Air France to “boost” performance with new low-cost carrier

Legacy airlines in Europe have long been feeling the pinch from low-cost carriers such as Ryanair and Easyjet. Now it looks like Norwegian Air Shuttle and WOW Air are pushing them to look farther before they lose more ground.
Lufthansa already offers a low-cost trans-Atlantic option from Europe to Las Vegas, Orlando, Miami and Seattle in the United States.

The International Airlines Group which owns British Airways, Iberia, Aer Lingusm and Vueling has just added another low-cost carrier – Level – to its stable. Level, based in Barcelona, will fly to Los Angeles and Oakland in California USA, Punta Cana in the Dominican Republic, and Buenos Aires in Argentina. Fares start at the familiar €99 reminiscent of the Norwegian and WOW Air’s promotions.

Courtesy Air France

Following in their footsteps is Air France, which announces the formation of a new subsidiary low-cost airline – Boost as its working name – planned to commence operations in winter. The airline will fly from the main hubs of the Air France/KLM group to destinations in Italy, Spain and Turkey initially, and then farther to destinations in Asia. Norwegian is already flying to Bangkok and will in October connect London with Singapore.

But Boost will be taking on full-service airlines as well, such as the Middle East carriers of Emirates Airlines, Etihad Airways and Qatar Airways which are already ruffling the feathers of the regional big birds of Singapore Airlines and Cathay Pacific.

The developments point to a gradual convergence of the low-cost and full-service product perceived value wise. It’s the antithetical success of low-cost carriers pushing to bridge the gulf and the failure of legacy airlines not being able to maintain if not increase the differentiation. It looks like the European tug-of-war is pulling the legacy airlines towards the centre line.

Airlines brace for the hard times of a troubled Europe

Two British Airways aircraft, with British Airways plane taking off in background.

Two British Airways aircraft, with British Airways plane taking off in background.

IT is easy to blame Brexit. International Airlines Group (IAG) which owns British Airways (BA) and EU carriers Iberia, Vueling and Aer Lingus, says the weak pound has caused its operating profits for Q2 (Apr to Jun) to fall below forecasts, even the number (€555m) (USD618m) is higher than a year ago ((€530m). The weak pound has cost the airline €148m.

But, of course, BA is a key contributor to IAG’s bottom line. IAG is not too upbeat about the immediate future as it “continued to experience a weaker trading environment in our UK point-of-sale business, which represents around one third of total revenue.”

The situation is definitely not helped and in fact made worse by the slew of terror attacks across the continent. Other European airlines such as Air France-KLM and Lufthansa are also under a lot of pressure to keep the numbers up, warning that travellers would avoid coming to popular destinations in their home countries.

Air France-KLM reported a 5% dip in revenue for Q2 to €6.22bn. The airline said: “The global context in 2016 remains highly uncertain… resulting in an increasing pressure on unit revenues and a special concern about France as a destination.”

So the problem is not entirely Brexit. And as the pound weakens and reduces purchasing power, and so too as travellers stay away from popular tourist destinations across Europe, the paradox is that airlines will be persuaded to reduce fares to shore up the demand for seats.

Ryanair CEO Michael O’Leary, referring to recent bombings, said: “Airlines have to respond with lower prices to keep people flying.” This will at the same time exert pressure on rival airlines to similarly take the same course. Mr O’Leary predicted average fares to fall approximately 7% this year.

Fortunately the continuing low fuel prices are working in the airlines’ favour although many are already complaining about the need to lower prices. So don’t expect the fuel surcharge to come down.

Budget phobia grips European airlines

Courtesy Getty Images

Courtesy Getty Images

THE strike by German airline Lufthansa’s pilots may be over a different personnel issue, but it reflects similar circumstances faced by Air France (see Air France/Union dispute reflects a divisive and unsure industry, Oct 3, 2014).

European airlines are gripped by budget phobia as both Air France and Lufthansa have blamed the strikes not only for the costly disruption of flights but also for hindering their efforts to effectively compete with the likes of Ryanair and easyJet through their respective subsidiaries, Transavia (Air France) and Germanwings (Lufthansa).

On the one hand, it is an issue of fair employee compensation and welfare, and the integrity of the human resource administration. On the other, it is a matter of survival in the competition that ultimately must address the issue of costs.

