Thursday, October 22, 2015

Air France is a Mess, What Needs to Change?

Air France was in the news over the past few weeks for all the wrong reasons after a mob of angry employees stormed the airline's headquarters, interrupting a meeting between union representatives and Air France executives. Two Air France executives had their shirts ripped off as they tried to get away from the protesters, leading to shocking photos that graced the covers of newspapers and websites worldwide 

This was just the latest development in a long and costly labor dispute between Air France and its union employees. In late 2014, a long pilot strike cost Air France more than €495 million euros in revenue. However, labor issues are only some of the problems facing Air France-KLM.  

The company has not turned a profit since 2008, including a 198 million euro loss in 2014 and a 1.83 billion euro loss in 2013. Many changes are needed at Air France-KLM as the airline tries to stay afloat in the cut-throat European market. 

The advent of low cost carriers in the 1990s and early 2000s was an immediate threat to the established European legacy carriers such as Air France and KLM. Facing increased competition from low cost carriers, the legacy carriers were eager to merge with each other. However, tough European regulations on airlines limited the number of mergers and forced Air France and KLM to stay as separate airlines under one umbrella: Air France-KLM.  

While the company was profitable up to 2007, the airline is still reeling from the detrimental effects of the 2008 financial crisis and has not turned a profit since. However, Air France-KLM's poor financial performance in the last few years is mostly due to poor management, high costs, and costly labor disputes.  

Air France has the highest costs out of any airline in Europe. Most of the costs are due to laborLabor costs account for 32% of its total revenue, a full 11% above rival British Airways and 7% clear of KLM. Air France also has one of the lowest revenue per employee rates, lagging behind all major European Legacy carriers. Air France's plan to cut 2,900 jobs this year has angered workers leading to the aforementioned protests. While painful, the cuts are necessary for Air France's financial health. 

Trying to better compete with the rapidly growing low cost carriers in Europe, Air France announced a major expansion of Transavia, a Dutch low cost carrier owned by Air France-KLM, in a new project called Transavia Europe. Air France wanted to more than double the number of passengers carried by Transavia by 2017 by investing over $1.28 billion dollars in the carrier and opening bases outside of France.  

This was a major management blunder from Air France. To expand Transavia, Air France would have to shift employees from mainline Air France to Transavia, which would most likely cause a strike (Ex: Germanwings), but it would have been survivable. However, Air France took it a step further when they decided to open bases outside of France. Not only would the employees from Air France operate out of a different country, they would take a pay cut too.  

This deeply angered the unions who proceeded to launch a costly ten day strike that costed Air France more than 10 million euros a day. The move also tarnished Air France's reputation in France as the expansion of Transavia was viewed as taking jobs away from the French people.  

After a ten day struggle, Air France conceded to only focusing on expanding Transavia France, in France. While expanding low cost offerings is extremely important in staying competitive in the European market, Air France should have recognized the dangers of expanding Transavia too far too fast, especially during a time of French economic uncertainty.                                                                                                                 

In the Air France-KLM corporate umbrella, Air France is the one weighing down the bottom line of Air France-KLM, according to recent analysis from CAPA. Air France has consistently had a lower load factor, lower operating margins, and higher costs than KLM since the merger in 2004.  

While Air France may be pulling Air France-KLM down, there seems to be light at the end of the tunnel. If not for the costly pilot strike in 2014, Air France would have posted its first operating profit since the great recession. Air France has also done a good job cutting unprofitable short/medium haul routes. The airline expects to break even on those flights in 2017. However, these are all baby steps and in reality Air France is still nowhere close to being a consistently profitable carrier. 

As Air France-KLM flies into the next decade, many changes need to be made. First off, Air France must cut costs. This includes cutting unprofitable routes and employees. While the union's may be unhappy with the job cuts, they are necessary if Air France wants to stay competitive with other airlines.  

Air France must also renew a focus on the long haul market and cut consistently unprofitable domestic routes, similar to what Alitalia is doing. No matter how hard Air France tries, it will never be able to compete with low cost carriers on certain routes.  

Following a blueprint of cutting costs and focusing on high margin, business-centric, profitable routes, Air France could be on its way back to profitability. It's been a rough ride for the past couple years and there are still many more to come in this long, painful recovery, but for Air France-KLM and France's sake, it's hopefully smoother flying from here.  

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