Transavia and Air France

Air France, After Strike, Faces New Uncertainty

Transavia and Air France

After a two-week pilots’ strike that inconvenienced nearly a million passengers and caused Air France to lose an estimated 280 million euros, the airline was slowly returning to the skies on Monday.

It was unclear what the pilots had achieved from the strike, other than to delay severely the return to profitability for the French-Dutch parent company, Air France-KLM, and to curb the company’s ambitions for growth in Europe’s fiercely competitive regional market.

One outcome may be difficult negotiations in coming months over Air France-KLM’s plans to transform its modest low-cost subsidiary, Transavia, into a credible competitor to well-established rivals like Ryanair and easyJet.

Last week, Alexandre de Juniac, Air France-KLM’s French chief executive, said that management’s only major concession to the pilots — to limit Transavia’s growth mainly to the French market — had made him “sick at heart.”

Analysts say that the scaling back of the Transavia plan from the broader European expansion that the company had originally announced — the plan that provoked the strike — could undermine the long-term business case for the budget brand. And they predict that it could force Air France-KLM to rely more heavily on profits from its intercontinental and premium-class services, which are under siege from cash-rich Middle Eastern competitors that are eagerly expanding into Europe.

“The only thing the pilots seem to have achieved is to lose the company a lot of money,” said Chris Tarry, an independent airline consultant in London.

While the total financial costs of the strike are likely to take some weeks to tally, analysts said the group — which had been tantalizingly close to breaking even — would for 2014 almost certainly report a sixth consecutive year of losses.

By curbing the Transavia plans, the pilots may have permanently relegated Air France-KLM, one of Europe’s largest airline groups, to second-tier status on its home turf.

“They’ve gained a commitment from management to keep Transavia flying as a subscale business,” Mr. Tarry said of the pilots.

By expanding its network with new bases in the Mediterranean, Air France-KLM had hoped not only to reduce its labor costs — the pilots’ primary fear — but also to secure a substantial presence for Transavia in Europe’s most popular leisure destinations. Giving up that broader plan will handicap Transavia “in what is the growth segment of the market” in Europe, Mr. Tarry said, while also making it “more difficult to have an appropriate cost base.”

Instead, Air France-KLM has said that the €1 billion, or about $1.3 billion, that it had earmarked for investment in dozens of new planes and 1,000 new employees — including 250 pilots — across France, the Netherlands and southern Europe, will now be funneled primarily into France. Transavia operates a fleet of only 14 Boeing 737 jets from three French airports: Paris Orly, Lyon and Nantes.

The French National Union of Airline Pilots, which represents about three-quarters of Air France’s 3,800 pilots, has said that it supports the growth of Transavia in France because it is intent on saving, or even expanding, the number of French pilot jobs. But analysts said that by thwarting a European expansion — and by resisting a separate contract for Transavia pilots — the unions may have ultimately placed more Air France pilot jobs at risk.

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“There was little, if any, threat to Air France pilot employment from the expansion of bases outside France,” said Shakeel Adam, a managing partner of Aviado Partners, a consulting firm in Frankfurt that specializes in airline restructuring. “So far, Transavia is a platform used to connect markets otherwise not flown by Air France, or to fly complementary off-peak services for the price-sensitive market.”

Transavia France, which flies to destinations like Lisbon; Istanbul; Barcelona, Spain; and Naples, Italy, is only about half the size of Transavia’s Dutch operation. But its operating costs per seat remain higher. Air France-KLM has said that it hopes to reduce those costs by as much as 15 percent through increased economies of scale and by operating more frequent flights.

But if Transavia’s growth is constrained to France, it is almost inevitable that the low-cost brand will start to replace Air France on certain routes that are currently unprofitable.

“In an ideal world, you would migrate all of your short-haul traffic” to Transavia, Mr. Tarry said. But he predicted the company would probably resist such a wholesale shift to avoid diluting the brand images of both Air France and KLM, which still rely heavily on business passengers accustomed to a certain level of comfort, even on short flights.

“When full-service airlines replace services with low-cost carriers just to get to lower cost bases, it does not always work,” said Mr. Adam of Aviado. Many airlines end up adding back frills like free baggage allowances to win back passengers, he said. “So costs don’t drop as much as planned and revenues fall much further than imagined.”

More…. http://www.nytimes.com/2014/09/30/business/international/air-france-after-strike-faces-new-uncertainty.html

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