Air France-KLM (finally) heals its ills

It’s been a little over a year since Ben Smith took the helm of Air France-KLM, and after having taken the temperature of the field and placed his pawns (not without having unblocked a few situations and signed major agreements), he is starting to get out of the management of a situation he inherited to really put its stamp on the airline’s strategy.

The annual meeting with investors that took place last week was an opportunity to see the ambition he has for the Franco-Dutch group and the strategy he intends to implement take shape.

The travelGuys’ roadmap for Ben Smith

A year ago, we used our own experience and knowledge of the subject to work out what we thought were the priorities of the new Air France KLM management team. An observation that was nothing new and seems to me to be shared by all observers of the sector, but in front of which too many people in the group were or are in denial.

To rephrase all this and in no order of priority:

  • Rationalize brands, products, fleet.
  • Resume the move upmarket of the product.
  • Putting the customer back at the center and regaining his trust.
  • Decomplexing the organization, bringing in new blood, changing the mindset, aligning everyone.
  • Make Air France KLM a real group and not the addition of two airlines.

This is easier said than done in a business that many portray as unreformable, but a lot has happened in a year.

A rationalized brand portfolio

No surprise announcement on this side because the work has already been done as it was obviously a priority for Ben Smith: exit Hop! and bye bye Joon, from now on the group will focus on three legible brands: Air France, KLM and Transavia.

A streamlined fleet…or almost

This work has also been initiated to reduce the type of aircraft used by each airline and thus reduce the costs associated with an overly diverse fleet. From now on, the A350s will go to Air France and the B787s to KLM, leaving the fate of the B787s already delivered to Air France, which are a blot on the landscape, but there’s nothing to say that they won’t change their livery the day Air France receives a significant number of A350s.

No more A380 which will leave the fleet by 2024 and that we won’t regret, not only for reasons of operating costs (but the passenger doesn’t care, even though this is reflected in the price of the ticket), but also for what Air France has done with it, or rather not done with it: a real flagship. Today it is an aircraft that frequent flyers prefer to avoid the cabin, which is a real problem for the airline.

One problem and some unknowns remain.

One problem: if the fleet is rationalized, this is not the case for the cabins, far from it. Flying long-haul on Air France – and even more so in business – is like playing Russian roulette. As our friend Forrest Gump would say: “Air France is like a box of chocolates, you never know which one you’ll get”. From 1-2-1, to 2-2-2, to 2-3-2, to full flat, to the ” toboggan ” …. there is something for everyone and if there is one area where passengers don’t like to be surprised, it’s this one !

The unknowns? What to do with the options on the A220 ? Given their number, we suspect that this is a potential replacement for some of the A320/321s, and in the absence of an extended A220 today, we are heading for a reduction in capacity. This is not an economic nonsense in itself. What to replace the A380 with? What replacement for the 777-200 which are all between 17 and 21 years old knowing that when we order a new aircraft it is not a 24 hours delivery! A question that will soon arise for the 777-300 but as only 6 aircraft are 15 years old we have time to see. For the “200”, the A350 is a natural replacement, but for the A380 and 777-300 we can’t help but look at the 777-9.

In short, there are still gray areas on the future of the fleet so some of them are starting to become urgent. But besides time, it is also a question of money and that is where the problem lies.

Simplification and synergies

The worst enemy of Air France-KLM (well, especially Air France) is not competition or even taxes, but its internal complication. We’ve known this for ages, but at least Ben Smith had the courage to say it in public this summer.

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 are therefore promised a simplification of operational processes, internal processes and the implementation of synergies at group level. It remains to be seen how long this will take, whether the bureaucracy will finally let go and whether the gains are as high as they should be.

As for synergies, since the merger took place, it is totally incomprehensible that a broad base of shared services does not yet exist, in contrast to the success of IAG or Lufthansa Group!

Here we attack an evil that is structural but also largely cultural, which requires technicality and courage. And for once, the two seem to be united, especially at Air France, which is the sicker of the two.

Refocusing on the most profitable segments

Here’s a good idea: focus on what pays the most! That is, connecting traffic for KLM and premium traffic for Air France (which de facto means that CDG is not seen as a hub but as a destination hub…weird).

