Air France restructuring update – what they tell us, what they don’t tell us

On 25 May, Air France published a progress report [1] on their “Transform 2015″ restructuring project.  I’ve previously written about the key problem areas in Air France (above all, the cost structure of short and medium haul), and the “Transform 2015″ plan focuses heavily on these.

The company outlines five main areas for improvement:

  1. Short and medium haul restructure (more on this below)
  2. Reposition long-haul, improving efficiency, punctuality and quality (this is likely also to involve depeaking CDG, moving from 6 daily hub waves to 7 to improve utilisation)
  3. Improve airport operations efficiency (e.g. self-boarding lanes and self-service baggage check-in)
  4. Speed up changes in the Cargo operation, notably further reducing the all-cargo fleet from 5 to 4 aircraft and integrating AF Cargo and Martinair operations
  5. Turn the Maintenance function into one of the top two global players (which will require it to “restore competitiveness” in AF’s own words – pain awaits)

Two thirds of AF’s long-haul passengers are connecting in CDG to or from a French (“court-courrier” or “short-haul” in AF jargon) or European (“medium-haul”) route. Wholesale cutting of the loss-making short and medium-haul network is therefore not an option as it would jeopardise the airline’s long-haul traffic base.

What’s going to happen in short and medium haul?
AF lays out three axes:
- AF mainline will provide feed at CDG, business-focused flights in France and Europe, and flights from the recently-launched “provincial bases” in Marseille, Toulouse and Nice
- There’ll be a new “regional pole” which will combine the subsidiaries Régional and Brit Air and the associated French domestic turboprop carrier Airlinair [2].
- Transavia France, currently operating 8 aircraft, will grow to over 20 aircraft and will have an expanded remit, launching new leisure-oriented routes (more so than taking on existing AF-operated routes).

Regional pole dancing
This new “regional pole” (“pôle” in the sense of “nexus” or “focus area”) represents a big change. It will be a more autonomous organisation, with its own identity and operating code, and its own commercial responsibility. It will provide feeder services to AF’s CDG hub on a wet-lease basis, as well as developing its own point-to-point routes. This is a huge and definitive move away from the previous “franchise” strategy which saw the subsidiaries flying under AF colours. This new organisation will have some 3,500 staff and 100 aircraft, and AF will bring in an external investor to drive the autonomous development of this new entity and ensure that costs are brought down. AF considered and rejected such a plan once before, some years ago; the fact that they are accepting it now is an indication of the severity of the situation (as well as of previous complacency).

It remains to be seen who the external partner will be. FlyBE must surely be in the frame, given their existing relationship with AF and their stated goal of expansion into Europe (for example, with the recent deal to operate Finnair’s Embraer fleet [3]), although they are not cash-rich enough to contemplate a straight equity investment. Of course they are not the only possible player, and an investor from outside the industry is another possibility. But since flyBE unveiled their new dual organisational structure some months ago, it’s been clear that they are betting on very significant growth in continental Europe.

Although not officially confirmed by AF, French media reports that the new AF regional operation will be headed up by Lionel Guérin, currently head of Transavia and majority owner of Airlinair. Last year, he was one of the candidates under consideration to take over AF after the departure of previous head P-H Gourgeon [4] and if his new appointment is confirmed, it will mean that he takes responsibility for a large share of the Air France Group’s European activity. It is anticipated that Mr Guérin will continue to head up Transavia France.

What’s not mentioned in the AF news releases?
The next steps for the company are the negotiation with the social partners (unions etc) with a view to a final agreement by the second half of June. There’s a lot to play for, especially as the plan already calls for the reduction of the regional fleet by 34 aircraft by the end of 2014. The company’s news releases mention many aspect’s of AF’s European operation but they are interestingly silent on two or three points:
- The Lyon hub: while AF stresses its commitment to its Marseille, Nice and Toulouse bases, no mention is made of the long-standing (and loss-making) regional hub operation at Lyon St-Exupery (LYS) [5]. Will the hub survive the proposed short-haul reorganisation, or will its (politically delicate) survival be “kicked down the road”, in other words made a matter for a future autonomous regional company to tackle?
- The proposed Bordeaux hub: AF had previously announced its intention of creating a Bordeaux hub using Régional aircraft, modelled after its mainline provincial bases. This project has been put on hold: the official excuse at one point was “revenue uncertainties” but in practice the need to secure a sustainable cost base is far more fundamental.
- CityJet: the lack of any reference to CityJet or the London City network suggests that this is no longer considered core to Air France activity. (It should be remembered that AF’s expansion in London City dates from 2007, a time when the prospects for the UK financial-services market looked very different.)  Alongside its LCY operations, CityJet continues to fly wet-lease feeder services to CDG, but in the game of “musical chairs” these seem likely to become the preserve of the new French regional organisation.

What does this mean for you?

For airports: there are likely to be some new relationships to be formed, and new opportunities for routes to and from secondary French destinations, with the change in commercial responsibilities in the “regional pole” and the expansion of Transavia activities.

For lessors and manufacturers: the fleet reduction is likely to be centred on smaller regional aircraft (50 seats and below) although 10 of CityJet’s RJ85s are also on lease and may come into the frame. AF is claiming it will maintain overall ASKs more-or-less constant despite this fleet cut, through more efficient utilisation of the remaining fleet. That it can envisage keeping production constant with 34 fewer aircraft is an eloquent demonstration of how bad things have gotten! We are already seeing some JOL and SLB activity from Air France and with the reductions in fleet capex, it is hard to see any significant refleeting in the coming 2-3 years, or indeed any significant fleet evolution without some very creative finance structuring.

Air France still has a long road ahead and we still don’t have the full picture of the planned changes, only some initial indications. What is clear, though, is that there’s going to be major change in the French airline landscape, and by extension in the networks and opportunities of a range of airports across France and Europe. Attachez vos ceintures!

Content is © 2012 Patrick Edmond, unless stated otherwise.

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