Turbulent times for European flag carriers as budget airlines take flight

Transavia Boeing 737-800

Transavia Boeing 737-800 (photo: Wikipedia)

Air France pilots are now into the second week of a strike over management plans to step up development of its budget Transavia unit where pilots are paid considerably less.
The strike has forced Europe’s second largest airline after Lufthansa to ground around half of its flights and is costing it €20 million per day, which Prime Minister Manuel Valls said yesterday “represents a real danger for Air France”. Air France-KLM has only recently recovered from a severe financial crisis at the end of 2011, thanks to a deep restructuring programme that has seen it reach pay and voluntary departure deals with employees. In the second quarter of this year it nearly tripled operating profit to €238 million but posted a small net loss of €6 million as it had to take a 106-million-euro write-down of assets in its freight division.

Low cost, high share

But that doesn’t mean clear skies ahead for Air France, as well as other traditional carriers, as budget airlines are relentlessly expanding their market share. “Low-cost airlines now represent between 25 and 45 per cent of air traffic in Europe, depending on the country,” said Didier Brechemier, an aviation expert at consultants Roland Berger. They are no longer minnows in the industry. Irish low-cost airline Ryanair, with a fleet of 300 Boeing 737 medium-haul aircraft, serves 186 airports in 30 European countries. Ryanair’s fleet is set to soon expand to 400, which would take it above Air France’s stable of 350 aircraft. Air France-KLM together have over 550 planes. British low-cost airline easyJet is also not far behind with a fleet of 226 Airbus A320 planes, carrying out more than 1,400 flights per day on average.

The low-cost model is changing how people fly.

Passengers are offered a low ticket price to be flown from one city to another, but many services previously included in the price must be paid for if desired, such as an on-board meal or a checked-in piece of luggage. The growth of low-cost airlines “has been facilitated and accelerated by the web which has cleared away the obscurity of prices,” said Jean-Pierre Nadir, the founder of the Easyvoyage.com website which allows people to compare ticket prices. Many people seem willing to give up frills, and maybe a little hassle, to get lower prices, which budget airlines are able to offer as they also cut other costs, usually by employing fewer staff at lower wages.

They also tend to fly newer aircraft, and have ordered many next-generation aircraft which promise even greater fuel economy, putting more pressure on traditional carriers as fuel is one of the biggest costs for airlines. Low-cost airlines have recently turned up the pressure by trying to make inroads into the business travel segment, which has been a big money-spinner for Air France, Lufthansa and British Airways that they have guarded jealously. Ryanair has recently introduced flexible tickets and priority boarding, two aspects often important for business travellers.

Traditional carriers are being forced to adapt their business models.

“If they don’t, they could end up being forced out of (the short and medium-haul) segments of the market,” said Brechemier. Since they can’t beat low-cost airlines, traditional carriers seem intent on joining them. Air France’s intended expansion of Transavia is only following moves by British Airways and Lufthansa. British Airways first created its own budget airline Go Fly in 1998, later selling it to easyJet. But with its merger with Spain’s Iberia in 2011 to create the International Airlines Group, it also picked up the low-cost airline Veuling which has a fleet of 90 aircraft.

Air France-KLM now wants to expand Transavia in France, where it has had around only 10 of its roughly 40 aircraft based. Air France pilots, who can earn up to 250,000 euros a year, fear that the group will shift flights to Transavia and its lesser-paid pilots.

Air France model ‘crumbling’

They have so far rejected overtures by management, including an offer to postpone for several months the implementation of the Transavia expansion while discussions take place. “It is distressing to see these pilots clinging to the vestiges of a world that doesn’t exist anymore,” said Easyvoyage.com’s Nadir. “It’s like they are refusing to see that the model under which barriers were erected to protect Air France is in the process of crumbling,” he said.

Philippe Jourdan, head of Promise Consulting, said the challenges facing Air France were the same as Lufthansa or British Airways, but the context was different.

– See more at: http://www.themalaymailonline.com/money/article/turbulent-times-for-european-airlines-as-budget-carriers-take-flight

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