FLUG REVUE May 2006: Air France/KLM on profitable track

May 2006

AIR FRANCE/KLM BUILD ON SUCCESS

By Sebastian Steinke

The Chairman and CEO of Air France (AF), Jean-Cyril Spinetta, seems to be bursting with strength: “We have made a profit every year for the last nine years. Even in the difficult industry crisis after 11 September we did not slide into the red in 2001/2002,” says the Président Directeur Général on the occasion of the opening of the new operations centre for aircrew in Paris. He goes on to add, “we have even succeeded in raising our market share in Europe in the last ten years from 13 to 18 percent. Our fleet has grown from 200 aircraft to 260. If you include our regional subsidiaries, we now have 360 aircraft and, with KLM, about 500. We are the number one in Europe.”

The difficult integration of KLM, under which the long-established brand and the Amsterdam hub have been retained, appears to have been a clear success: according to figures for the third business quarter 2005/2006 reported in mid-February, the Air France-KLM Group's sales had risen by 12.4 percent to Euro 5.43 billion. Net profit rose from Euro 20 million for the last quarter of 2004 to Euro 77 million for the last quarter of 2005. In the last nine months of 2005, the profit margin rose by 2.2 percent to 5.8 percent while net profit was up by 24 percent to Euro 906 million, even though fuel costs had at the same time risen by 27.4 percent to Euro 1 billion. According to Air France, the Group's combined market share in Europe is around 30 percent. Calculated by turnover, the Air France-KLM Group is the biggest airline in the world.

The time is therefore nigh for fresh onslaughts on the German market. Accordingly, on 26 March the French resumed a service from Paris Charles de Gaulle to Leipzig in Saxony which had been suspended many years ago but will now be operated twice a day by Air France's subsidiary Régional using a 50-seat Embraer 145 jet, complete with leather seats and full AF on-board product. The flight times are co-ordinated with 225 connecting flights from Paris, including to tourist destinations. Among them are services to North America and the Caribbean, and also to Johannesburg and Hong Kong. As far as the new flights to Leipzig are concerned, Air France is now hoping that the numerous French companies which have settled in the central German industrial and chemical triangle will provide the necessary demand to fill the offered seats.

Frank Silvy, Director Sales Germany at Air France, explains: “The next item on our list of priorities is to increase the frequencies. Only then will we introduce a larger aircraft.” Bernard Bazot, who is in charge of the airline's German operations, confesses, “We are already thinking of additional destinations.”

The German regional airline, European Air Express, recently started up an additional strategic connection on behalf of KLM at the beginning of March: it now flies up to three times a day from Münster/Osnabrück to Amsterdam with the ATR 42. From other directions, too, Air France is encircling the German market through its SkyTeam alliance. Thus, its partner CSA alone operates nine German routes which are linked via Prague to international connections, especially in the Baltic and Poland.

This latest German offensive is strengthening the industry giant Air France is steadily gaining strength in relation to its European arch-rival, Lufthansa. Like the German flag carrier, the French see themselves as the provider of a full range of products and offer the traditional product spectrum of scheduled air services in every category of comfort and price, from the cramped Economy flight at discount price through to the luxurious First Class seat on overseas flights. At the top end of the market they offer both First Class (“L'Espace Première”) and a comfortable Business Class (“L'Espace Affaires”). Then, on European flights there is an Economy-Plus (“Tempo Challenge”) with improved seating and better catering, a regular full Economy Class (“Tempo”) and a separate domestic product within France. Here, following the model of the no-frills airlines and competing directly with the TGV high-speed trains which are a major competitor within France, they have introduced, for example, a single-class product known as “La Navette” (“the bus”). Every hour, and in peak hours as frequently as every half-hour, these domestic jets with limited on-board catering take off from the domestic airport of Paris Orly bound for Nice, Marseilles, Toulouse and Bordeaux.

There are even cut-price offerings on the long-haul routes, and with a two-class product. Similarly, the airline offers cheap flights from Orly to the French (and EU domestic) overseas territories in the Caribbean and the Indian Ocean on the special network referred to internally within Air France as “COI” for short. The older Boeing 747-300's employed on these routes are to be replaced between June and August by more fuel-efficient, brand new Boeing 777-300ER's But before that can happen the runways in Paris-Orly have to be reinforced.

The inexpensive fares that are only offered on these routes are possible thanks to the adoption of an extremely tight “Japanese” seating configuration in the restricted “Tempo” Economy and restricted “Alizé” Business Class, combined with state infrastructural aid which was granted after an EU-wide, fixed-period competition for connections to remote regions, known as public service obligations (PSO). easyJet recently came up against the power of Air France: when the rapidly expanding UK low-fares airline, which already carries eight million passengers per year from Paris, announced a parallel, non-subsidised direct connection from the Seine to Corsica, the French aviation authority blocked it, citing the special need of protection of the route rights granted to Air France up to October 2008.

Yet, according to Air France CEO Spinetta, the airline has no need of support from the state: “In 2004 and 2005, ten years after the market entry of the no-frills airlines, we experienced extraordinary recovery on our medium-range routes. This shows that the two business models can coexist. However, sometimes it is necessary to make minor adjustments to the products.” Thus, for example, starting on the Paris-London and Paris-Madrid routes, Spinetta has reduced the cabin crew by one member and slightly simplified the services offered. “All the passenger surveys tell us that the service is still rated as positively as before,” he says. “Price, service, punctuality and quality are all equally important.”

To reward the aircrew after the efforts to economise, Air France has invested Euro 230 million building a new operations centre for staff – the “Cité” – at Charles de Gaulle airport. In the centre of this building, which is optimised for speeding up operating sequences and is triangular in shape, is a central hall which serves as communications centre. Here around 3,500 air- and cabin crew report for duty every day, meet their crew colleagues, carry out their pre-flight actions, hand over their bags or wait in rest rooms on standby. But the most important innovation is the big staff car park with 4,300 parking places which is intended to eliminate the nightmare of trying to find somewhere to park at the start of work. As Spinetta explains, “We want to make everything run as gently as possible. After all, our passengers will benefit later on if the crew know each other and work well together.”

On the other hand, he is currently somewhat unhappy with his Paris hub airport, Charles de Gaulle: “We are the biggest airline in CDG, but we don't have enough room here. Sometimes we are only able to handle half our passengers through passenger bridges. The rest have to go by bus. No major airport in the world can function like that. Normally new airports are built with 100 passenger bridges. We need time to improve this. It is already hard work having to request such an expansion at the airport. The airports have to want to grow in the same way as the airlines.” At least in 2007 the handling situation should improve with advent of Satellite 3. In 2008 the renovated new terminal E will follow, and there are also plans for a Satellite 4.

Meanwhile, Spinetta is urging strict cost control. “Our costs must be at the level of the costs of our major competitors. Otherwise we will lose customers. The Internet is raising this pressure. At the same time we have to offer new features in the product and be better than the others. Today we have a good position and we are winning market share, not just in Europe. The conditions are favourable for this to remain so. Air France and KLM are developing synergies. That is something which BA and Lufthansa can't do.”

From FLUG REVUE 5/2006

Last updated 10 April 2006

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