orbitmic

Oh yes they would - and indeed they do, publically but also privately. You can be sure that if they have been willing to let the airline suffer one of the worst strikes in recent year for it, it was not just to save the face of "marketing talk" but because they really think that they need that Transavia Europe flying and believe that it will significantly improve their short and medium haul profitability which I and several others do not believe at all.

FD1971

Just ask yourself the following question?

What do they get from KLM that is not available at the same cost from another provider?

We all know that Emirates is highly subsidized, hence you cannot really use them as a Benchmark, however they were absolutely right pointing out the huge costs of alliances and mergers...and they always argued that less capital invested might result in comparable financial benefits in a co-op.

In the case of AF, it is even more interesting, because some experts argued that they benefit from various factors anyway, because of significantly closer ties with their Government, at least in comparison to LH or BA (which are both 'neglected' by their respective Governments to a very high extent)

Of course, they are still some synergies, but I fear the cost of managing this strange airline group is probably higher, simply because the French want to control too much...

And can you blame the Dutch side for not taking the French seriously? (based on the track record of Air France in the past...)

FD1971

Regarding the homework it is quite easy.

As long as your long-haul ops. were able to cross-subsidize the rest of your activities needed to support the big birds, you were fine.

With all due respect, but we do not really have to discuss whether or not Mainline or Mainline Lite should operate the support flights (aka feeding) or the EU P2P flights.

Retirement at 60 and spreading your life as a pilot evenly between flying a Feeder at 40-60K and flying Mainline at 120-150k was one of the main discussion points between LH and the pilots and so far the compromise looks solid.

Remember the old saying about pilot salaries at AA and UA....

One party will get the same salary the others negotiated before anyway...and I guess it is the same over here in Europe. The current cost structure of LH will become the Benchmark for AF...

On a side note, regarding Wings or Transavia or Vueling, quite some experts argue that those units are being dressed for the shopping window at the moment, just to spin them off at a later stage (as pointed out before, I am very sceptical regarding their financial success...)

San Gottardo

OK, now I understand. Sounds coherent, and to take the thinking further, two sets questions:

1) If AF wanted to avoid alliances and equity partnerships, if it didn't want to "internalize" some of the benefits it currently gets from a partner like KL, if it wanted to get from a "free" provider the things it currently gets from KLM at a lower cost - who would that partner be? In a scenario where KL would be snatched by someone else like BA or LH or EY or joined forces with SK or whatever (im)probable scenario we can think of - who then would be the partner that is neither an alliance partner nor an equity partner of AF? Easyjet, Ryanair, Norwegian, Wizzair for shorthaul? Because all the other meaningful European legacy carriers are either already owned by one of the EU3 or tied up in some alliance. Or is a JV like the one they have with DL for TATL the better solution that should also be applied to other parts of their network? And for longhaul, who would the provider be? Or would it be several providers?
2) Ronald Coase got a Nobel Prize (and deservedly so) for explaining why firms internalize certain transactions rather than carry them out with partners in the market place. For what parts of the airline industry that are still integrated today will that no longer hold true?

To put the question on the table: what would the benefit, in EUR, be if AF did not own and manage KL but if had a more loose setup with another provider? If that number does not exist, no case can be made for or against the integration of KL into AF.

By the way, we do not *know* that Emirates is subsidised, at least not in the sense of "state funds are used to run a business that otherwise would not be viable/at least not at this scale". I do happen to have some insights into how state money is allocated and managed in Dubai and the UAE, and they are not into subsidising businesses that have no viable business case. The rebuttal paper that EK produced in response to the (amateurishly prepared) allegations by the US3 gives some explanations.

Sorry, I don't get that point.

"Probably higher" - by how much (ballpark range)? And what exactly is it that the French want to control "too much"?

Irrespective of whether we blame them or not, they did after all sell out to "the French".

orbitmic

I'm not sure that I am following you: we did not discuss that - that is the question of AF mainline vs Hop! and I do not think that anyone has mentioned it so far. Transavia Europe is an entirely separate question - AF's desire to now scale up a fully owned but autonomous low cost airline with no perspective of operating either feeder flights or AF's point-to-point flights (this remains with AF and A5 respectively).

FD1971

And this is the interesting point I mentioned some days ago, when I commented on the 1-1.5 major programs that AF is behind the competition in Europe.

Investing into a different unit like Transavia is expensive, is years behind the competition and takes place in a market that is already congested and not really lucrative (without all the subsidies and cross-subsidies being paid at the moment)

And this brings us back to the discussion of home work....do they have a plan in the drawer that just needs the Go from various stakeholders or are they still in the process of figuring out what to do without having a detailed plan yet...

