The move, first announced in December, is both a reminder of the high costs that French companies face and a glimmer of hope for Greece, which could benefit from investment thanks to its lower labour expenses.

"Many employers are watching what will happen and the government's reaction to the relocation of air transportation companies," Fatiha Aggoune-Schneider, the head of France's cabin crew and pilots union, told Reuters.

"Today it is Air Mediterranee, but who will it be tomorrow?" she added.

French industry, whose contribution to the country's wealth creation has gradually shrunk, faces tough competition from global technological progress and cheaper production and labour costs in Southern and Eastern Europe and emerging countries.

Outsourcing issues have taken centre-stage in the country's political debate as President Nicolas Sarkozy, who is seeking re-election in May, has tried to engineer rescues for a handful of doomed factories from steel to lingerie.

High taxes for state pensions, health and unemployment benefits are impeding the country's competitiveness, he warned, calling on the French to work more.

France's loss could be Greece's gain.

For Nicholas Magginas, an economist at the National Bank of Greece, Air Mediterranee's move could be the start of a trend.

"Greece potentially could be a target, especially for those kinds of companies connected with the transportation sector, because it is a large tourism market, and if the environment stabilises and the macro-economic conditions improve, the attractiveness of Greece as a destination would increase," he said.

At the Franco-Greek chamber of commerce in Athens, President Christophe Hadzopoulos said efforts to increase Greece's competitiveness are paying off and investment is picking up again.

Yet Greece needs to regain political and social stability to encourage foreign investment and restart important projects, notably in the construction field, he said.

"There are big efforts from our European partners and the Greek government to reduce salaries in order to increase competitiveness," he said.

"Outsourcing to Greece could start becoming a trend, but it is not yet one. For now, there is no upturn in the economy."

LONGER HOURS

Air Mediterranee, a charter carrier based near Toulouse which flies to destinations including Egypt and Turkey, set up a redundancy scheme for 85 flight staff including cabin crew and pilots last November after failing to come to an agreement with unions on a productivity increase, its chief executive said.

Its Greek staff numbers about 100 and is rapidly growing.

"We are fighting against foreign airlines based in France, which have employment costs way inferior to ours," Antoine Ferretti told Reuters.

"What I see is that French flight staff do not work to the maximum of what the French law allows," Ferretti said, adding that unions had ignored the "extreme turmoil" faced by the sector.

The redundancy scheme was approved by the French Labour Ministry and the company's workers committee, allowing the company to move forward with its plans despite union calls for a strike and an appeal to the government in an open letter.

Now the airline plans to hire new flight staff under Greek contracts while it transfers five of Air Mediterranee's 10-jetliner fleet to its Greek unit, Hermes Airlines, created in June last year and which until today operated a single plane, Ferretti said.

"I could have kept more planes in France, but for that it would have been necessary for my staff to work more, within the legal framework," said Ferretti who operates mostly Airbus single-aisle passenger jets.

In April, Hermes Airlines will start flights to France, Israel and Italy from Heraklion and Rhodes.

The SNPNC-FO union said Air Mediterranee was trying to exempt itself from health and pension social charges owed by French companies, adding that some 30 staff were offered jobs in Athens for a salary of 900 euros per month, 30 percent below what they make today.

Ferretti denies having offered jobs in Greece to any of the 85 staff, let alone with a pay cut. Ferretti said the pay of Greek employees was in line with Greece as a whole.

"It is true that salaries in our Greek unit are lower than French salaries, but they are based in Greece," Ferretti said. "We have not offered anyone a pay cut in our Greek unit."

"The French market is contracting. Remaining purely French in this context is very dangerous," Ferretti added.

(Reporting by Alice Cannet; Editing by Christian Plumb and Jane Baird)

• A Permanent Economic Emergency