So why isn't KLM going LCC? No cost pressure like AF?
 

Just had another European flight on KLM. While nothing to write home about, I did find it pleasant enough and better than what I would have got on AF.

I don't quite understand: the AFKL Group in in financial difficulties and costs have to be saved, everywhere. However, it seems that only the Air France part of the business is being LCCed to the bones while KLM keeps on having some niceties for its European flights. And it seems they are actually upgrading rather than downgrading parts of their offering (for instance its "Business" Class).

Arguably KLM starts from a low level and upgrading still results in nothing fantastic, but what intrigues me is that one airline in the group seems to move downward quality-wise whilst the other one moves up, with AF now undercutting KLM in service poverty.

Why? Why is the cost pressure that exists in the group only transmitted to Air France? Or am I missing something?

Cutting cost doesn't equal to changing to low cost business model.

I agree. But in the minds of AFKL management it seems to, just look at their various publications. So why such different approaches at AF and KL?

AF/KL is currently creating/expanding it's holding for the group.

Thus, Gourgeon is taking a step down from Air France as he will be the head of the holding. The holding will be employing around 200 people and is currently looking for a building in Paris. I wonder what will be the cost of the new entity, as most of the people will be replaced within AF and KL.

Talking about cash being thrown out of the window....

Maybe because one part of the company is profitable, while the other is not?

GenevaFlyer

I don't think that is it. I think the real issue is two-fold:

(1) first that the single most expensive cost airlines have to face are staff costs and in a nutshell, while KLM has managed to reduce personnel-related expenses a bit by typically flying with slightly smaller crews, AF is chronically unable to make their flying operation less labour intensive. Ultimately, as AF are not capable or redeploying staff in such a way as to put fewer people on planes or making them fly longer (in short in reducing the personnel cost per passenger) unlike more or less every other airline, they have to cut everything else, even at the risk of damaging the product sufficiently to lose some customers.

(2) second that AF believe that the future lies in full fare economy. This means that everything they spend on business class passengers within Europe is also spent on full fare paying economy passengers. This means that, say, a €5 per passenger on the business product won't cost them € 5 * 10 business passengers = € 50, but instead € 5 * (10 business+10 full fare eco passengers) = € 100. As a result their European business product is being consistently eroded as changes have a disproportionate impact on costs as compared to other airlines.

This would only be true if there was a savings target by company, e.g. "Air France, KLM, each one of you must reduce costs by 20%. It's your choice how to do it" - and then KL goes to reduce personnel costs while AF has to reduce product quality because its flying personnel are divas who still want to feel like in the 1950s when their job was a very glorious, high-pay-for-low-effort profession that people envied them for (and we all know that with all due respect for their professionalism etc FAs in 2011 are glorified cart pushers).

But if this is the case I ask myself what kind of cost rationalisation logic the group has. Haven't they said "take out any cost you can"? Have they instead said "only take out up to xx%, and then stop your efforts?". Interesting.

Unfortunately, we have no data on the relative profitability of AF and KL But AF and KL are two different companies. Rationalization certainly but I do not think that they have an identical business model, in part because of AF personnel constraints. I would bet that their products will remain different and that KL will not follow the LCCzation happening at AF domestic, Europe and LH.
BTW, do we know who will be the next CEO? He might have his own views.

KLM may not be 'LCC-ising' its services, but the folks who set the fares for short-haul economy ex UK are certainly aware of the LCC market as competition; consider:

LPL-AMS r/t (12-15 Jan): KLM = £79, EZ (incl. luggage) = £64
EDI-AMS r/t (12-15 Jan): KLM = £79, EZ (incl. luggage) = £70

However:

BHX-AMS r/t (12-15 Jan): KLM = £99: no LCC offering (?) on this route!
CWL-AMS r/t (12-15 Jan): KLM = £99: no LCC offering (?) on this route!

The difference may only be £20 but, for a budget traveller looking for a long weekend in Amsterdam, that could make a difference: train or bus fares to/from the nearest LCC airport (ex CWL or BHX) could easily add up to more than £20.

-- Henry

I think AF/KL are first waiting for the first results of the AF LCC experience and based on those results they might look further to expand this concept while guaranteeing good service as of the many transfer passengers from/to intercontinental flights.

AF is already close to LCC on its existing European service. And not far from it on its LH service. The province-base LCC service is just a small experiment, but the whole airline is moving toward LCC in its mainline service.

Agreed.

I don't know Aer Lingus, but I wonder whether Air France today is more or less what Aer Lingus was after they decided to be a sort of LCC and left oneworld. They focused on cost cutting, low fares/low service for MH with only a farcical full fare/full service offering combined with a more classical positioning on LH. They made that move in the face of the strong competition from Ryanair, and since then deeply regretted it and made a sort of turnaround since. Now AF wants to go where Aer Lingus went and already came back from.

Or am I having a completely skewed view of EI here?

I have been flying KLM several times this year and I'm rather amazed mainly by the great service in terms of catering offered on relatively short flights such as AMS-FCO (2 sandwiches, cold/hot drinks and a nice little cookie in economy class :eek:) and the extremely convenient fares, even when booking next to the departure date: I normally fly MAN-AMS/CDG-FCO and tariffs are often cheaper than jet2 (direct flight) and 99% of the time also cheaper than the fares published by other competitors like BA, LH/LX etc. Long it may continue ^

The budget traveler looking for a long weekend in Amsterdam would in all likelihood not have any hold luggage, especially as Easyjet has no weight limit on hand luggage (just the usual dimension restrictions), so that the price differential between KL and EZY is rather more substantial for that target market.

It is funny how quickly perceptions change!

Am I the only one who remembers that all except the shortest shorthaul flights would offer a bar service, followed by a hot meal, then coffee/tea and finally another bar service, in economy class?

It wasn't that many years ago!

Johan