Friday, November 11, 2016

Air France's New Long-haul Low-cost Unit is Exactly What the Embattled French Carrier Doesn't Need

Air France, as part of the airline's "Trust Together" branded turnaround plan, recently announced the launch of a new low-cost long-haul airline within the Air France-KLM group. The goal of the new airline is to recoup market share on routes from Paris to Asia and the Middle East that have recently been taken over by the gulf carriers. 

Air France, infamous for high costs and poor planning, has struggled in the current hyper-competitive market environment. The gulf carriers have undercut the fares of the European legacy carriers while poaching lucrative business class passengers with high quality, luxurious business and first class products.  Due to these pressures, Air France has cut routes to the Middle East and Asia.  Air France's new low-cost airline will mostly operate medium to long-haul flights to Asia and the Middle East that are currently unprofitable for the mainline carrier, although Air France executives also plan on launching service to new destinations as well 

Air France's answer to the gulf carriers, a hybrid low-cost long-haul airline, is severely misguided and will do little to ease the hemorrhaging of market share to the gulf carriers. The fleet of the new low cost long haul airline will comprise of up to 10 A340 aircraft and feature lie flat seats in business class, albeit without direct aisle access at every seat. Air France says the business class product on the new airline will be in line with those of American carriers instead of those from the gulf, which the new airline will be competing against. What's ironic is that every American legacy carrier has invested in direct aisle access in business class, especially Air France's fellow Sky Team member Delta Air Lines. From a business traveler's point of view, the product on Air France's new airline, which, according to Air France chairman and CEO Jean-Marc Janaillac, will be "premium enough,"  is a major step down from the business and first classes offered by the gulf carriers, which feature in-flight showers, direct aisle access at every seat, and personal chefs. 

If mainline Air France's premium class products couldn't compete with the gulf carriers, the premium class product on Air France's new low cost airline will do little to poach business travelers from the gulf carriers. 

Air France's decision to load the fleet of its low-cost long-haul unit with loud, ancient, fuel-guzzling A340s is another head scratcher for an airline that is striving for low costs. It's important to note that the few successful low-cost long-haul airlines in the world, such as Norwegian Air International, operate the latest fuel efficient aircraft in a high density seating arrangement.  

Another hallmark of successful low cost operations, low labor costs, eludes Air France as well. Air France says it will rely on pilots from its mainline airline to volunteer to switch over to the new low-cost unit, where they will work more hours and receive the same pay. In regards to flight attendants, Air France will employ an entirely new batch of recruits who will be paid less than their counterparts who work for the mainline carrier. For an airline with a history of labor issues, most recently during the expansion of Air France's other low cost unit, Transavia, which was ultimately halted due to the labor backlash, it seems like the airline is playing with fire.  

Ultimately, the costs facing Air France's new low cost carrier will be too high for the airline to be profitable on routes dominated by the gulf carrier's who flood markets with low fares.  

Air France's new low-cost long-haul airline does little to address the various structural problems facing Air France. While Air France executives are touting the per year cost savings of the new low cost unit, which are in the 1.5 to 2.5% range, the 10 aircraft sized low-cost long-haul airline will do little to ease the financial situation of Air France. 

It appears that Air France is intent on battling competition through its current two pronged approach of launching 'low cost' airlines within its core airline and trying to shut down competition with the gulf carriers through protectionist measures. Air France is a deeply flawed airline in need of significant reforms, not another 'low cost' brand

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