Yes, but for that to happen, we need to attract the right clientele, which for Air France is far from being won today (I’m not going to repeat once again the speech about the inconsistency or even the weakness of the premium products on certain aircraft).

This implies the resumption of the upgrading of the cabins (and how to finance it?) and of the service, because unless being are in total denial, Air France is now well behind the competition on the markers that are in theory its playground, that of excellence and luxury in the French style. But many people still find it hard to accept that the staff at Lufthansa, Swiss or KLM is infinitely more helpful, friendly and warm. That the wines in first are better at Lufthansa. That the catering in business is largely superior at Swiss. And I’m not talking about the Gulf or Asian airlines. Coming to such a conclusion hurts but it is the truth.

The return of a business class on domestic flights is a step in the right direction, but it remains to be seen at what price it will be sold, even if its primary purpose is to serve as a feeder flight for the CDG hub with a coherent end-to-end experience.

Interesting decision: the abandonment of KPIs that led to the reduction of the premium offer to the benefit of the economic one, even though it is the premium that generates the most margin. Finally some common sense. We already told you, the future is in the premiumization of the majors more than in the competition on the low fares.

Leveraging the power of its hubs

Air-France KLM has two attractive hubs in Amsterdam and Paris, and this is an asset that the group intends to use against the competition. And that makes sense. Now we can fear that he sees things more beautiful than they are.

Yes, CDG and Schiphol are two beautiful hubs. But to tell investors that this is a huge advantage over British Airways, which only has Heathrow, and Lufthansa, which only has Frankfurt…I don’t know if they bought this smoke and mirrors due to a sleight of hand on the perimeters taken into account but in our opinion it is a little too big not to be noticed.

Yes, Air France has Charles de Gaulle, KLM Schiphol, Lufthansa Frankfurt and British Airways London. But this is forgetting Munich, which is anything but a secondary airport, especially in terms of connections.

But if we say that the Air France-KLM Group has CDG and Schiphol, it must be added that the IAH Group has Heathrow and Madrid, and that the Lufthansa Group has Frankfurt, Munich but also Zurich and Vienna.

This changes everything, and when you see how Lufthansa Group makes the most of its hubs in terms of connections and multi-carrier routes, you can’t help but feel that they’ve tried to make the bride a little more beautiful than she is.

Participate in the consolidation of the sector…or not

When IAG buys Air Europa and Lufthansa has its eye on Alitalia, we cannot ignore the group’s ambitions in a rapidly consolidating market.

And what is it? The group announces that it considers the consolidation of the European market in a pragmatic way. So be it, but what does it mean?

The deciphering is quite simple: the “good deals” are rare and anyway we can’t afford them.

Une stratégie financière avant tout

All this has only one goal and it is logical: to put Air France-KLM back in line with the competition with a margin of 8%. Lufthansa is not doing anything else by tightening the screw while its situation is more enviable today.

Talking to investors we understand the meaning of the message, now we are waiting to see how it will be translated concretely for the customer, but the announcements are in any case going in the right direction after years spent giving up any form of improvement. It remains to be seen how sensible words translate into action, a subject on which we have already had some surprises.

Now, if all this is to restore the group’s profitability, it will also have a cost at first, and this is where it is important to project ourselves in a competitive logic.

It is not surprising that in terms of market analysis and strategy, Air France-KLM is more or less in line with IAG and Lufthansa Group, and that the resulting announcements are along the same lines, except that not everyone starts from the same point.

The problem is that Air France-KLM has to run two races at the same time: restore its profitability and invest. And the latter is of course conditioned by the former.

On the other hand, IAG and Lufthansa Group have amassed a fine war chest which means that, while anticipating a more complicated market, they have enough to invest today and only need to maintain their existing profitability.

And this is what it all comes down to: knowing whether the market will allow Air France-KLM to move at a speed that will enable it to catch up with its competitors, or whether the accumulated lag is irrecoverable as slightly more difficult times lie ahead. It is all the more unfortunate that for once the announcements are going in the right direction and that we cannot blame Ben Smith and his teams for the carelessness or even the inconsistency of certain managers in the past as well as of the unions. He knew that he was engaging in a race that he started with a ball and chain, let’s hope that his decisions allow him to quickly lighten it.

Photo : Air France and KLM aircrafts by Markus Mainka via Shutterstock

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.
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