French connection: Air France-KLM chairman

Air France-KLM is midway through a cost-cutting programme that aims to fast-track what was once the world’s biggest airline back to profit. Chairman and CEO Alexandre de Juniac explains how the plan is working, what the carrier is doing to revamp its premium offering, and addresses the long-running dispute with the Gulf carriers
The Transform 2015 programme saw Air France-KLM record an operating profit in 2013 — only its second in six years.
By Courtney Trenwith
Sat 12 Jul 2014 10:47 AM

Barely a few years after its formation, Air France-KLM faced a decisive decision: drastically transform its operations or, as its head Alexandre de Juniac, warned last year, risk dying or becoming a “small regional carrier”.

“Now more than half-way through the three-year “Transform 2015” programme, the boss of what was once the largest airline company in the world by operating revenues is preparing to release a surprise second instalment — news that is likely to send shivers of panic down the spines of the company’s nearly 50,000 employees, given the recent culling of several thousand jobs and deep cost-cutting.

De Juniac has no apologies for enforcing what he says is necessary to save the airline group, but in words intended to inspire workers, he says: “I’ll put on the table what I think is a fair deal to ensure you have a bright future and a future that is brighter than the one you had. That’s the improvements you have to make; you take it or leave it. Let’s be real.”

Air France alone was bleeding €700m ($952.9m) a year when Transform 2015 was announced in 2012. The goal is to increase economic efficiency by 20 percent by the end of 2014, reduce net debt by between €2-4.5bn and raise EBITDA (earnings before interest, taxes, depreciation and amortisation) to at least €2.5bn.

At the centre of the strategy is jobs: the company, which was formed through a voluntary merger of Air France and Royal Dutch Airlines in 2004, originally targeted 5,100 job cuts out of a total workforce of 49,000 in 2012. The majority of the job losses have been assumed by volunteers willing to retire or depart the company, and almost all have come from Air France.

Other savings being negotiated with unions include wage modernisation measures, seasonal roster changes, job sharing and moving some employees to part-time.

But, positively, the strategy also has included launching new routes, mostly in Africa, Asia and Latin America, boosting the long-haul network, growing its profitable engineering and maintenance divisions, improving online bookings to widen the customer base and investing €500m in revamping much of the fleet.

The Transform 2015 programme saw Air France-KLM record an operating profit in 2013 — only its second in six years. However, another net loss highlights the carrier’s work is far from over.

De Juniac says he is preparing to release the second Transform document by the end of the summer, which he dates as 21 September.

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This next instalment will be far more detailed according to each department and will aim to boost growth and competitiveness rather than cut costs.

“Transform [2015] was cost-saving only and there were savings for everyone. The new plan will not be at all based on the same methodology,” de Juniac, who is group chairman and CEO, says.

“It will be split into various measures targeting activity by activity. We will determine where our competitive position is and what we need to do in terms of competitive gain to reach a certain level of growth. So it’s a completely different approach.

“We’ll target a growth rate which has to be at the minimum level of the market, to ensure we maintain our market position and even increase our market position, and then we’ll discuss [the targets] with everyone in our airline so they are totally aware of what we need to do. It’s enormous work but it’s, I think, very challenging for people.”

Air France has taken most of the hit, while KLM, which is profitable, has been spared the same level of overhaul. KLM CEO Camiel Eurlings has been a staunch supporter of the Transform programme and heaps praise on his French partner for its progress so far.

“I think Air France deserves a lot of respect for what was done labour wise, a lot of costs were saved,” he says during the joint interview in Doha recently.

“Now we are getting out of the troubles; we are getting in the good part of the business again. What you feel now, during all the talks we have and all the talks with the [employees], [is that] there is an ambition to be part of the winning parties in the aviation sector, there is an ambition to be on the offensive, and that’s what we want to do, not just in terms of growth but also in improving our product.

“We are really going on the offensive, with a fleet that will be renewed substantially, it will be a very big Dreamliner operator; we will go with the A350s starting from next year. And in that line, we ask ourselves the question in a very open way, what is necessary to be able to be on that offensive part of the business? Which means we are looking all around, [asking] what does the competition do? What is necessary to have the growth? Which product do we need and how can we in a positive way support it to achieve this productivity gain?

“But I can tell you one thing, there is this ambition because people feel we are improving year over year and this is a very beautiful thing to witness.”

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Air France-KLM also is sizing up opportunities to strengthen its other existing partnerships, including with Abu Dhabi-based Etihad. The pair has a limited codeshare agreement already and deepening that tie is of great interest to de Juniac.

