ANALYSIS: Air France restructure targets seven key areas

London
Source:
This story is sourced from Pro
See more Pro news »

Alexandre de Juniac, chairman and chief executive of Air France, has delivered a damning indictment of the carrier's performance, claiming the airline shows "insufficient" regard to its customers, operates a long-haul business that is "moving in slow motion", and owns an MRO provider whose competitiveness is "wholly inadequate".

His comments are contained in an update on the company's restructuring programme, Transform 2015.

Executives and employees of the loss-making carrier have been working over the past three months to identify priority areas and objectives that need to be tackled in order for it to return to profitability. It will unveil its business plan addressing these seven areas in June after the French presidential elections.

Its short- and medium-haul business will undergo "extensive restructuring and a drastic reduction in costs" says de Juniac as it targets break-even for point-to-point operations in 2013 and the entire short- and medium-haul network by 2014.

Initial measures include growing budget subsidiary Transavia France "under its own or another brand", as it attempts to tap into the "growing leisure travel segment" and fend off the challenge posed by low-cost carriers EasyJet and Ryanair which are expanding in the French market.

It will also extend the roll-out of its recently-launched "regional commercial offensive" to the rest of the point-to-point network, including flights from Paris Orly, and the creation of a dedicated division to "optimise the working relationship between Air France and its regional subsidiaries."

However, de Juniac cautions that even if these proposals are fully implemented, "additional savings must be found in order to reach the break-even point in 2014".

Its long-haul operation also needs revamping and restructuring, says de Juniac. The division, he notes, was formerly the airline's "growth engine" but is now "moving in slow motion under the combined effect of the economic crisis, higher fuel costs, increased competitive pressure and higher costs than the competition".

De Juniac promises "significant investments" will be made in the long-haul product if sufficient money is saved through the Air France's cost-cutting and productivity drive.

Its cargo business - hit by both low overall volumes due to the stagnant global economy and "insufficient competitiveness" - will become more integrated with sister carriers KLM and Martinair, yielding improvements in "purchasing, fleet and business development".

De Juniac is equally scathing about the performance of its maintenance business, describing its competitiveness as "wholly inadequate". A series of reforms at the business will be implemented "as a priority" with the carrier's ambition to become the second largest MRO provider globally.

It must also address its "insufficient" customer focus, says de Juniac in order to win back passengers.

Air France's historically high cost base will be cut by 20% "to reach the industry level" and increase competitiveness, says de Juniac. The exact nature of the cost reduction will not be revealed until June, but it is widely anticipated that there will be large-scale job cuts.

If the 20% saving is not made it "would jeopardise the recovery and the company's future" warns de Juniac.

Ground staff are already fearful the axe may fall on them. A strike on 23 March by the carrier's ground-handlers, which caused flight disruption, may be a taste of things to come.

The carrier, which is negotiations with its unions on new labour agreements to be implemented in June, is thought to have the backing of France's pilot union, the Syndicat National des Pilotes de Ligne.

Yan Derocles, an analyst at Oddo Securities, a stockbroker, says: "The fact that the SNPL is more or less supporting the transformation plan is a very good point for de Juniac He will have to tackle the surplus on the ground which is the biggest issue and if the pilots support the move any action any by the ground staff will be manageable."

Derocles says a restructure of the airline is "mandatory" and points to the €353 million ($471 million) 2011 operating loss made by parent company Air France-KLM. The need for urgent action is even more apparent if the effect of hedging gains are stripped out, argues Derocles. The "true operating loss without hedging" would have been around €1.2 billion, he says.

Further integration with KLM may be key to driving cost savings. Peter Morris, chief economist at Flightglobal's data and consultancy division Ascend, notes this has not been fully addressed since the merger between the two airlines. "Many people feel we are yet to see how the reduced cost structure would come in. They've made some efficiency gains without doing anything about pilot costs or [staffing] levels."

De Juniac promises to simplify

A simplification of Air France's structure will also take place, with "a new organisation being established". This will involve "streamlining processes and procedures, reducing the number of hierarchical levels, improving management practices and deepening the integration with KLM," he says.