Airline Weekly - September 15, 2014
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Airline Weekly - September 15, 2014

The Surge: Air France/KLM thinks Transavia can beat easyJet and others at their own game

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Cover Story

The Surge: Air France/KLM thinks Transavia can beat easyJet and others at their own game

Air France/KLM, it seems, knows how to right its wrongs. As detailed in Airline Weekly’s May 19 cover story, the airline faced an alarming streak of huge losses that galvanized it to cut capacity, reduce capital spending, renegotiate labor contracts, downsize cargo operations, upgrade longhaul products, reduce its equity exposure to Alitalia and fortify overseas alliances. The effort—dubbed Transform 2015—worked as intended, removing €1b from its cost base in just three years and producing a small operating profit in 2013, its first since 2010.

But the job isn’t done.

To restore the sort of profit margins it managed a decade ago, Air France/KLM is embarking on a new five-year plan, this one christened Perform 2020, which aims to overcome challenges like economic stagnation, geopolitical unrest, forex volatility and Gulf carrier incursions. It will modestly grow its longhaul network, cultivate alliances with carriers to its east (i.e., Etihad, China Southern and China Eastern) and expand its profitable maintenance business. Air France/KLM’s longhaul network, by the way, even with its many macroeconomic and geopolitical setbacks, produced more than $1b in profits last year, good for a solid 6% operating margin. Its maintenance division did nearly as well. Its catering division? Even better.

So what’s the problem?

Well, cargo for one, and efforts are under way to address that. But the real problem: Air France/KLM bleeds rivers of red ink on its shorthaul network, and although Transform 2015 made important progress in damming those rivers, they nonetheless remain red. Last year, shorthaul losses amounted to a massive $850m, nearly wiping out profits from the larger longhaul business. Why so bad? In a word, competition, not just from Europe’s countless other shorthaul airlines, including LCCs with far lower costs than Air France/KLM, but also high-speed trains and increasingly—CEO Alexandre de Juniac even mentioned this last week—the new phenomenon of ridesharing facilitated by firms like Uber.

Which is why, for all the company’s sensible reforms so far, a key pillar of Perform 2020 seems highly suspect. To right its wrongs within Europe, Air France/KLM will put its low-fare Transavia operation on steroids, growing it from 45 planes two summers ago and 53 planes last summer to more than 100 by the summer of 2017. Passenger volumes will jump from 9m to 20m. From the Netherlands, where Transavia originally developed and long held... (406 or 1,622 words)

Also Inside this Issue:

History is filled with armies that marched into battles they could not win. Will the same be true for Air France/KLM? Rather than retreat to its strongholds, it will instead march its Transavia unit headlong into the hornet's nest of point-to-point European shorthaul flying. As this week’s cover story suggests, the mission won’t be easy.

But that’s to be determined some other day. Today—and possibly for the remainder of this week—Air France must deal with a pilot strike motivated, as it happens, by disputes surrounding the Transavia offensive.

All this masks an otherwise positive story at Air France/KLM, whose recently completed restructuring program accomplished much of what it intended. The group’s finances are hardly stellar, but they’re much better than they were a few years ago.

The same is true for Air France/ KLM’s Brazilian partner Gol. By mimicking its U.S. partner Delta and slashing capacity, Gol sharply boosted margins, in a tumultuous macroeconomic environment no less. To sustain the momentum, the carrier is now chasing corporate traffic.

So, by the way, is Ryanair—how unlikely that would have seemed a few years ago. But by whatever means, Mr. O’Leary and company intend to keep growing well into the 2020s, supported by another big B737 order, this time for future-gen MAX jets re-designed to hold extra seats.

Ryanair joins other MAX buyers like Comair, which reported good first-half results, all things considered, and Southwest, which gave itself a new look as it expands its horizons to new places like Costa Rica.

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