Air France replicates low cost competition

Over the last few weeks, rumors and false information on a possible conversion of Air France-KLM short/medium-haul network into a low cost operation abounded so much that the management of the French national carrier decided to reveal a new strategy earlier than planned. On November 12th, Air France highlighted its new structure for its short- and medium-haul routes. On November 18th, Pierre Gourgeon, Air France-KLM Group CEO gave full details on the perspectives of the airline’s future offer. “We have seen a slow erosion of our unit revenue since 2002 on short-and medium-haul routes. Despite the adjustments and changes that we have made in 2003/4 especially with more competitive fares, we continue to see our unit revenue plunging to levels unseen for over a decade. We had to react strongly,” explains Pierre Gourgeon.

Air France will reposition its product from April 2010. The product will be simplified into two new reservation segments: Premium and Voyageur. Premium will integrate both Business Class and Full-flexible economy fares and Voyageur will propose low fares in economy with little flexibility to change. Most importantly, Air France will lower its current fares by 5% to 20% for its lowest fares and by 19% to 29% for its most expensive tickets. “Premium will then give full flexibility and quick procedures for passengers. By contrary, Voyageur is conceived for savvy travelers, I am convinced that we will see a rapid turn-around as we will gain market shares again in Europe thanks to our low fares in both leisure and business travel segments” predicts Gourgeon.

Is Air France emulating budget airlines? “We are looking to be more competitive. However, our concept is to match the needs of our clients –especially SME and leisure travelers- but not to match at any price the budget airlines’ model. When asking our passengers about their expectations for our short/medium-haul product, most highlight that they want more competitive fares and a simpler service but without becoming a low cost airline’s operation. We listen to them and act accordingly,” says Gourgeon.

Other measures include the long haul network rationalization, with better offer in terms of product segment. “With Economy Premium, we close the gap between the normal economy class and the business class. We will watch how Premium Economy fits into the market: if we see business travelers further downgrading their travel habits, we could then reduce capacities in business class or we could also decrease economy class seats if we see an upgrading of travel habits from the rear of the cabin,” tells Gourgeon.

The integration of the Airbus A380 will also help to reduce frequencies thanks to larger capacities. One daily A380 flight to New York will replace two Air France daily flights starting November 23, followed by a single daily flight to Johannesburg in February. “We estimate that the Airbus A380 will reduce our CO2 consumption per passenger/km by 20% and help us to save € 15 million per aircraft,” says Air France-KLM CEO

Air France will continue to streamline operations at its two hubs of Paris CDG and Amsterdam Schiphol. According to Pierre Gourgeon, the company will continue to operate the best connection system in Europe. “ We have by far the best connection system, with 19,727 connection possibilities at Charles de Gaulle and 6,675 connections at Schiphol, at least twice as many as any other airline in Europe. Hubs are becoming the answer to economic crisis. With traffic affected by economic uncertainties, we see smaller unprofitable direct routes weakening and then disappearing. Meanwhile, hubs increase their share as airlines prefer to concentrate their business on larger bases,” highlights Air France CEO.

In total, various rationalization measures should help Air France-KLM to turn around the corner and be able to break even again by 2010-2011.