“We have a smooth relationship now with Etihad, we have roughly 20 [flights] between Abu Dhabi and [Amsterdam] and Abu Dhabi and Paris, so the point is to extend the number of flights and strengthen the routes we have,” he says.

Discussions have already started, but how deep could that relationship go?

“I don’t know. We have always said having a revenue-sharing relationship with them should be a good solution,” de Juniac says. “It is a good solution everywhere for us in the world, [in] China, it is a fantastic solution in the North Atlantic [with Delta], [where] it’s enormous business and profitable, which is not always the case in every part of the world. So repeating the same type of mechanism with Etihad is totally logical.”

The airlines also will soon have a closer working relationship if Etihad’s bid for a 49 percent stake in loss-making Italian carrier Alitalia is approved by regulators. Air France-KLM also has a 7 percent stake, which was diluted from 25 percent in November 2013 after it declined to participate in a funds injection, despite speculation it might bring Alitalia into the Franco-Dutch group.

Air France-KLM had also made an offer to Alitalia that appears to be similar to that of Etihad. But de Juniac insists there’s no hard feelings against the Gulf carrier.

“That’s the way it is,” de Juniac says. “They’re also investing money; I had no money to invest, I was poor.

“If all the conditions were met for us [we would have invested in Alitalia], but it wasn’t the case.”

Either way, de Juniac says he expects Etihad’s investment in Alitalia will be “friendly”, in which case it would also allow for stronger ties with Air France-KLM.

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“It’s not in the interest of anyone to reduce or harm the partnerships we have with Alitalia,” he says. “We have to see a development plan from Etihad for Alitalia and then we’ll make a decision [on future involvement in the airline].”

De Juniac hasn’t always been so friendly when talking about Gulf airlines. He has been one of the most vocal European airline executives to criticise what they perceive as Gulf governments unfairly propping up their carriers with hefty loans, gas subsidies and cut-price airport access fees in what they claim give the region’s airlines an unfair economic advantage that allows them to undercut fares.

Those airlines have also called on their governments not to approve more landing rights for the Gulf carriers.

“We are advocating to our authorities that we want fair competition and to have a level playing field,” de Juniac says. “We are asking for caution before giving [more landing rights], in fairness.”

Although de Juniac says he’s not yet too concerned by Etihad’s ongoing strategy to buy into European airlines — it also has a 29.2 percent stake in airberlin, 4.99 percent of Aer Lingus and 49 percent of Air Serbia, as well as a pending 33.3 percent cut of Swiss regional carrier Darwin Airlines.

“It’s a concern if it leads to a major grant of traffic rights but I’m not sure that it will lead to that,” de Juniac says. “In Germany, they’ve bought 49 percent of Air Berlin and it didn’t give them anything more than they had — nothing. The agreement [for landing rights] was signed in the ‘80s and it hasn’t been extended.”

Air France also is heating up the competition in the realm of luxury — a target segment for the Gulf’s major airlines.

The airline will introduce four La Première First Class suites to each of its long-haul Boeing 777-300 aircraft. The hallmark of the three-metre-square suites is curtains, which the airline says allow passengers the choice of total privacy without creating the sensation of being shut in, as a heavier door can do.

The seat also can be converted into a two-metre long bed, with a mattress and bedding provided.

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De Juniac says the luxury suites — due to hit the skies in September — generate more revenue than if the same space was occupied by economy or business class.

But he is keen to emphasise the airline is improving every class — a distinction compared to other airlines.

Presently, Middle East customers barely contribute to Air France’s luxury fares, but de Juniac says emerging markets are increasingly playing a bigger role in this segment.

“There is a market for luxury of people willing to pay high price which requires a very high quality product, which is what we’re offering,” he says. “I think this market is expanding, because when you are talking about passengers in emerging markets you have a small proportion, [although] still significant, that are looking for this type of product.

“Secondly, for us it’s an enormous marketing tool to explain what is our know-how; the know-how of Air France is to be able to deal with passengers in the best way. Thirdly, internally, it’s a way to [motivate] our people; they’re able to provide the best.”

Ultimately, Air France appears on its way to recording a profit. And that could be as early as this year, de Juniac says, hesitantly.

“Our target is €2.5bn in terms of EBITDA. If you make calculations, we should be positive in operating margin; net is another story. It’s too early to talk about net,” de Juniac says.

But with a net profit at least in the horizon, surely, the worst is over?

“I think so. The worst is over but the job is not finished, will never be finished.”

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