Continued Paris Orly losses force Air France into a strategy rethink

An operating margin that continues to falter and is getting below pre-pandemic levels forces Air France-KLM to revise its airport strategy at Paris Orly. With Air France moving almost all operations to Charles de Gaulle, Orly is set to become the main hub of Transavia France and regional carrier Air France HOP! In last Friday’s Q3 earnings call, Group CEO Ben Smith dug a little deeper into the issues with which Air France has been confronted at Orly. Between 2019 and this year, traffic on domestic point-to-point routes has dropped by more than 40 percent and same-day return trips by 60 percent. Demand between Paris and Marseille has dropped by 50 percent as travelers opt for the train. The airline blames this on the rise of video-conferencing since the Covid crisis, a drop in business travel, and the shift towards (high-speed) rail travel, in line with the government’s policies to discourage people from flying on domestic routes. Legislation became active this year that actually forbids flying on three domestic routes, although they are no longer served for a couple of years. “Although we have introduced measures over the past three years to offset this rapid deterioration in activities, they are proving insufficient in view of the accelerating impact of the trends mentioned earlier,” said Smith. Air France’s current three “Navette” routes to Marseille, Nice, and Toulouse are expected to produce a negative EBIT this year of €80 million, but domestic has been loss-making “over the last decades.” During the pandemic, Bordeaux was already discontinued. The plan is now to move all domestic and the limited number of international flights of Air France from Orly to CdG. The exception is flights to Corsica in a joint venture with Air Corsica in order to comply with the public service order guidelines by the French state. With the new winter schedule, AF already has moved flights to French Guyana to CdG, which leaves five Boeing 777s based at Orly. Efficiency benefits While the move to CdG can be interpreted as a retreat of Air France, there could be benefits to it. The centralization of all flights at Charles de Gaulle will make operations more efficient for the airline. The feeder function of CdG for long-haul flights will become more relevant. Travelers with connecting AF flights no longer will have to commute from CdG in the Northeast to Orly in the Southwest of Paris, saving precious traveling time. With a 51 percent share of the slots, Transavia France will try to strengthen its position at Orly. “The initiatives as a whole would help Air France maintain a strong presence in all markets it serves and be more responsive to rapidly changing travel demands. It will optimize the use of each brand’s resources and a simplified offering should improve Air France’s competitiveness,” said Ben Smith. Air France has a long history at Orly that spans over seven decades. Once the dominant carrier, its share dropped to 37 percent in 2016 according to CAPA, and is believed to be in the mid-20s now. Orly has seen strong competition from low-cost airlines, with initially easyJet leading the way. Mofe recently, IAG’s Vueling has gained a share at Orly after acquiring eighteen slots in 2021 from Air France-KLM as part of the French state aid package. Transavia expansion Orly will remain “a true asset” for Air France-KLM, but now thanks to Transavia France. Since the airline concluded a crucial agreement with the influential pilot union SNPL in 2020, the low-cost airline is no longer restricted in fleet size and overall size. From 40 aircraft in December 2020, the fleet grew to 61 in 2021, 71 this year, and will go to 76 in 2026. Transavia pilots work with Air France contracts with different work rules, said Smith. This has brought unit costs and productivity to levels comparable with easyJet. Cabin crew have different contracts. Transavia France operates on 22 domestic routes, having acquired slots that previously were held by Air France and HOP! The regional airline had 30 aircraft based at Orly, but they were removed in 2020 at the start of the pandemic and have not returned. Paris Orly, Nantes, Montpellier, and Lyon are already key domestic hubs. Under the new Orly strategy, the plan is to transfer the Air France Navette routes to Marseille, Nice, and Toulouse to Transavia. “TO”, as Transavia France is also known for its callsign, also continues its international expansion. It will launch services to Dubai from Lyon and Marseille and will grow at Orly, taking over more slots vacated by AF. “Now having a viable low-cost operator that has 51 percent of the slots, a new metro link that will be in place by May next year (ahead of the Summer Olympics), Orly is going to be a very attractive airport for both business and leisure travel. We are very well positioned with a highly competitive cost structure with Transavia,” said Ben Smith. Union challenge Air France informed unions of its Orly plans two weeks ago. With a troubled history, it will be interesting to see how they react to the plans. Smith is hopeful: “From a union perspective, obviously, any major change like that is negative for pilots, cabin crew, and ground staff. But maintenance will remain. We do a lot of heavy maintenance at Orly and that will remain. We do expect challenges with the unions that have members impacted by this, but over the medium term, we think it will work out.” Paris Orly should flourish as a low-cost airport for Air France-KLM, thanks to the growth of Transavia. (Sylvain Cambon/SGP) He added that some technical jobs will be outsourced and that the new strategy will not become effective until 2026. “We give a lot of notice, up to three years. There will be no forced job losses, there will be offers to take the necessary training to move to new jobs in maintenance. All cabin crew and pilots can take options to be based at CdG.” In the press release on the revised strategy, Air France said: “Regarding employees based in Paris-Orly, staffing needs at Paris-Charles de Gaulle will be such by 2026 to guarantee everyone an equivalent position at the Roissy site. Mobility options on the Paris-Orly platform would be considered first.” With a relatively high average age of ground staff at Orly, Smith expects that early retirement will be an option for some staff at Orly. While this will result in extra costs, they will be one-off until 2026. Transavia will suffer cost headwinds until the end of this decade, as it transitions from an all-Boeing fleet to the Airbus A320neo and A321neo. The French subsidiary expects to take delivery of the first A320neo before the end of this year, as is the Dutch airline with the first A321neo.

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