The imbroglio can only benefit the budget carriers, as disgruntled travellers switch their allegiance. easyJet announced a windfall riding on the Air France/union dispute, which had boosted its revenue by £5m (US$5.35m) (see Easyjet rides on Air France’s troubles, Oct 8. 2014).

Lufthansa management has offered to retain the pension scheme for employees who joined the company before this year. The scheme allows pilots to retire at age 55 but they will continue to receive up to 60 per cent of their pay before regular pension payments kick in at 65. However, Lufthansa will increase the retirement age for new recruits.

Apparently the pilots union has proposed a plan to cover the costs of retaining the current scheme. It would be interesting to find out what.

The industrial action has cost Lufthansa 70m euros (US$89m). The airline failed to get the court to declare the strikes as illegal, and the Vereinigung Cockpit (VC) union does not rule out further action.

Until the dispute is settled, budget carriers can look forward to a better year-end season as travellers make advance bookings for Christmas and the New Year. easyJet announced it has sold 25 per cent of its seats for the next six months.

Easyjet rides on Air France’s troubles

Courtesy AFP

Courtesy AFP

AIR FRANCE should feel chastened by Easyjet’s jubilant admission that the strike by French pilots had brought it a windfall. The industrial action has boosted the budget carrier’s revenue by about £5m (US$5.35m), raising hope of the financial year ending September 30 achieving better pre-tax profit of between £575m and £580m, previously expected to be between £545m and £570m. This will be Easyjet’s fourth consecutive year of record profits.

The Air France/SNPL (Syndicat National des Pilotes de Ligne) dispute may be said to be fulfilling a prophecy that the French flag carrier feared. The issue at heart was Air France’s plan to expand budget subsidiary Transavia’s network across Europe with regional hubs established at airports outside France, and this raised its pilots’ concern about transfers to Transavia and being paid lower wages and hired on less favourable terms as regulated by the country where they are based.

For Air France, growing Transavia a strategy to better compete with the likes of Easyjet and Ryanair, which together with the growing number of low-cost operators, have taken a big chunk of the business away from legacy carriers. Inevitably it must weigh in the factor of cost, a sizeable part of it is wage-related. Perhaps there is a strong reason here why independent full-fledged budget carriers such as Easyjet and Ryanair tend to fare better than upstarts spawned by established full-service airlines.

Lufthansa faces the same problem, when its pilots went on strike in protest against the airline’s cost-cutting plan to introduce new low-cost units to improve its competitive edge. This led to a dispute over retirement benefits for pilots, resulting in strikes in August and September that affected operations at Frankfurt and Munich, disrupting flights to major destinations such as New York, Washington D.C., Boston, Chicago, Los Angeles, Dallas and Atlanta in the United States, and to gateway airports in Asia including Singapore and Tokyo.

Needless to say, the single most critical focus of any budget carrier is cost even as it means a necessary sacrifice of service, the lack of which may somewhat be compensated by the customer’s pre-flight low expectations. Most of the other factors may be said to be universal applications to all airlines, though in varying degrees how they impact on the bottom-line. A cheaper fuel bill will go a long way to boost the carrier’s viability, compared to how on the other hand the higher cost of fuel is more likely to bear a heavier toll on a budget carrier than a legacy airline. Easyjet said it expected its fuel bill for the next financial year to decrease by about £50m, and that is a huge plus.

One may argue that Easyjet’s windfall from the Air France strikes might be a fortuitous once-off event, with more passengers switching to Easyjet in light of the disruption. The question remains as to whether the switch will continue to trend even after complete normalcy returns to Air France. It is more than just a foot in the door for the competitor but a clear signal to the likes of Air France as to where the competition is heading in Europe.

Easyjet CEO Carolyn McCall has added a new spin to what the low-cost model means in a recent interview with BBT (Buying Business Travel, Jun 18, 2014): “It means we have new engines, high fuel efficiency. Our plane utilisation, turn-time and load factors are very high. We use our assets really well. We use our assets really well. We don’t have fancy offices, we have a hanger – open plan offices, and we share space with plane maintenance. It’s very important to us, we’’ never lose sight of it – without that low-cost model, we wouldn’t be able to do the low fares.”

