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20
Oct-2014

Air France-KLM fails to find recipe for success (Analysis by Euromonitor)

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COMMENT: Air France-KLM fails to find recipe for success

Legacies are still a major millstone for Air France-KLM writes Euromonitor travel analyst Nadejda Popova.

Air France-KLM has been suffering significant losses in recent years. In a bid to cut back on expenses that are causing this negative performance, the airline has been reallocating and cutting capacity at its subsidiaries in order to improve efficiency and, ultimately, reduce costs.

Among the other measures introduced over the years, the carrier has also been upgrading its fleet, reviewing employment contracts, boosting partnerships and looking to improve its positioning in the low-cost segment.

Its major aim has been to restore the financial health and stability of the group. And yet it has been failing to find the right recipe for success.

The proliferation of low-cost carriers in Europe and slowing customer demand are putting significant pressure on short-haul prices, and these are predicted to further decline, burdening airlines’ bottom lines.

Indeed, its short-haul business is the one that has been struggling the most in recent years. To add to the woes, the recent pilot strike at Air France, which lasted 14 days in September 2014, is estimated by the company to have cost almost €500 million in lost revenues.

So what does Air France-KLM keep doing wrong?

A major concern for Air France-KLM has been the rapid growth of low-cost carriers. The group’s lack of presence in this segment made it difficult to respond to the threat, and, as a result, Air France-KLM is pushing Transavia forward as part of a new strategy called “Perform 2020”, while regrouping Air France’s point-to-point and regional operations under one brand – HOP!, which further adds to the high level of complexity within the overall organisational structure.

A number of strategic priorities have been identified for both HOP! and Transavia, but these appear hasty and the result of something akin to panic at the corporate level.

In its home market of France, HOP! has been suffering from increased competition from both high-speed rail and car-sharing companies, such as Uber, which links passengers with drivers of private vehicles.

At the same time, it is also unclear whether HOP! is competitive enough with Ryanair and easyJet, which offer far lower prices and are increasingly raising their share in this part of the world.

Transavia, on the other hand, is being leveraged as part of the group’s vision to strengthen its low-cost presence, and short-/medium-haul routes are being revisited accordingly, by shifting Air France short- and medium-haul routes entirely towards Transavia.

The creation of several Transavia subsidiaries (ie Tranasavia France and Transavia Netherlands) and the recently proposed Transavia Europe (which actually triggered the pilot strike) also results in a confused marketplace and an overburdening of the company’s bottom line.

The group seems to be forcefully trying to bring to life a model that has not yet worked, as proven by HOP!’s difficulties, while the long-term strategy may well require a rethink.

Air France-KLM is also expected to be affected by such global threats as the Ebola virus in West Africa, where the player has strong exposure, and the conflict zones in Russia and the Middle East, which, in turn, are triggering fluctuations in fuel prices.

It is evident that despite almost 10 years under the umbrella of Air France-KLM, the carriers have yet to create real synergies. Both Air France and KLM appear to be competing with each other in the short-haul segment. This makes the existing threat from low-cost carriers even more dangerous.

One way of beating the competition could be to create one low-cost proposition under one brand for the whole group, rather than investing more into diluted and overly complicated brands.

This could help achieve greater efficiency, while controlling costs in the short-haul business and countering the impact of high-speed rail transportation and the new forms of “sharing economy”.

Air France-KLM is also working on alleviating debt levels and, in 2014, the carrier announced its intention to realise some €200 million in early repayments of bank debt in order to lengthen its debt maturity profile.

The company’s debt was €5.35 billion in 2013, down from €5.97 billion in 2012, and the new target for 2014 is €4.5 billion. This could be in jeopardy, however, in light of the recent pilot strike, which is expected to make a huge dent in its financial performance.

Indeed, Air France-KLM’s financial position worsened, with its net loss deteriorating further in 2013, from €1 billion in 2012 to €1.7 billion. Although revenue has improved slightly, this was not reflected in the company’s bottom line, which continues to show a loss.

Nadejda Popova, Senior Analyst – Travel and Tourism, Euromonitor.

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