ANALYSIS: Air France-KLM wrestles with medium-haul challenge

By:   Alex Thomas
Source:

Speaking at its half-year results announcement in Paris on 30 July, group chief executive Jean-Cyril Spinetta said “priority number one is medium-haul” as it seeks to stem the losses made by that part of its business and return to profitability.

This flexible, three-pronged approach is the latest legacy attempt at answering the difficulties posed by the arrival of low-cost competitors into the marketplace.

Air France-KLM will grow the fleet of Transavia in order to take over flights operated by its parent carriers on “highly competitive routes”. In addition, an enlarged Transavia will offer flights to destinations not previously served by the group’s airlines, according to Spinetta.

However CTAIRA analyst Chris Tarry questions how co-operative Air France-KLM’s unions will be as restructuring gathers pace. “If they start putting Transavia on the Air France-KLM routes and withdrawing the legacy services, what are the unions going to say?” he asks. Tarry also wonders how many of Air France’s pilots will accept a lower salary and transfer to Transavia France, even with the generous lump-sum on offer.

And any upturn in Air France’s fortunes brought about by the restructuring may be used as an excuse to fight cuts to their terms and conditions, Tarry adds.

Peter Morris, chief economist of Flightglobal’s data and consultancy division, Ascend, believes the success of the strategy will depend on ticket prices. “The key thing you’re coming back to is that this is short-haul travel and one-way or another it’s about price,” he says. While acknowledging the issues surrounding long-haul feed, such as product continuity, he says: “Yes there’s a connectivity issue but the reason the low-cost carriers gained market share is because they put the right price in the marketplace for a high volume of the market.”

Morris believes that previous responses from legacy carriers to the low-cost threat “have been very similar so far. They’ve looked to reduce frequencies, they’ve looked to reduce aircraft size, they’ve looked to stop serving destinations”. Yet he says that “in a business which since time immemorial has grown economies of scale and volume growth, it’s quite a cul-de-sac strategy to say this is all about downsizing.”

However he is sceptical about whether restructuring will provide a solution to its problems.

“If there’s something they can do that gets a step-jump down in costs then yes, that definitely that buys some time, but ultimately they’ve always got that problem to deal with that the competitors, in one form or another, have a lower cost base and therefore can put a lower price in the market,” says Morris.

The SkyTeam carrier’s regional business unit, which includes the subsidiaries Britair, Regional, plus affiliate Airlinair is likely to be combined into a single brand and will have its fleet reduced by 21 aircraft. The group plans for the three airlines to operate flights to Paris Charles de Gaulle on Air France’s behalf and point-to-point flights from Paris Orly and across the French domestic network. Dublin-based subsidiary CityJet has not been included in the plans.

Air France’s regional base strategy, under which pilots and cabin crew work longer hours and are based in the French regions rather than Paris, is “highly reactive” according to Spinetta. “We’ll quickly close [routes] if they don’t work, he says”, while Air France chief executive Alexandre de Juniac says after the creation of bases in Marseille, Nice and Toulouse, there is now no chance of a similar base being created in Bordeaux, due to the size of the market.

Sourced by Flightglobal

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