Over the past few years, the Air France-KLM group has been in its fair share of turmoil. While KLM is financially stable, the same cannot be said about Air France and its current state of affairs. At Air France-KLM group Investor Day 2019 on November 5, 2019, Ben Smith, the Chief Executive Officer of the group, said that Air France has a “broken operational model” which needs to be fixed in order for the French airline to return to profitability, a process that has been done step-by-step, according to the CEO.
This includes new labor agreements and fleet changes – the aircraft and the configuration inside them are going to see a major overhaul in the coming years.
Current state of affairs at Air France
The latest financial results as of July 31, 2019, for the first half of the year, showcase that Air France is not a profitable airline – its operating loss in H1 2019 was $125 million (€113 million). While the operating margin improved slightly (by 0.8%) to a -1.4%, the vast majority of the improvement was written down to costly union strikes back in 2018.
In Q3 2019, the airline‘s profit compared to the same period in 2018, dropped by more than $111 million (€100 million), which was as a result of the decision to retire the Airbus A380 early, due to its high operational costs and low operational performance. Air France-KLM estimated that the retirement of the double-decker will cost them $444 million (€400 million). The expenses will be spread throughout the period between Q3 2019 and 2020 when the A380 is set to leave Air France’s fleet. As of November 5, 2019, the carrier operates 10 aircraft of the type.
However, most of the pressure to the group, and Air France in particular, comes from the fact that its domestic and medium-haul, point-to-point services have been put under a lot of pressure from low-cost carriers within Europe.
Struggles in Europe
In 2018, all medium-haul operations across the Air France-KLM group, including Transavia, barely improved. The group increased their capacity (ASK) by 0.8%, while demand (RPK) was up by 1.6%. Revenues in the medium-haul market, measured by RASK, improved slightly, by 1.5%. Point-to-point operations were all decreasing – capacity was reduced by 3.3%, demand followed suit and decreased by 1.4%, while revenues also dropped by 2.6% in FY2018.
Throughout 2019, as of October 31, 2019, revenues in the medium-haul market were down by 1.1% compared to the same period last year, even if capacity and demand were up – 2.2% and 3.5%, respectively.
Meanwhile, Ryanair, for example, has steadily increased capacity in France. In Summer 2019, it launched two new bases in Bordeaux (BOD) and Marseille (MRS), placing two Boeing 737s per base, according to an announcement by Ryanair dating September 27, 2018. The expansion of capacity has increased further in the Winter 2019 season. The low-cost carrier opened a new base in Toulouse (TLS) with two new aircraft, while also increasing the capacity at the two aforementioned bases by one extra aircraft respectively.
easyJet has also increased its capacity in the country – the British low-cost carrier opened its seventh base in the country, opening a new hub in Nantes-Atlantique (NTE) on April 4, 2019.
Yet low-cost carriers are not the only trouble makers for Air France – announcing changes in the domestic sector on May 13, 2019, the airline highlighted that “on routes where high-speed trains connect Paris to the provinces in under two hours, Air France has lost 90% of its market share”.
Poised for change
Yet significant changes are coming to Air France’s operations.
First things first, the airline signed a contract with its unions in October 2018, something that has allowed Air France to negotiate with cabin crew, pilot and ground handling unions individually.
“I’m happy to say that these agreements are now in place, which has unlocked an enormous amount of opportunities for Air France,” noted Ben Smith at Investor Day 2019.
While the new agreement with SNPL, the main pilot union in France, put a lot of focus on long-haul operations, medium-haul operations were a talking point as well. Namely, Transavia France has been freed of a capacity limit. As of July 31, 2019, the low-cost subsidiary of Air France-KLM will now be able to operate without aircraft number restrictions.
“Huge win to be able to completely lift this cap, we have zero limit on the number of aircraft that Transavia France can operate. This tool, which is very cost-effective against low-cost competitors here in Europe, we now have the opportunity to use this tool defensively or offensively”, said the CEO of Air France-KLM.
Secondly, Air France is consolidating. Instead of four separate brands serving the French market (Air France, HOP!, Joon and Transavia France), there now will be three (or two and a half): Air France, Air France Hop and Transavia France.
Thirdly, the medium-haul and domestic fleet complexity will be reduced. Currently, the airline operates four different aircraft types to serve its domestic routes, while medium-haul destinations are flown by the A320 family aircraft – from the smallest A318 to the biggest A321.
Air France Hop will phase out its remaining four ATR 72 aircraft, 13 Embraer E145 aircraft and keep the Bombardier CRJ 700 and CRJ 1000, together with the Embraer E170 and E190 regional jets. However, the CRJ 700 and the E170 might be on the chopping block as well, as Air France might only stick with the bigger regional jet variants.
Even if pilots are able to operate all four A320 family aircraft due to a common type rating, Smith has called the fleet complex. Air France will slowly phase out the A318 and the A319 to replace them with the new, clean-sheet Airbus A220 – an order that was confirmed on July 30, 2019.
