When Ben Smith took the helm of Air France-KLM a year ago, the SkyTeam carrier group was embroiled in familiar challenges.
Air France was locked in labour disputes, cracks were continuing to surface in the French arm’s relationship with more profitable partner KLM, and the group faced ever more pressure in the highly competitive European market.
Smith has so far focused on tackling the tensions and simplifying the business in an attempt to better position the group. It remains to be seen how far Air France-KLM has progressed towards overcoming its challenges, but it enters a milestone month in October able to focus on the positives.
Air France has just taken delivery of its first Airbus A350-900, a key tool in it is future strategy both in terms of economics and environmental efficiency. The aircraft will make its debut in Air France colours on 7 October, the same day its Dutch sibling officially marks its centenary.
Air France-KLM
While KLM is not without its challenges, the most pressing problems were around Air France when Smith took the helm.
“When I arrived here last September, we were just getting over a very difficult social unrest period within Air France,” Smith said during a press event on 27 September in Toulouse to mark delivery of the first A350 to the French carrier.
“It was a very difficult and long strike. So the first priority was to stabilise the social environment within Air France.”
Smith’s appointment as the first non-French national to lead the parent company had threatened to add more fuel to the flames of strained labour relations, but working with Anne Rigail – who took the helm at Air France in December – he now at least has a clear labour environment to work in.
“We were able to quickly come to agreements on many of the contracts that needed renewal, and the last major contract in February,” says Smith. “So with all major groups at Air France there are updated contracts in place and the atmosphere and culture within the airline is particularly strong.”
Notably the labour agreements also include a recent deal with pilots on lifting of a scope-clause, which had capped at 40 the number of aircraft that could be operated with a French AOC by the group’s leisure unit Transavia. Cirium fleets data showed it operated 38 aircraft at the point of the agreement in July, and the deal clears the carrier to operate more flights where it faces low-cost competition.
An earlier labour deal struck with pilots in February had enabled the French carrier to revisit the configuration of its long-haul cabins. Prior to this, cabin layouts were governed by “very restrictive” contractual obligations with employees, meaning that the carrier was not able to properly “optimise” them, Smith noted at the time.
A January deal with cabin crew also spelt the end of its short-lived millennial brand Joon. The attempt to woo a new audience, introduced by former boss Jean-Marc Janaillac, was dropped amid concerns that a plurality of brands was providing “complexity in the marketplace”.
Regional brand Hop was also refreshed to align it more closely to the French carrier with the addition of the Air France name.
FLEET SIMPLIFICATION
Simplification is also evident in Smith’s plans for the fleet at Air France-KLM. Speaking at the group’s second-quarter results press conference at the start of August, he said that the complexity of Air France’s long-haul fleet “puts us into a big disadvantage” versus competitors.
Some of the first moves to address this include retirement plans for Air France’s Airbus A380s and a swap deal under which the French carrier is taking the seven A350-900s originally destined for KLM.
“With the size of both long-haul fleets at KLM and Air France, we have large enough fleets [to] offer several different models. At KLM we do have 13 long-range Airbus airplanes and two types of Boeing airplanes. We felt the 28 A350s we have on firm order would be best positioned at Air France,” says Smith.
“At Air France, with over 100 long-haul airplanes both from Airbus and from Boeing, we are still studying the best way to have the most efficient and consistent aircraft both on the engine and the airframe side. The goal would be to streamline as much as we can.”
As part of that swap, KLM will take six 787s that had been ordered by Air France. Asked about the future of the Dreamliner within in Air France – it will have 10 787s by next summer – Smith said: “Today the plan is to maintain those 787s in the Air France fleet.”
At the end of July, Air France announced plans to retire its full fleet of 10 A380s by 2022. Smith cites several factors behind the move.
“They burn 20% more fuel than our other next-generation aircraft, with four engines. They are large, we have over 500 seats on this aircraft, so they offered less frequency options for us and many of our business customers are looking for multiple flight options. And a small fleet of 10 operationally made the aircraft challenging.
“For the replacement of these aircraft we are still studying the options that are out there. We have not made a decision and we are hoping to do so in the near future.”
Alongside the A380s, Air France is also in the process of phasing out its remaining A340s next year.
At the other end of spectrum, Air France also this summer placed orders for up 120 A220s for delivery from September 2021. In doing so, it regained its status as the only airline to have ordered all Airbus aircraft types.
MARKET OPPORTUNITIES
While the first of the European majors to form an airline group, Air France-KLM has lagged rivals IAG and Lufthansa in consolidation moves.
Most of those moves in Europe have been driven by airline failures, and opportunities have emerged in the French market with long-haul operators Aigle Azur and XL Airways both running into trouble.
Speaking at the A350 press conference ahead of the formal decision to liquidate Aigle Azur on 27 September, Smith said that any potential interest could not come at the cost of complicating labour relations at Air France.
“The two airlines have recently gone into protection because of their failed business models and potentially could be liquidated. There are some interesting assets that could perhaps be favourable under certain conditions to be brought into the Air France family,” he says.
“But as we see right now, [there] would be legal implications surrounding labour contracts, so it’s quite challenging for Air France to do so. We have a stable social environment today within Air France, and we have been clear we are not going to jeopardise that in any way by doing something that does not make sense for our frontline staff.”
While XL Airways also proposed that Air France should consider using it as a long-haul low-cost proposition, Smith sees limited gains. “We are not yet convinced” by that business model, he says.
“We have within the Air France part of the Air France-KLM group 12 Boeing 777-300ERs that are configured in a very high-density layout and these airplanes are used for leisure destinations.
“So we have a leisure product which does work well and I do not believe that today the XL model offers something that complements that or makes it more powerful.”
But he sees benefits from consolidation in the market, noting for example that between Paris and New York there are 10 competitors.
“We have a very fragmented market in France. There is going to be consolidation, I believe positive results will come out of it.”
FUTURE CHALLENGES
Smith notes that the second big priority he faced on taking the job was to “clarify the governance structure within the group between KLM and Air France”. Strains around this became further evident in February when the Dutch government upped its stake in holding company Air France-KLM to match that of its French counterpart.
“From a management structure, [clarification] has been accomplished,” says Smith. “From an ownership perspective, the Dutch government purchased a stake in the group in February and there are ongoing discussions between the two governments to ensure that the assurances that both governments are looking for a healthy KLM and Air France going forward are in place.”
Smith adds: “The third priority, which is not new as it has been there long before I started, is to ensure the group is positioned in the marketplace to regain its number one position in Europe.”
Financial results have shown a small uptick. Second-quarter group operating profit increased by €54 million ($60 million) to €400 million, while revenue grew 6.4% to €7.05 billion. Its long-haul activities drove an increase in unit revenues, though higher fuel costs partly offset these gains.
“This is a tough market, it’s always been a tough market,” says Smith. “We do see… some reduction in demand in some of our markets, but we see the opposite in others.
“Domestic France is one of the most challenging markets for the Air France-KLM group. We face two types of competition – the TGV and some low-cost carriers, most of them based outside France with different advantages that we don’t have with our staff based in France,” notes Smith, also citing the higher cost of operating out of Paris.
On long-haul he points to pressure in the Chinese market, but sees “a very healthy” market on US operations. “We are planning growth in that market for 2020. We do see a positive return on the Brazil market, which is very important for Air France, and we are looking at putting in a very small bit of capacity. Africa is always very strong for Air France.”
Source: FlightGlobal.com