Even if Air France finds that a little stretched, it must recognize the close call, especially when  budget carriers begin paying more if only some attention to customer service, albeit their own differentiated brand. Even Ryanair chief Michael  O’Leary said his airline, noted for its bad service, needed to stop “unnecessarily pissing people off.”

In the end it is all about efficiency as defined by the cost-benefit relationship. Easyjet attributed its success to increased efficiency, which made up for increases in airport charges and other related operating costs. Forward  booking for the next six months has improved, with more than 25 per cent of capacity sold. The plane is achieving a 90-per-cent load. But the industry is far from being stabilized, with new concerns over political unrest in Eastern Europe, the Middle East and Africa, and the Ebola scare.

In summary, Ms McCall said: “We have to understand the economics.” But, of course, with one caveat that neither Air France nor Easyjet can refute: It is the customer that decides, full-service or low-cost. In a way, Easyjet seems to understand what its customers want. One asks, Does Air France, noting how the aviation landscape has changed? If expanding Transavia’s operations is a positive move, has Air France the gumption = and right formula – to press on and succeed?

This article was first published in Aspire Aviation.

Air France/Union dispute reflects a divisive and unsure industry

AFTER two weeks, the dispute between Air France and the pilots’ union SNPL was finally called off. One may be tempted to ask: Who wins, who loses? That aside, the dispute clearly reflects not only a divisive industry but also an unsure one trapped without clear strategies in place in the throes of uncertainty.

The pilots’ strike is costing Air France hundreds of millions of euros, estimated to be as much as 15m euros (US$19m) a day. Yet a day after the announcement last Saturday, the airline was still operating with half its scheduled number of flights though with the hope that flights would gradually return to normal in the week that follows. An agreement is still pending, the only consolation being that according to SNPL, negotiations could now “continue in a calmer climate.”

Courtesy Getty Images

Courtesy Getty Images

The union’s protest concerned Air France’s plans to expand low-cost operator Transavia across Europe as part of the strategy to better compete with budget carriers such as Ryanair and Easyjet. Transavia would operate from regional hubs. The pilots expressed two main concerns: a possible loss of jobs, and transfers to Transavia whose employees are paid lower wages and in accordance with local terms. Air France chairman Alexandre de Juniac and chief executive Frederic Gagey said in a statement: “Our Transavaia project is a 100 per cent pro-France project. It is about developing Transavia to encourage growth in France and quickly create more than 1,000 jobs in France.” Refuting the union’s concern about job security, the airline said an additional 250 pilot jobs would be created.

It is easy to understand how the opposition might treat that public spirited bit as a red herring. But the reason for survival is as difficult an argument to refute, and that does not do the pilots any favour when British operator Monarch Airlines announced at the same time that its employees have agreed to pay cuts of up to 30 per cent to secure the future of the airline, supported by the British Airline Pilots’ Association (Balpa) which said its pilots had made “major sacrifices”. But, of course, the British issue was not complicated by the suggested disparity in wage and employment terms between the parent airline and its budget subsidiary in the French dispute.

The differences between Air France and its pilots are far from being resolved at this stage even as the airline has conceded to expanding its Transavia operations only within France and guaranteed there would be no job relocation while maintaining its prerogative to vary the terms for employment with the low-cost subsidiary. SNPL insisted on similar wage and terms, and issued a statement to say its “determination remains intact.” It proposed the appointment of an independent mediator which Air France rejected, supported by the Government which has a 16-per-cent stake in the loss-making airline.

French government spokesperson Stephan Le Foll had said the Transavia expansion project “strategically, is important to the company. We have to find ways and means for Air France to extend its activity in low-cost flights.” French Prime Minister Manuel Valls said: “The creation of Transavia in France has to go forward.”

Clearly Air France is smarting from losses which it attributed to the competition posed by low-cost operators. There are some 40 budget carriers operating across Europe, and these apparently have taken a large chunk of the business away from not only of Air France but also other legacy European carriers. But is Transavia the answer to Air France’s woes, as an alternative cheap option to stem its losses?

British Airways (BA) had a short run with Go Fly, founded in 1998 and operating flights between Stansted Airport and destinations in Europe until it was sold first in 2001 to a private equity firm and then in 2002 to BA’s rival Easyjet. There had to be reasons for its divestment, among them one of synergy and how Go Fly was attracting BA customers to cross over as well. Other established airlines have gone down that path, in most cases the result of a push rather than pull factor as a way to maintain rather than grow the market and, hopefully, muscle out the competition.