Good reason to phase out the Airbus A380
To further optimize the fleet, the French carrier has also taken a deep look at the aircraft that serve its long-haul network. Currently, the airline operates a wide variety of wide-body aircraft: from the Airbus A330, A340, A350 and the A380 to the Boeing 777 and the 787 Dreamliner.
Nevertheless, changes are also coming here – the A340 will leave the airline in 2020 and Air France is awaiting delivery for 27 more Airbus A350 aircraft out of the total order of 28 wide-bodies. The A330 is put under a microscope, as Air France looks to eventually replace them – the average age of their A330 aircraft is 17 years, according to data by planespotters.net.
How and when the French airline will replace the A330 and the oldest Boeing 777s is still unclear. However, what is clear that Air France is using the A350 and the 787 as leverage against both manufacturers before issuing a tender to replace the two aging wide-bodies.
And, of course, the metaphorical and literal elephant in the room, the Airbus A380. Smith reiterated once again that they will completely exit Air France’s fleet in 2022, a decision that was “very, very tough”
“Even though it’s only 10 airplanes, they drive a lot of decisions,” the group’s CEO noted. But the decision to retire the A380 early will give Air France “more flexibility”, as the airline will replace the former double-decker flights with smaller aircraft, but additional frequencies. In addition, retirement will save a lot of money in the long-run. The other two airlines in Europe, which operate the A380, have already refurbished their cabins, according to Smith. Air France has not done so.The decision was made not to invest $38.8-44.4 million (€35-40 million) to “bring the interiors of the aircraft up to competitive standards,” Smith said.
Even if the A380 is flying on the most lucrative Air France routes, namely to John F. Kennedy International Airport (JFK), Los Angeles International Airport (LAX) and San Francisco International Airport (SFO) – the older interior prevents showcasing “the best of Air France, according to Smith”
Yet there are a lot of negative sides to the A380, as Smith highlighted that the Superjumbo is “the poorest operated aircraft in the fleet”. “We have an enormous amount of delays on this aircraft – this fleet has the highest rate of cancellations, so getting these aircraft out sooner than later is going to help the operations at Air France”.
Smith is not worried about replacing the A380 – according to him, “this is a good time to buy long-haul airplanes,” due to the fact that demand for these aircraft is down, so Air France is more than likely to get “opportunistic prices for the aircraft we’ll select to replace the A380”. The potential replacement will be either the A350 or the 787, a decision that is due “in the coming weeks”.
Long-haul economics
Previous agreement with its unions limited the available seat kilometers (ASK), block hours and the number of long-haul aircraft. The ASK metric has been limiting Air France from acquiring certain aircraft and configuring the inside of the aircraft, as highlighted by the presentation with an example of Paris/Amsterdam – Singapore flights, operated by Air France and KLM, respectively. The configuration at Air France limits capacity, as KLM has 35% more ASKs due to the configuration – Air France 296 seats passengers, while KLM fitted 408 seats on a Boeing 777-300ER.
Air France had between 59 to 77 premium cabin seats in 2014, while in 2018 it had between 52-64 seats in First, Business and Premium Economy classes. Meanwhile, Smith highlighted that premium cabin capacity has increased in Paris by 9%, while Air France has decreased its capacity by 4%.
“The model of Air France is positioned to gain as much of this traffic as possible”.
One example is the re-fitting of its Boeing 787-9 – the airline seats 276 passengers on its Dreamliners, while the industry-leading standard is 298 passengers – making the Air France configuration 9% less efficient. Going forward, the airline will adopt the 298-passenger layout after shaking hands with its cabin crew unions on an agreement on January 10, 2019.
The group is still not convinced about the future of low-cost long-haul. Air France is in a strong position to maintain a competitive market share on the big leisure markets in and out of Paris, he noted. Surprisingly, while the number one market is New York, number two is Guadalupe, number three is Réunion, near Madagascar, and the fourth biggest leisure market is Martinique, located in the Caribbean.
To ensure a strong position on these markets, Air France decided to densify 12 Boeing 777-300ER to compete with long-haul low-cost carriers. Yet competition is getting thin – two airlines that also operated on these markets, XL Airways and Aigle Azur, ceased operating in the fall of 2019.
Air France also aims to increase the utilization of its aircraft, which would allow for a potential reduction in ownership costs by 10-20%. The increase in utilization will be done by moving the schedules around and repositioning aircraft during their down-time. Air France was far behind KLM, which increased aircraft utilization, according to Smith.
Operating environment
Operating an airline in France is not easy, noted Smith, and Air France will continue to lobby for a more competitive environment in the country. The difference in costs between Paris-Charles De Gaulle International Airport (CDG) and Schiphol International Airport (AMS) is $333 million (€300 million) alone, including specific French taxes that focus on civil aviation – those can potentially cost the airline $299 million (€270 million). Furthermore, France has the highest social taxes in Europe, Smith pointed out.
Overall, the future is exciting for Air France, as foundations have been laid out to secure the long-term growth of the company – with new aircraft coming and old interiors being refurbished to better suit the airline’s needs, including an optimized fleet, the Air France-KLM group will be better prepared for the times ahead.