The going promises to get tough for Air France as European competitors take up positions in its home market, snapping up some key French regional carriers.

In the latest deal, Swissair has stepped in to acquire a 44% stake in Air Littoral. The partnership now gives Swissair a foothold in Nice, which is an important Air France hub and focus for the flag carrier's ambitious expansion plans.

The French regional has been struggling to establish itself in Nice. Although it almost doubled traffic over the last year and is now the second largest carrier at the airport, the effort has proved costly. With little help from code-share partner Lufthansa, Air Littoral posted Fr80 million ($15 million) of losses for the 1997/8 financial year on sales of Fr1.5 billion. Swissair's Fr150-200 million injection of urgently needed fresh capital, is in line with what most French market observers believe that the company now requires to right itself. Additional business should come from Air Littoral's admittance to the Swiss carrier's European Qualiflyer group. With the help of its new shareholders, the company hopes to return to profit within two years.

Swissair now also wants Air Littoral to terminate its codeshare with Lufthansa, which is operated between Nice and six destinations in Germany. Swissair says that the company "would prefer that Air Littoral didn't continue" the arrangement. Air Littoral, however, which retains management control, shows no enthusiasm to terminate the arrangement.

By taking an equity stake in Air Littoral, Swissair has potentially upset the plans of its own regional subsidiary Crossair, which had clear ambitions to expand in France and southern Europe. The regional airline holds a minority stake in Crossair Europe, which started services from Basle into France and Italy earlier this year. "We have the tools to do exactly [what Air Littoral is doing]. Crossair Europe is a much better product than Air Littoral," says Andre Dose, Crossair's vice-president flight operations

Crossair is not giving up, however, and has made a separate bid for AOM, another French carrier due to come to the market next year. Air France has shown an interest but a further strengthening of its already dominant position in the domestic market will not go down well with the competition authorities. The line-up of hopefuls is completed by the two big front runners: Lufthansa and British Airways, hoping to add to its existing Air Liberte/TAT acquisitions.

This time Swissair is effectively ruled out, at least on the current terms of the bid. As the carrier of a non-European Union country it simply could not take the full ownership being offered in AOM.

The final decision could take another six months, but if BA does win, and merges AOM with its existing French operations, that could spell real trouble for Air France.

Source: Airline Business