Air France-KLM will (have to) ‘reinvent’ itself if it wants to meet its targets of higher revenues, strong improvement of the operating margin, reduced costs, and more operational efficiency, the French-Dutch airline group said on its Investor Day on November 5. That will take some much-needed changes.
Group CEO Ben Smith, KLM’s CEO Pieter Elbers and Air France CEO Anne Rigail explained to investors (and many journalists) the strategy for the next five years or so. The foundations have been prepared and announced by Smith at this Summer’s HY1-results presentation, but plans have now matured and been discussed with share- and stakeholders.
In what it calls a ‘value-focused’ model for its employees, stakeholders, and customers, AF-KLM is optimizing its operational model to generate EUR 800-900 million in savings, tries to generate 350-400 million in extra revenues out of the most profitable segments, and develops new income models that are data-driven (direct sales and New Distribution Capability) around amongst others its loyalty programs like Flying Blue (target: additional EUR 100-150 million).
Medium-term operating profit margins should improve from 4 to 7-8 percent, with a target for Air France to improve by EUR 900 million, KLM by 250 million, and Transavia by 100 million. Free cash flow should be positive and the net debt/EBITA margin should be around 1.5. Annual cost reduction is targeted at 1 percent, capacity growth at 2-3 percent per year.
Air France: tackle costs
To get there, each brand has some hurdles to tackle. At Air France, this is the company model, which according to Smith needs fixing. Since he joined Air France-KLM as Group CEO, Smith has given priority to restoring trust, confidence, and confidentiality especially within Air France after years of severe social unrest. That’s why he has chosen to discuss his strategy plans at length for almost a year with the unions and partners prior to the Investor Day-presentation.
Negotiating new social contracts with cockpit, cabin and ground staff unions last year has been a bonus for Smith but Air France needs to work hard on its cost structure and efficiency. Costs, especially at Paris Orly, are high compared to Charles de Gaulle, which comes from inefficiencies of using available slots. Weak performers in AF’s current strategy are the Economy Class network on medium and short-haul, the latter losing EUR 180 million a year. Reallocating the fleet from loss-making to more profitable areas should improve profitability. From 2020, Air France will offer Business Class on its domestic network, where premium traffic has performed well.
A new production balance agreement with the cockpit crew will improve this efficiency and what Smith called the ‘ASK-metric’, which has been out of sync with KLM. As an example, he explained how KLM was able to operate a 408-seat Boeing 777 from Amsterdam to Singapore versus an artificially, cabin-rule restricted 296-seat Air France-777 on the flight to Changi from Paris, resulting in a much worse Available Seat Kilometer-metric for the French operations. Thanks to the new agreement Smith can address this issue by adapting the cabin lay-out of Air France’s long-haul fleet to a denser and more profitable configuration.
Anne Rigail expects (organizational) simplification, fleet renewal, and revenue mix optimization to improve Air France’s operating result by EUR 900 million in 2024.
Smith said AF will lobby for a more competitive business environment in France, where social taxation is high and taxes and fares at Paris CdG are costing EUR 300 million more compared to KLM’s Schiphol-base. However, both the French and Dutch governments have announced extra taxes from 2021.
KLM: improve the business model
While more efficient and profitable, KLM also needs to improve by continuing to develop its business model, especially by generating more connecting traffic on its medium-haul network. On its long-haul routes, the Dutch are more profitable compared to the French, although in recent quarters Air France has outperformed KLM on this. A major reason for this is slot-constrained Amsterdam Schiphol that has put a cap on KLM’s growth ambitions.
Introducing bigger aircraft like the Embraer E195-E2 and Boeing 787-10 and continuing growing its ASK-capacity is seen as one solution to the problem. At the same time, KLM will continue to lobby for additional growth at Schiphol beyond the current cap of 500.000 movements. This will be met with strong opposition from a major faction in Dutch parliament, Schiphol’s neighbors, and environmentalists.
Transavia must grow
Air France-KLM low-cost brand Transavia and Transavia France will become more important to meet the group’s targets. The half a century-old Dutch Transavia will have to optimize its position in The Netherlands by flying from secondary and tertiary airports (like the yet to be opened Lelystad Airport) and grow seat capacity by purchasing bigger aircraft. As reported by Airinsight last January, Transavia was on the verge of announcing an order for the Boeing MAX 10 but this has been postponed following the grounding of the MAX.
Smith is very much pleased with the agreement between the French pilot unions and Transavia France that removes the previous cap of 40 aircraft in the fleet. The airline can now grow without restrictions ‘to whatever we want’ and will have to assist Air France to become more profitable on its home market by opening additional routes and basis (Montpellier from Spring 2020, strengthening of Nantes this year). Transavia France too is looking at a fleet renewal and has an eye on replacing its 737s with Airbus A320neo-family aircraft.
Talking about the fleet, this is where major efficiencies are to be found, says Smith. The current fleet of both network airlines is much too complicated and expensive. KLM will reduce its long haul-fleet from four types to just one family with two types with common type rating (the Boeing 777 and 787) as it retires the Boeing 747 around 2021 and the Airbus A330 by 2025. The Embraer E175/E190s and E195-E2s will form the foundation of the Cityhopper fleet. No decision has been made on replacing the oldest 737NGs as Smith wants to see first how the MAX performs when the type re-enters service.
Air France will simplify its fleet by retiring the ATRs, Embraer E145 and probably too the E170 and Bombardier CRJ700 from its Air France-HOP fleet. The Embraer E170/190 and the Bombardier CRJ1000 will stay. As announced, all ten Airbus A380s will leave the long haul-fleet by 2022 at a cost of EUR 400 million. Smith expects to announce a decision on their successor (either the 787-9 or A350) within the next weeks. Out too will go some A330-200s and the A340-300s.
To stay are the 777s and of course the new A350-900s which will have a positive impact on EBITA long-term of EUR 350 million once all 28 have been delivered. Smith said it is undecided what will happen to the 9 787-9s. They could either be returned to their lessors or moved to KLM, which currently operates 14 Dreamliners.
The short haul-fleet will be replaced by the Airbus A220, which on Air France’s slide included the yet to be launched -500. Like at KLM, no decision has made on the replacement of the A320ceo-family fleet. Higher fleet utilization will improve AF’s cost structure, while the airline has high hopes of additional revenues coming from its premium cabin products.
While Air France-KLM has enough to do to get its house on order, the group isn’t ruling out to partner up or even buy another airline if the situation is right. Smith said the group will be ‘pragmatically considering consolidation opportunities’ but stressed no financial risks will be taken. He admitted that the joint-venture with Air Europe is under review, now that the Spanish airline has been bought by IAG’s Iberia pending regulatory approval.
Active as a journalist since 1987, with a background in newspapers, magazines, and a regional news station, Richard has been covering commercial aviation on a freelance basis since late 2016.
Richard is contributing to AirInsight since December 2018. He also writes for Airliner World, Aviation News, Piloot & Vliegtuig, and Luchtvaartnieuws Magazine. Twitter: @rschuur_aero.
