Air France-KLM has turned to the group's founding fathers Jean-Cyril Spinetta and Leo van Wijk to help guide the carrier through troubled waters, with challenges around cost savings, increased competition and financial obligations lieing ahead for the group.

The two men were at the helm of Air France and KLM respectively when the companies merged eight years ago and guided the enlarged group through its initial years. Both later moved upstairs, Spinetta becoming Air France-KLM chairman and van Wijk vice-chairman, as well as SkyTeam chairman.

Now after yesterday's resignation of Air France-KLM group chief executive Pierre-Henri Gourgeon, the airline is again looking to Spinetta and van Wijk while it regroups. Spinetta, who served as Air France and latterly group chief executive for 12 years until 2009, has been given the role of group chief executive. Van Wijk returns as his deputy. French finance ministry chief of staff Alexandre de Juniac becomes Air France chief executive and chairman.

The airline has also put back plans to establish a full Air France-KLM holding structure, originally planned for the start of next year, until 2013. During this period Spinetta and van Wijk have been tasked with improving the group's operating and financial performance, in the face of expanded competition.

Gourgeon had been at the group's helm since 2009, but his tenure was dominated by efforts to overcome heavy losses as well as the fallout from the high-profile loss of Air France flight AF447 in 2009.

The airline, which recorded an operating profit of $162 million in 2010, slipped into the red in the first quarter of its new financial year with an operating loss of $211 million. Its share price has slid 60% this year and the airline last month approached unions over further cost-savings.

In a research note issued on 18 October, Morgan Stanley foresees continued challenges for the group and does not expect it to return to net profit until full-year 2013. "In a relative sense Air France-KLM remains among the most leveraged and operationally exposed names to a greater than expected downturn in Q4 or 2012," it said.

The investment bank highlights a number of challenges including the difficult cargo market, high fuel prices and capacity growth it believes is still aggressive. The group is lifting capacity 3% this winter, notably in short-haul markets with the launch of its new provincial flights concept at Marseilles. Morgan Stanley said this will challenge yields and require at least the equivalent unit cost reductions.

It also said that the group's financial obligations remain "challenging" over the next two years. "From second half 2011 to December 2013, the company has €3.07 billion [$4.2 billion] due for rollover, €450 million of which is a convertible bond with a put option available to exercise on 1 April 2012," it noted.

CTAIRA analyst Chris Tarry said one of the big challenges the group faces is to structurally improve its performance, which has been difficult to achieve since the merger, given constraints attached for the first seven years under the terms of the original deal and the strength of the French unions.

"Both Air France and KLM are more dependent on the economic cycle than other carriers, as they are demand aggregators," he added, noting structural change will be needed if it is to benefit when the upturn comes. "The issue for Air France-KLM is deciding where the group will be, how it will get there and what the size and shape of the group needs to be. It may well need to retrench before it grows again."

Source: Air Transport Intelligence news