Although Air France-KLM’s stock rose as pilots finally ended a two-week strike that sapped the company of a whopping $250 million, the beleaguered company has no choice but to deal with its bête noire: Its low-cost subsidiary, Transavia.
Company management had planned to make Transavia into a leading budget airline by expanding its network through creating new bases in the Mediterranean, but pilots strongly opposed that idea, together with the lower wages and longer working hours that are part of the course for budget airlines.
Currently, Air France pilots are among the highest paid in Europe and reportedly fly fewer hours than their peers at other legacy airlines, but this, according to Torsten Wulf, academic director Center for Strategy and Scenario Planning and the Leipzig Graduate School of Management, is unsustainable in the long run, “and Air France has to do something urgently if it wants to become competitive again, particularly about personnel costs, which are far too expensive.”
What the company will do, though, remains to be seen, since there is no word on wages, and expansion plans for Transavia have been watered down considerably, thereby serving little toward its profitability. Like any other European airline, Transavia faces intense competition from well-established budget carriers like Ryanair and EasyJet, which fly to and from multiple European destinations, but there’s little choice for parent company Air France-KLM but to take Transavia forward.
For its part, Air France is also finding it difficult to compete against airlines like Singapore Airlines, Emirates and Etihad, which are not only flush with cash but more attractive to consumers seeking long haul flights out of Europe, and also expanding rapidly in Europe.
European airlines have had a rough few years, there’s no doubt about it. Air France, part of the Air France-KLM group, is no exception, and has been impacted by the economic crisis, which dragged profits down.
France has recently been dubbed the new “sick man of Europe,” its economy is in trouble, and many believe there’s a need for some major restructuring to spur the private sector.
But surviving and returning to profitability by cutting costs and devising an effective low-cost strategy is likely to be easier said than done for Air France and German carrier Lufthansa, which also continues to face pilot strikes on a regular basis, said John Strickland, an independent aviation consultant based in London and director of JLS Consulting. “Both these companies are struggling with their pilot groups, who are resistant to change and fail to understand what needs to be done,” Strickland said. “Management, too, seems unable to communicate effectively.”
Still, Strickland said it isn’t impossible to devise a keen strategy for a competitive low-cost airline that can help legacy carriers cut their own costs and become more profitable. He cites the example of International Airlines Group (IAG), the holding company for British Airways and Spanish carrier Iberia, which has been quite successful in its strategy. “IAG took losses with Iberia because of the recession in the Spanish economy but they have been clear on what they needed to achieve and why,” he said.
And unlike other airlines that either bought or set up budget carriers and then got out of the business because of the competition, IAG stuck to its guns by holding onto Iberia’s low-cost airline Vueling, whose ultimate success has helped boost British Airways 2015 profit target by around 12% and Iberia, too, has turned around and is returning to profitability.
“Iberia also had cabin crew strikes but [IAG] managed to get through all of that and move forward,” Strickland said.
According to Philippe Vignon, current CEO of Geneva Tourism who worked for many years in the airline industry and was instrumental to the launch of a successful European budget carrier, Transavia could leverage Air France’s prime slots at Paris’s Orly airport to its benefit.
“Any new operator isn’t going to get those eight a.m. takeoff times that many travelers favor, so based on that, Transavia could get a strong share of some markets,” Vignon said.
The airline could also look to fly to destinations that other budget airlines currently do not. Easyjet and Ryanair have Morocco— a popular destination for French tourists—well covered, but “Algeria is a possibility,” he said.
Then again, Algeria isn’t really a top tourist spot and with most of Europe already covered by existing budget carriers, the path ahead isn’t easy for Transavia. Nevertheless, for Air France, the bottom line is cost cutting, Wulf said, and one way or another, this has to happen.
“The U.S. airlines went through this process 15 years ago and now it has to happen here in Europe. The airlines here have to do something about their costs, personnel costs in particular,” he said.