PARIS (Reuters) - The hunt for a new chief executive to lead Air France-KLM, a group hobbled by union resistance to cost-cutting at its French brand, is testing President Emmanuel Macron’s resolve for a lighter state touch on the economy.

FILE PHOTO: An Air France Airbus A320 airplane lands at the Charles-de-Gaulle airport in Roissy, near Paris, France, May 9, 2018. REUTERS/Christian Hartmann/File Photo

Macron's government has told the Franco-Dutch airline group its very survival is at stake if it fails to become more competitive and undergo the painful reforms completed by carriers such as British Airways ICAG.L and Lufthansa LHAG.DE as they battle low-cost airlines and Gulf carriers.

In what would signal a subtle shift in French industrial strategy, two sources familiar with Macron’s thinking said the government is open to considering a non-French national as chairman of the group for the first time.

This chairman would sit above one chief executive for Air France, who would almost certainly be a French national, and one for KLM, one of the sources said.

It is just one option on the table. Macron’s office expects to receive a shortlist of candidates from the group’s interim management by the end of next week, a third source familiar with the matter said.

The Air France-KLM group AIRF.PA has been led by French chief executives since its formation in 2004, a demand of the French state, its largest shareholder and one with heavy influence over the group's board thanks to its outsized voting rights.

The last, Jean-Marc Janaillac, resigned in May after losing a fight over pay with Air France staff. His role as group chief executive and chairman as well as chairman of the Air France unit has prompted a rethink of the structure.

Paris’ readiness to consider a foreigner to oversee a revamp of the airline’s strategy and negotiations with Air France unions reflects Macron’s desire to create pan-European companies that can withstand globalization, even if that means placing control of a national asset in foreign hands.

“What we want to do is to create European champions,” a finance ministry official said, speaking on condition of anonymity. “It’s not of primary importance that the boss has to be French.”

“It wouldn’t worry us if we ended up with an aviation specialist from Europe.”

Delta Air Lines DAL.N and China Eastern Airlines 600115.SS, which both hold 8.8 percent stakes in Air France-KLM, declined to comment.

Two names have leaked to media in past weeks. Philippe Capron, the financial head of Veolia Environnement, pulled out after French ministers said they wanted an aviation specialist and that he was one of several candidates.

Le Figaro reported on Monday that Catherine Guillouard, chief executive of French public transport group RATP, was being considered for the top job at Air France-KLM. Two sources told Reuters she was not an official candidate.

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INVESTOR PRESSURE

The job of Air France-KLM chief executive may not be one that widely appeals.

The next company chief will face the unenviable task of having to break union resistance to reduce Air France’s swollen cost base, while keeping increasingly frustrated Dutch KLM staff onside. A wave of strikes this spring at Air France over pay cost the group some 350 million euros ($410.97 million) and led to the ouster of Janaillac.

Sources say KLM officials are frustrated at French staff’s chronic labor conflicts and blame Air France’s weak handling of the powerful SNPL pilots’ union for the group’s fragile state.

Investors are frustrated too. The group’s share price has slumped 47 percent so far this year.

Asked recently if the group could have a Dutch chief executive, KLM CEO Pieter Elbers responded: “why not?”

The pressure from investors to slash costs has intensified as rising fuel costs and overcapacity squeeze margins.

Finance Minister Bruno Le Maire warned after Janaillac quit that he would not soak up the airline’s losses.

Overseeing a restructuring of Air France-KLM would cement Macron’s reputation as a reformist and modernizer.

“Restructuring ... is what is required to move Air France-KLM forward. Anything else will be history repeating itself,” said Bernstein analyst Daniel Roeska.

STATE EXIT?

Macron could go further and sell-down France’s 14.3 percent stake in Air France-KLM, a move that would deliver a potent message that he is serious about liberalizing the economy.

The state’s exit from the airline group would hand its leadership more freedom to stare down the unions.

“(IAG chief executive) Willie Walsh just stared them down until blood came out of their eyes and they gave up,” said aviation consultant Andrew Charlton.

AccorHotels ACCP.PA announced last month it was looking at buying all or part of the French state's stake - an option the government has not closed the door on but which faces obstacles.

“The government is studying things and is closed to nothing, but the first priority is to find a new leadership team for Air France-KLM,” the finance ministry official said.

AccorHotels’ overseas investors could, however, complicate any deal. Its main investors are from China and the Gulf, whose own airlines compete with Air France-KLM on long-haul routes.

European Union rules also require more than half of a European airline’s capital to be held by member states or EU nationals.

“Accor’s capital today is not sufficiently European for it to work,” said a second source familiar with the discussions. There would, however, be ways to overcome this, analysts say.

The state’s holding remains an open question. Nonetheless, analysts are encouraged by broader comments on the future of Air France-KLM coming out of the French finance ministry.

“The noises heard out of the finance ministry definitely signify a change in attitude toward Air France-KLM from the French state, said Roeska. ” And they fit with Macron’s wider strategy.”