(Bloomberg) -- Air France-KLM Group plans to create a new long-haul airline to fend off Persian Gulf rivals and will scale back short-haul ambitions as new Chief Executive Officer Jean-Marc Janaillac pushes to revive a company beset by internal strife and waning market share.
The group will establish a French arm parallel to Air France aimed at turning a profit in “ultra-competitive” long-haul markets, Janaillac said Thursday. The project, identified for now as Boost, “will not be low cost” and will draw pilots from Air France on a voluntary basis while flight attendants will be hired from outside the company. The unit will get 10 planes by 2020, with new routes comprising a third of its flights. The group's European point-to-point flights will operate only under the Hop! and Transavia brands as of next year, with the Air France and KLM names reserved for network operations.
Jean-Marc Janaillac
Janaillac's nine-point business strategy also includes increasing annual revenue about 10 percent to 28 billion euros ($31 billion) by 2020 and reducing costs by more than 1.5 percent. It's a response to new long-haul competition from low-cost European carriers such as Norwegian Air Shuttle ASA as well as growing Gulf airlines including Dubai-based Emirates. The CEO is seeking to balance operational changes with demands from labor unions that have led to profit-sapping strikes in recent years.
“We shall be fighting back on every front,” Janaillac said in his first major strategy statement since taking charge in July from predecessor Alexandre de Juniac. “The status quo is not an option.”
Air France rose 6.5 percent to 5.78 euros as of 4:52 p.m. in Paris, heading for the highest closing price since July 18. That pared the stock's decline this year to 18 percent, valuing the airline at 1.74 billion euros.
Balancing Pricing
The company didn't specify how much it will invest to create or run the new carrier, whose name hasn't been finalized but will include Air France in its branding. It will aim for reduced costs to be competitive with “aggressive” pricing from Gulf-based carriers, though fares shouldn't be lower than the main carrier's offerings, Janaillac said in a Bloomberg Television interview.
“The goal is not to have cheaper fares,” Janaillac said. “The only goal is to stop us from losing money. If we reduce costs by 10 percent and the fares are 10 percent cheaper, that won't solve our problem.”
The Air France brand is currently losing money on 35 percent of its routes, with 10 percent of those involving “heavy” losses, he said. At the Dutch division KLM, 15 percent of routes are unprofitable. Earnings are an issue particularly for flights serving China, Thailand and India, he said. The new unit is intended to reconquer those routes with a less elaborate product aimed more at a younger audience. Business class will still offer lie-flat seats, he said, though the service will generally be “simpler,” he said, without elaborating.
Transavia will limit service to the French and Dutch home markets rather than seeking to compete with low-cost carriers elsewhere in Europe.
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The new strategy is “all stuff that was put in place by the previous management,” Oddo Securities analyst Yan Derocles said. “The only new element is Boost, but it's not clear how that will be profitable. And they haven't even negotiated the creation of the new airline with unions.”
Janaillac needs to persuade pilots in particular to accept the idea of a separate carrier with more liberal work rules. The last time management sought to do something comparable was when de Juniac announced plans for a new European low-cost airline. Pilots responded with a two-week walkout in 2014 that cost the carrier about 500 million euros.
Janaillac also announced his first senior management change, assigning Franck Terner, 56, currently head of Air France-KLM's engineering and maintenance unit, to run the Air France brand, succeeding Frederic Gagey. The new configuration may prepare the ground for fresh labor negotiations by bringing in someone who hasn't battled with pilots and flight attendants for the past three years. Gagey will become group chief financial officer, as current CFO Pierre-Francois Riolacci leaves the company.
Court Case
Air France has repeatedly failed to get pilots to commit to productivity improvements. While it won a court case against the employees, Air France held back on imposing the new work terms for fear of further strikes.
The need for change was highlighted as third-quarter operating profit slumped 16 percent to 737 million euros. Terrorist attacks in Paris and other French cities have depressed tourist and business travel, and seat overcapacity across European markets is weighing on fares.
“There's lots of uncertainty surrounding the economic rebound, and the geopolitical situation has been worrying, especially with the consequences of terrorist attacks on European destinations, particularly France,” Riolacci said.
To contact the reporters on this story: Andrea Rothman in Toulouse at aerothman@bloomberg.net, Caroline Connan in Paris at cconnan@bloomberg.net.
To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net, Christopher Jasper, Tom Lavell
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