"An ambitious three year plan to restore profitability"

AIR FRANCE-KLM: AN AMBITIOUS THREE YEAR PLAN TO RESTORE PROFITABILITY

Thursday 12 January 2012

At its meeting on 11 January 2012, the Board of Directors of Air France-KLM examined the transformation plan over three years (2012-2014) for the Group, and the implementation of the three priorities set out on 9th November last year: restoring competitiveness through cost-cutting, restructuring the short- and medium-haul operations and rapidly reducing debt.



Downward revision of capacity growth and investments

The Board of Directors first examined the Group’s growth prospects for the next three years. Given the uncertain economic environment and the ongoing imbalance between transport supply and demand, the Board deemed it necessary to opt for quasi stable capacity for the Air France-KLM Group in both passenger and cargo. Consequently, over the next three years (2012-2014), the Group will only increase capacity by a little over 5% on a cumulative basis.

This will lead to a shrinkage of the Group’s fleet with an attendant reduction in the investment program, with the exception of spending targeted at the ongoing improvement in operational safety and client service. The investment program will be reduced from over 6 billion euros over the period 2009-2011 to below 5 billion euros for the coming three years. This decision has led the Group to adjust its medium-term fleet plan combining, amongst others, the deferral of aircraft deliveries and the non-exercise of options.

Two billion euros debt reduction by end December 2014

The Board of Directors also considered as a key priority the reduction of the Group’s net debt by two billion euros to some 4.5 billion euros by end December 2014. Over the period 2012-2014, two billion euros in net cash flow will be generated through a combination of immediate actions and a transformation plan.

Immediate cost reduction measures

New cost cutting measures amounting to some one billion euros will be implemented immediately. They include a freeze on general pay rises in 2012 and 2013 at Air France and a policy of wage moderation at KLM. The hiring freeze introduced in September 2011 will also be pursued. Additional productivity measures, a further reduction in overhead costs and network adaptations will complete the measures.

These measures, the components of which have already been fully identified, will be implemented with immediate effect, in compliance with regulations concerning the information or consultation of the Group’s social partners.

Transformation plan

These improvements on their own, however, are not sufficient to guarantee the durable restoration of the Group’s competitive position and financial strength. The Board of Directors therefore decided to implement a transformation plan, encompassing all its businesses, with a target of generating an additional one billion euros in free cash flow over three years.

Improved productivity

The return to a satisfactory level of profitability will require a significant improvement in productivity in all parts of the Group, which will imply the renegotiation of the employment rules contained in the existing collective agreements. Negotiations with the organisations representing the various categories of employees concerned will begin rapidly.

Although the passenger business will be the primary focus with the restructuring of the short- and medium-haul operations, cargo and maintenance will also have to redefine their conditions for profitability.

Break-even of medium-haul within three years

The short and medium-haul network remains indispensable to the Group’s development, assuring not only its presence throughout Europe, but also feeding the long-haul operations of the two hubs, Paris-CDG and Amsterdam.

Since the financial crisis of 2008-2009, the structural decline in unit revenues has led, despite the NEO plan, to deepening losses in this business, estimated at some 700 million euros in 2011. As the financial results of recent quarters demonstrate, the long-haul operations, also subject to increasing competition, cannot alone offset these losses.

To restore the medium-haul business to breakeven, the Group is working on the following structural measures:

• better utilization rate of aircraft and assets;
• significantly improved productivity in all employee categories;
• redefinition of certain activities, potentially leading to more extensive outsourcing in some areas.

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The Board of Directors considers this progress report has enabled the definition of ambitious but realistic objectives for the three year transformation plan. The implementation of these measures will contribute to reinforcing the Group’s financial position and preserving the current level of liquidity. It will be the subject of regular updates in order to measure its progress.

What about meeting with customer panels and ask them what they are expecting and what they would be ready to pay for?

Here are a few things which would sure go towards increasing revenue behind the curtain:

- offer seat reservation for a fee at time of booking
- offer seat reservation with extra leg room for a higher fee at time of reservation
- offer full meal for a fee for a fee at time of booking

NB : all three above are practised at AB and make the travelling experience more enjoyable.

- offer the choice for higher fares in return for higher FB miles earnings (right now, it is either ludicrously expensive full fare or lowest possible fare).

Of course, this would not spare them the efforts of offering better product/service at no extra costs in order to gain market share.

@:-) no?

From Le Monde:

CGT Regional was at AF headquarter with megaphones, flags and all the package, asking for interim people that have been terminated to be hired (CDI) by Air France.

That's a bit lol regarding AF situation.

Nothing good for customers.
More cost-cutting, no investments in longhaul product. Quite different from recent quotes about raising AF to SQ quality.
And a lot of industrial actions in the near future.

Yupee, get ready for some strikes.

If it was for CGT we`d still be in caves in the bronze age because one of their revendications would have been to stop the decline of the metal industry.

Indeed very LOL.

An interesting article, actually more like a blog (although only in French):

http://thewingman.blog.lemonde.fr/20...nouvel-espoir/

Very pilot-oriented imho.
Nothing about Air France pilots working 620 hours whereas the average is 800 for european majors for example.

Indeed. the basic message of this blog is that the only way out is for the State to subsidize AF even more.

My comments (in french sorry) available here :
http://voyageforum.com/v.f?post=4770271#4770271

Notwithstanding the crisitism brought up by former posters, the blogger makes an interesting argument:
This argument is clearly valid for bargain-seekers Y travellers, but these customers do not contribute to the profit margin of the airline. So what about business travellers, have they changed their patterns, prefering price to travel time? Judging by posts of C-travellers on this forum I quite doubt it but it is a pertinent point.

I fully share your analysis.

+1

I think that the argument developed by the blogger is incoherent. Pax have two choices 1) nonstop at higher price, 2) hubbing somewhere at lower price. If anything, the hub concept has been growing in popularity. Well over 50% of AF Longhaul traffic is hubbing in CDG. Paris is a very small market, AF has no choice but attracting pax from other airports and that can only be done at lower price. All airlines compete on hubbing. IMO the argument that the hub concept is outdated is ridiculous. Indeed, some flights/airlines require a long connection time and gulf airlines are sometimes obliged to include such long connection times due to their geographic position. But if AF does not hub and mostly relies on Paris-point traffic, it might as well close immediately.

Regarding Airlib's interesting question about premium pax: I think that there is a third factor to be included and that is product's quality. When you have a 12+ hours flight to Asia, quality/reliability is a major factor. there is much more differentiation in premium products than in Y. Frankly, when I contemplate 12 hours in AF angled seat (meaning back problems), poor customer service/respect, inconsistent onboard service, potential strikes, mediocre FFP (very few benefits to frequent flyers), etc... I have no problem adding one shorthaul and 3 hours of travel time. That is even if price is equal. And if I can fly BA, CX or SQ at a lower price, then the choice is obvious. Some premium pax are constrained by the company's policy (who can negociate good fares from AF), but many others are not. AF has lost market share on premium traffic not only from pax flying to/from Paris, but also pax who hub somewhere anyhow and can choose another airline to do so (e.g. pax flying from MAN or NCE). Then BA, LX, LH or some US/Asian/Gulf airline prove more attractive in terms of quality/price.
AF faces a huge uphill fight in premium classes, but it is a hopeless fight if they do not have the money to invest in better quality. It is a hopeless fight if they compete on price alone as 1) they have higher cost structure and 2) premium pax are less sensitive to price and more sensitive to quality given the huge money spent anyway.