Revamping Revealed
Lufthansa, Air France and other European carriers ponde major overhauls
That the face of Europe’s network
carriers is changing has been clear for some time, but even those in the drivers’
seats are wondering just how deep those changes will go. The process will take
time to sort out. Air France signals that there will be significant shifts in
the next three years, although some progress is already noted. Lufthansa, for instance, is a step closer to
shedding BMI British Midland a financial albatross for the German carrier; now
that the European Commission has green-lighted the proposed takeover by British
Airways’ (BA) parent, International Airlines Group (IAG).
Air France may have
been late to the game in dealing with major structural changes, but it is becoming more
aggressive and expansive with what its "Trans- form 2015" agenda is
supposed to deliver:New vectors are planned for everything from the long-haul
business, to the troubled short- and medium-haul sector, and its Transavia
low-cost venture.
Freight and maintenance, repair and overhaul
activities also are being targeted. But the turnaround will not be easy.Air
France warns that "drastic" cost reductions will be needed to
maintain its medium- and short—haul operations as it tackles its fiscal
disarray. The airline’s goal is to reach a 20% reduction in controllable costs.
A frame work agreement is in place with unions
to negotiate new terms that will allow the significant changes to go forward,
although the prospect of union unrest has not been dispelled. A key pilots’
union points out that the changes cannot just be about cutting costs, but also
need to offer growth prospects. And, a
union official emphasizes, no agreements to contract terms have been agreed to
yet.
Air France only has to look to Iberia to see how disruptive big structural
changes can be. Pilots have staged numerous strikes to protest that carrier’s
new entity Iberia Express. But Air France CEO Alexandre de Juniac leaves no
doubt that significant changes are in
the cards. "The 20% cost-reduction objective is a minimum threshold; to
fall short would jeopardize the recovery and the company’s future.
These equally shared efforts must
be implemented without delay." Closer integration with sister company KLM
is being targeted, as is stream lining the organization to reduce over head and
make it more responsive.Core elements of the day-to-day opera tions are also up
for an overhaul. The medium- and short-haul business has long been a headache
for Air France, given the competition from high-speed rail and low fare rivals.The
target date is now 2013 to reach a break-even point for at least the
point-to-point elements of the service.
The entire short- and medium-haul
operations should break even a year later. Exactly how this will be
accomplished has not been settled. But the parent air line intends to gird its
low-cost venture, Transavia, to combat low-fare rivals.Also, Air France aims to
standardize its regional operations with various subsid- iaries. But, the
airline states in updating its "Transform 2015" plan,
"additional savings still must be found to reach the break-even point in
2014.
"The long-haul service, which has been the airline’s one bright spot
for several years novig also is under going scrutiny Air France states: [We] must find ways to better
respond to growing leisure travel demand," and notes that long haul
upgrades are contingent on success of the savings plan. Survival of Air
France’s short- and medium-haul operations is contin gent on meeting key cost
targets.In the freight business, greater integration of Air France,KLM and
Martinair services is being sought.
The maintenance operation also is
under fire, with management saying "competitiveness in major overhaul
maintenance is wholly inadequate." The engine and equipment maintenance
operations, specifically are being eyed for restruc turing. The company’s goal
is to become the second-largest player globally More details on Air France’s
plans are due mid-year. Meanwhile, Lufthansa must decide how to deal with BMI
Baby, the low-fare adjunct of BMI. The EC approved the sale of BMI Baby to IAG
when the latter agreed to shed 14 daily slot pairs at London Heathrow Airport.
The slots are on routes where BA
and BMI have competed, such as to Aberdeen or Edinburgh, Scotland, and,
long-haul, to Riyadh, Saudi Arabia; Cairo, Egypt; Nice, France; and Moscow.
Moreover, other carriers will receive access to seats on the BMI/BA short- and
medium-haul aircraft "on normal commercial terms" to accommodate
their transfer passengers.
This is being done to make sure that "the
competitive dynamics will be maintained so as to ensure choice and
quality of air services for passengers," says EU Com- petition
Commissioner Joaquin Almunia.If Lufthansa is unable to divest BMI Baby, IAG’s
purchase price would be reduced from the current 55172.5 million ($273 million) to offset the
difficulties of having to deal with the low-cost business.
Lufthansa and IAG
expect the sale of BMI to close around April 20. By 2015, IAG expects BMI to
add about £100 million to its bottom line. In the short term, IAG faces around
£100 million in restructuring costs. The EC’s approval of the deal has angered
Virgin Atlantic; that carrier has long-opposed any BA expansion on the grounds
that the "remedies have not been subject to a detailed
assessment."