To be honest, up until some quarters ago, I thought they knew what to do...before they starting eliminating major spokes like MCO and MIA (ex AMS)

Not the right move in case you intend to compete with the major network players like LH, but maybe the right move in case you want to downsize your operation and rely on CDG and a strong partnership with a major player from the Near East...

Getting rid of KLM would make sense in this case and I do not really know whether the classic hub and spoke model will be viable in case you cannot generate cheap feed and as long as the yields in many longhaul markets decrease.

And we all agree that France is simply not capable of reducing costs like Germany, the farmers are one example, without major major Hartz like schemes. I do not see them in France and up to a certain point, I admire the French people for their resistance against those schemes.

FD1971

KL is really controlled by AF, rephrasing the sentence, you could also say that KL is mostly controlled by the French Government. I am not able to put a figure out here, but it is amazing to compare the autonomy of Swiss and KL as 'independant' airlines being 'controlled' by a big brother.

Maybe, you have to be in real financial dire straits, maybe you have to lose most of your leaders in the process, but isn't it amazing to see how Swiss worked and how easy it was and is to manage Swiss in comparison to KL, SN or OS (from the perspective of the owner)

Aviation as a whole is of far higher interest for the French Government in comparision to Germany and the Netherlands (today, I should add quickly, it used to be different decades ago in the NL)

LH and BA did not really get a lot of support from their respective Governments after deregulation, which is not so much the case in France.

Aviation in Europe will revolve around KLM in the next few quarters, everything else has been decided anyway, IAG and LH Group are on the right path already with minor construction work ahead.

Mokshu

I don't think the Transavia Europe debate is really about improving SMH profitability. The main objective is for AF/KL to have credibility when negotiating alliances and JV in Asia, where profitability is. And currently, when they are negotiating they face this : "What do you have to offer me ? You own nothing in Europe : EasyJet and Ryanair do". So unless they improve their market share and limit the plunge fast enough, they won't reach a deal that will allow them to stay competitive worldwide.

So in my view it could be "acceptable" for AF/KL to lose money within Europe as long as they have consequent market share and credibility. Which is definitely not the case at the moment.

orbitmic

Well, with Transavia Europe, they will get the further losses (and I'm not sure it is that acceptable considering their current disastrous financial situation) and they won't get the market share. I also personally think that the said further losses will only contribute to further deteriorating their credibility.

Goldorak

Slightly OT but in link with the decrease in profitability of long-haul sector in AF : I just came across this article about SQ saying that their LH OP's are unprofitable since 2009
http://finance.yahoo.com/news/distre...QDBHNlYwNzcg--

We all know that SQ feels also the pain from ME3 but I was a bit surprised to read this.
Even more surprising to me in this article :
There are so many LCC now in Asia that it's hard for me to believe that the money is now in short and medium-haul flights for full service carriers like SQ. Is the situation so different in Asia vs Europe for this ?

stimpy

Singapore is a big money town and has a large population of business class fliers. Every time I take a short or medium trip in Asia, be it on SQ or CX, the front of the plane is full. These people don't want anything to do with LCC's. But that's just my observations.

brunos

Asia si geographically very different from tiny Europe. Regional flights are typically 2 to 6 hours, not 1 to 3 like Europe with use of widebodies or narrowbodies.

SQ home base is minuscule, so its LH traffic relies primarily on transit pax. But SQ is a high-end airline and feels the bite of ME3 and Chinese airlines on its LH traffic. Most SEA airline are focusing growth on regional flights (TG, GA, MH, etc...) as they have a difficult time getting market share in LH transit pax.

Also SQ is geographically poorly-positioned for flights to US. So US is growing and Europe is stagnating, but SQ cannot fly economically to US. SQ is feeling the pinch of economic conditions in Europe. CX is geographically better positioned to fly to US. Not ideal for NYC compared to Northern Asia airlines but still, they increase frequency to NYC.

My final remark, is that we are back to cost accounting. How do we assign revenues to LH and SMH for all these transit pax? SQ probably has a different assignment matrix than AF.

orbitmic

The only thing that I would add to brunos's excellent post is that the concept of "low cost airlines" also doesn't travel very well across continents. The Asian low cost landscape is very different from the European low-cost landscape, which, itself, resembles neither US, nor Mexican, nor South African, etc.

To cut a long story short, arguably, some Asian low cost airlines offer a more comprehensive onboard service that is very close to some European full service ones...

Goldorak

Very true indeed.

FD1971

I do not get that point at all.

Can you name anyone in Asia who cares about what Ryan or Easyjet bring to the table?

Can you name any significant destination in Europe that is not served by KL/AF through their hubs?

Actually, it is the complete opposite. As long as you do not offer a coop. , interlining etc. , you are not really interesting for anyone offering long-haul service into a hub in Europe.