ALEXANDER CAMPBELL / PARIS Flag carrier banking on compensation payment to help offset severe losses predicted for second half of the year

Air France is counting on an €80 million ($70 million) compensation payment to stay in the black this year after losing an estimated €150 million in ticket sales since 11 September. Executives believe the airline is well placed to survive the downturn, but have started to reorganise the airline's fleet to cope with the difficult times ahead.

Although sales actually rose slightly in the six months to 30 September, up 7.3% to €6.58 billion, the company predicts deep losses in the second half of the year. Operating profits, already down 22% in the first half to €325 million, will continue to fall, giving a forecast income for the full year to 31 March of more or less zero. Net profits were down 34% to €283 million.

The airline denied it had been affected by the slowdown prior to 11 September, saying that "until 10 September, Air France had been on target". It was the only major European airline to raise capacity in the first part of 2001 and is only now moving to freeze capacity after watching severe cuts made by its rivals after the terrorist attacks.

The carrier has started to ground aircraft, with 16 set for retirement by April: nine Airbus A310s, four Boeing 747-200s and three Airbus A321s, keeping capacity constant as previously ordered aircraft come into service.

Air France plans to move from leasing one-third of its fleet to leasing two-thirds - a move which implies that management are nervous about the near future and want to build cash reserves rather than tying up capital in aircraft.

Powerful employee unions and French labour law had always made lay-offs unlikely, and chairman Jean-Cyril Spinetta confirmed that "we do not intend to lay people off at this stage". In fact, even if it were practical, the risk of another strike makes lay-offs inadvisable. The company plans to sweeten staff morale with a profit-sharing deal in a couple of years.

While carriers elsewhere in Europe have faced growing competition from low-cost airlines, Spinetta believes that the threat they pose has been overestimated, pointing out that air travel in Europe has always been structured around a few large hubs such as London Heathrow, Paris Charles de Gaulle and Frankfurt, which leaves limited regional traffic for the low-cost airlines to take.

Chief finance officer Philippe Calavia says: "EasyJet chief executive Ray Webster says that the low-costs will have 80% of the market - he is wrong. I do not think anyway there is any room in Europe for several low-cost operators. They will face consolidation."

Calavia says the European Commission's decision to allow airlines to keep unused slots temporarily would restrict low-cost carriers' growth. Observers say the airlines are likely to be assisted by some European governments unwilling to see flag carriers suffer at the hands of low-cost carriers.

Source: Flight International