than most of its competitors. Profits dropped 63.7 per cent for the financial year that ended on March 31st, to €153 million, but Air France remains, with Iberia (whose profits were €50 million) the only profitable airline in Europe. By comparison, British Airways lost €333 million, Lufthansa €633 million, our own Aer Lingus €140 million and Alitalia €907 million.

Air France is now the third most profitable airline in the world, following Singapore Airlines and the Australian Qantas. In terms of passenger kilometres flown, Air France ranks sixth at 95.8 million, after four US airlines and British Airways.

While other companies cut back, the French airline increased turnover by 2 per cent over the past year. With Roissy-Charles-de-Gaulle Airport as its hub, it raised its market share in Europe from 15.4 per cent to 16.9 per cent.

Nine years ago, Air France was on the verge of bankruptcy after a severe strike. The then prime minister, Mr Edouard Balladur, hired Mr Christian Blanc to save it. Mr Blanc cut costs, closed down unprofitable routes, froze salaries and absorbed the former domestic airline, Air Inter. But in 1997 Mr Blanc clashed with the socialist prime minister, Mr Lionel Jospin, who refused to privatise the company.

Mr Blanc was replaced by an executive with left-wing credentials, Mr Jean-Claude Spinetta. Mr Spinetta continued in the same vein, building partnerships with other airlines and taking over African routes lost by Sabena, Swissair and Air Afrique.

Mr Spinetta will now oversee the privatisation that Mr Blanc so badly wanted.

During Mr Blanc's four years at Air France, Paris spent €3 billion in state funds to subsidise the airline. Brussels refused to allow the practice to continue and Mr Jospin was forced to accept partial privatisation in February 1999. The state's ownership fell from 97.3 per cent to 54.4 per cent. Now the Raffarin government intends to sell about 35 per cent of the company in late 2002 or early 2003, reducing its share to less than 20 per cent.

The 1999 flotation was delayed by a pilots' strike in June 1998 - just before the World Cup - which cost the company €200 million. The pilots accepted lower salaries in exchange for shares and now own 8 per cent of the airline.

Other Air France staff hold another 5 per cent, giving 55,000 employees 13 per cent of the company. Some unions would like to raise staff participation to 25 per cent in the upcoming flotation.

In June 2000, Air France introduced the SkyTeam partnership with Delta Airlines, Aero Mexico and Korea Airlines. The Czech airline CSA and Alitalia have since joined.

The statement issued by the finance ministry at Bercy this week said the privatisation would allow Air France "to speed up the modernisation of its fleet, consolidate its alliances and establish partnerships".

The French company and Alitalia are about to conclude a 3 per cent share swap. Rome will reduce its ownership of Alitalia from 62.4 per cent to 30 per cent by the end of 2003. Mr Spinetta attended an Alitalia board meeting for the first time this week, after inviting his Italian counterpart to a recent Air France board meeting.

Less than six months after the July 2000 Concorde crash, Air France's share price reached an all-time high of €25.60, in January 2001. In March 2001, the company reported its highest profits: €421 million.

The finance ministry noted that Air France shares would be sold "when market conditions permit it". At €13.69 on Monday - for a Bourse capitalisation of about €3 billion - market analysts said the share price was undervalued by nearly 30 per cent.

On the strength of the announcement, the share price rose 4.09 per cent on Tuesday, to €14.25. The finance ministry is expected to wait until the price reaches around €18 to initiate its privatisation, which would bring close to €1.3 billion to government coffers.

Two other conditions must be met before the privatisation takes place. The French parliament will pass a draft law, to be inserted in the finance bill in mid-October. The law will ensure the company's traffic rights, and forbid non-European shareholders from buying more than 50 per cent of the company. In most western countries, foreigners are not allowed to buy airlines.

The other condition - mentioned in the finance ministry's seven-paragraph announcement - is "a phase of consultation with employees that will make it possible to fully take account of their interests".

Analysts do not expect major difficulties, since lengthy negotiations preceded the first flotation in 1999. The most negative assessment came from the former transport minister, Mr Jean-Claude Gayssot, the communist who sacked Mr Blanc for demanding Air France's privatisation.

The Raffarin government's decision follows "the same logic that leads private companies like British Airways to fire people and shut down routes, or to bankruptcy as was the case with Swissair and Sabena", Mr Gayssot said.