Air France: is a bounce back possible after attrition?

There has been talk recently of the possibility of attrition the Air France network in order to return to a better profitability. But the question is whether the airline will be able to return to growth after a period of slimming down and detoxification.

So let’s take it one step at a time.

Why should Air France improve its profitability?

At the end of July, in an interview with Le Figaro, Ben Smith, the CEO of Air France-KLM, said this:

“Air France’s margin in 2018 was only 2 percent, compared to 9 percent for KLM, 10 percent for Lufthansa, 12 percent for British Airways and 18 percent for Ryanair. A 2% margin at Air France is not satisfactory. Five points can be explained by the costs in France. But two points are due to the complexity and inefficiency of the airline. It’s up to us to tackle it. “

We thank him in passing for this frankness, which is all too rare among his predecessors.

This ineffectiveness can be assessed, in our opinion, from many angles. Inefficient and cumbersome organization, energy inefficiency with a globally aging fleet and cost inefficiency. This last element means that Air France has a cost structure that is the result of its fiscal nationality, its history and that this does not allow it to compete on all routes and markets : there will be many cases where an airline with other costs will be able to be profitable, whereas it is almost mathematically impossible for Air France.

The issue of profitability has two facets.

The first one is obvious: when your competitors are 6 or 9 times more profitable than you, you don’t need to graduate from one of the best business schools to know that you are being left behind. And when your “little sister airline” that you have looked at with contempt for too long is 4.5 times more profitable than you are, this can only raise questions internally.

The second is that everything suggests that the industry is heading for a crisis which, and here we totally agree with Carsten Spohr, the CEO of Lufthansa, will lead to a consolidation from which, in his opinion, 12 airlines will emerge (we can discuss the figure, but the trend is lucid).

There is only one way to be in the 12: first survive the crisis, then be able to grow again once the storm is over, either on the corpses of your competitors or by buying them out. And for that you need money, cash. And with a 2% margin after years of successive losses, this is Air France’s big problem.

Cadavre ? Prey? Or Predator?

No advanced reflection on the replacement of the A380 and B777? A renewal of the cabins which is done at the speed of an anemic snail? The choice of the A220 against the A320Neo ? A common denominator: if Air France has ambitions, it does not have the means today and has to make do with its limited resources, while its competitors Lufthansa Group and IAG (British, Iberia…) have the cash that allows them to see the crisis coming, to invest and to participate in the market consolidation.

Once the storm has passed, will Air France have disappeared? Will it be a prey? Will it be a predator? The answer to this question can be found in four letters: C A S H.

L’attrition n’est pas une stratégie

What is attrition? It’s a slimming cure aimed at repositioning a business on the products/markets on which it makes money by disengaging from where it structurally loses money without much hope that things will change.

This can take different forms depending on the gravity of the evil or the courage of the leaders.

In its most “pure” or fundamentalist version, we are talking about removing aircraft from the fleet, cancelling routes and laying off staff. In lighter approaches, fewer routes are closed, with little or no layoffs, but capacity is reduced on the routes that are retained.

Attention: attrition is not a strategy, or else you just have to close down everything, sell the planes and lay off all the staff, and if you don’t make any money, you’re sure not to lose any more. On the other hand, it is the consequence of a strategy to return to profitability when it has not been possible to do so in any other way, notably by playing on costs and organization. We remember that during the last major strike by Air France pilots, attrition was presented by the management as the only way out in the absence of an agreement with the pilots. And the time it took to get out of the loss spiral and post a sad 2% margin seems to prove them right in retrospect.

The British Airways example

One European airline has successfully implemented an attrition plan: British Airways.

At the beginning of the year 2000, the British airline was already dragging its feet and September 11 was a wake-up call: it had to transform or die.

13,000 jobs will be cut in 3 years. 47 aircrafts (out of 361) will leave the fleet in 2 years. Almost all loss-making routes will be discontinued (36 in total).

To complete the package capacities are reduced by 20%. by reducing the number of seats in economy class to increase the number of seats in business class and introducing, for the first time at the time, fully-flat bed seats in business class as part of an upmarket strategy for the most “profitable” passengers.

As a result, British Airways’ market share in Europe has fallen from 25% to 17% in three years. But the profitability is there and today the airline shows the insolent health that we know.

Remarkably, once the financial situation improved, all previously closed routes were reopened. And the fleet has started to grow again, that goes without saying.

The same remedy was applied at Iberia (owned by IAG like British Airways) with the same results.

A model for Air France?

If things went in the direction of attrition, can we expect the same happy ending for Air France? There is no way to tell.

Firstly, because the path that Air France seems to be taking is a middle path. There will be obvious capacity reductions on medium-haul routes, but there is no indication that any routes will be closed. While the performance of the A220 may help to make some unprofitable routes profitable, the airline will certainly continue to operate loss-making routes.

Secondly, because the closure of medium-haul routes would have a direct impact on long-haul routes (even if a simple reduction in capacity will have some anyway). Many of these routes feed the Roissy hub and, by definition, their closure would have consequences on the filling of long-haul routes.

Another factor to take into account is the low-cost carriers, which at the time of the great British Airways cure did not have the power or the size they have today. If we add the excellent health of British Airways and Lufthansa, we can fear that what will be left to the competition will not be recoverable in the future. Unless one believes that the low cost business model will not survive the upcoming crisis in the sector, or that it makes them much more vulnerable than the historical airlines in such a context. This is far from unimaginable.

Note that if we assume the model to the end and start from the principle that where Air France is good and profitable is long-haul, why not bring up the idea sometimes put forward by certain low-cost airlines of specializing Air France in this niche and partnering with EasyJet, for example, or subcontracting medium-haul flights and feeding its hub?

Last point: the loss of slots at Roissy and Orly, which certainly means that they are moving more towards a reduction in capacity than “hard” attrition. However, is it better to lose slots than to open weird routes like the recent Orly-Geneva for the pleasure of keeping them?

Air France has no choice

They are therefore moving towards a “light” attrition model that allows to hope for a return to profitability without harming the network too much, and it’s hard to say whether this will be enough. But there is nothing to say that going further and doing what British Airways did would work in today’s world, especially since a massive layoff plan would, in the context of Air France, only add crisis to crisis.

But with a 2% margin, the French airline has no choice if it wants to get through the coming winter in good shape. Light” attrition won’t solve everything, and organizational effectiveness will need to be addressed, but it is certainly part of the cure.

And the issue is not so much whether this approach is the right one, but whether, after having possibly recovered, the airline will have the means and the space to become offensive again

Photo : B777-200 Air France By Matheus Obst via Shutterstock