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Sun 6 Nov 2016 10:09 AM

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Air France-KLM targets Gulf rivals with new long-haul business

New long-haul business is set to have a fleet of 10 planes by 2020

Air France-KLM targets Gulf rivals with new long-haul business
Air France-KLM group CEO, Jean-Marc Janaillac (C) presents the Air France-KLM new strategic Trust Together project, flanked by New Air France CEO Franck Terner (L) and KLM President and CEO Pieter Elbers (R). Air France-KLM said o it will launch an assault on the competition with the creation of a long and medium-haul subsidiary, aimed at taking business from Gulf-based rivals. (Eric Piermont/AFP/Getty Images)

Air France-KLM will launch a new long-haul business with lower costs, the Franco-Dutch airline has said, aiming to regain market share from Gulf rivals and revive profits without further straining relations with staff.

Like rival Lufthansa, Air France-KLM has been hit by the rapid growth of carriers such as Emirates and Turkish Airlines, which have used new planes and lower prices to lure passengers away from hubs in Europe and through Dubai and Istanbul instead.

Air France-KLM has long been trying to cut costs at its Air France operations but has faced a series of strikes, notably over plans to expand low-cost arm Transavia across Europe.

Changing tack, the company said Transavia would now focus on its home markets of France and the Netherlands.

Meanwhile, the new long-haul business, set to have a fleet of 10 planes by 2020, will be staffed by pilots from Air France willing to move on a voluntary basis. Staff will be expected to work longer hours, and the company will aim to keep planes airborne for longer each day to cut costs.

Air France-KLM said the new business, which is yet to be named, was not trying to be a budget brand. CEO Jean-Marc Janaillac said the group's higher ticket revenues - stemming from its hubs, alliances, market share and image - meant it did not need costs at the level of easyJet or Gulf carriers.

But some analysts said the project, currently named Boost, was not bold enough, noting it would make up only a small fraction of a group which is aiming for a fleet of 435 planes, not including regional jets, by 2020.

"Plans at Air France-KLM look like change will still be slow and potentially thus too late," said RBC analyst Damian Brewer, arguing the company needed to go further to tackle its high debts and high unit costs. Brewer has a "sector perform" rating on the stock.

Air France-KLM shares initially fell, but recovered to trade up 5 percent, helped by in-line quarterly earnings.

Boost

While rival IAG, whose boss Willie Walsh drove through deep cuts at Iberia and British Airways, reduced non-fuel unit costs by 2.4 percent in the first nine months of 2016 to 5.11 euro cents, Air France-KLM has cut its by just 0.9 percent to 6.08 cents.

It predicts costs will come down by 1 percent this year. The group also slightly increased a longer-term target for cost cuts, saying it wanted to reduce unit costs by over 1.5 percent a year between 2017 and 2020.

The company said the new long-haul business would help it return to profit on loss-making routes or reopen routes, especially to Asia, which it closed due to competition.

On board, the planes will have a business class, but lie-flat seats without direct aisle access.

The project is similar to Lufthansa's Jump project, which sees staff working longer to make long-haul Lufthansa-brand tourist routes more profitable and uses older A340 jets.

But Janaillac said Boost was eventually looking to use new A350 jets, due to arrive in 2019.

Air France-KLM also named Franck Terner, current head of its maintenance unit, as new CEO of Air France, replacing Frederic Gagey, who moves to the role of group chief financial officer.

The group will also study a spin-off of its maintenance arm, although intends to retain control of the unit, it added.

Group-wide, it said it was aiming for sales of 28 billion euros (£25.09 billion) by 2020, with 100 million passengers, compared with 90 million in 2015.

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