But not all subsidiary low-cost operators managed the challenge as successfully as the likes of Ryanair and Easyjet, although it is to be also noted that only a third of the independent upstarts have survived. However the demise of many budget carriers could be attributed largely to wider economic factors and not necessarily the intimidation of the big boys. On the contrary, it is the threat posed by low-cost carriers that had the established airlines sending their second liners into the game.

Yet that is no argument for Air France to abandon its expansionary plan via Transavia, which the Air France-KLM merger inherited 100 per cent from the Dutch entity, if that is the way to regain its grounds. The paradox is that this then lends some credence to SNPL’s fear particularly if Transavia grows at the expense of the parent airline, and that which must necessarily bring into question what makes a budget carrier tick if not low cost?

Beyond the lure of the budget model that has reshaped the traditional market across the globe, a more pertinent question to ask is why airlines such as BA and Cathay Pacific are profitable but not Air France-KLM and Qantas, with or without the complement of low-cost offshoots.

Frederic Gagey

Europe’s aviation challenges

HOPE of Europe-based airlines bouncing back into good times on the back of an improved economy is not turning out to be as expected. Much of the good news reported last year seems to be short-lived.

Air France-KLM is among the airlines that have issued profit warnings, even though it expects higher earnings compared with 2013. The issue is the trending back down in growth. The airline is expecting to fall short of the forecast with revenue falling from 2.5 billion euros (USD 3.39 billion) to between 2.2 billion and 2.3 billion euros. It has cited rising competition from other carriers on the long-haul especially to North America and Asia, over-capacity as a consequence of the competition, weak cargo demand, and currency restrictions in Venezuela for the negative impact on its profitability.

Courtesy Reuters

Courtesy Reuters

Lufthansa has already announced a similar profit warning ahead of Air France-KLM. The German flag carrier is expecting lower than forecast profits – 1 billion euros compared to a high of 1.5 billion euros. Consequently it is also reducing its 2015 earnings forecast from 2.65 billion euros to 2 billion euros. Also citing competition for its woes, Lufthansa faces the same currency restrictions in Venezuela, which would reduce its profitability by 60 million euros. Additionally, the airline was plagued by a pilot strike in April that cost it another 60 million euros. The slowdown is evident in reduced seats offered over the winter, according to Lufthansa chief financial officer Simone Menne.

Irish airline Aer Lingus has also issued a warning on reduced profits estimated to be 10 to 20 per cent lower than last year’s, following a strike by cabin crew last month that caused disruption to some 200 flights and, according to a statement issued by the airline, “significant damage to Aer Lingus’ trading and forward bookings for several months into the future.”

The International Air Transport Association (IATA) was optimistic about a positive year for the global industry, expecting 2014 profits (US$3.2 billion) to almost double that of 2013 (US$1.7 billion). Although it has revised its forecast a little downward on account of new uncertainties in fuel prices as a consequence of geopolitical risks threatening Ukraine and the Middle East, and of capital outflows moving away from emerging economies largely to a strongly revived US economy, it will still be a much better year globally. But compared with other regions, the latest performance statistics for June showed that breakeven load factors are highest in Europe – the result of low yields and high regulatory costs. So, even though the region scored the second highest load factors, its financial performance fell behind the United States, the Middle East and Asia Pacific.

Of the top 10 countries ranked by the number of international passengers identified by IATA, five are in Europe: United Kingdom, Germany, Spain, France and Italy. About a quarter of the world`s tourist arrivals are concentrated in Europe (excluding Russia). Yet the situation is not all that rosy. The weakness of Europe seems to stem from inherent issues that have caused home airlines to direct their umbrage at the competition posed by foreign carriers, rather than the other way around as impacted first by external factors.

While foreign carriers in the Middle East and Asia Pacific have often been accused of unfair competition from a lower cost base and in some cases allegedly supported by government subsidies, the corollary is that airline operations in Europe are faced with high costs that include wages and airport charges, high taxes, cumbersome regulations and the propensity of costly industrial strikes. Some of the costs are levied directly on air travellers or through the airlines, since invariably the fees are passed on to the passengers. The UK is notorious for the suite of fees, among them the Air Passenger Duty which continues to escalate and which has become a significant source of revenue for the authorities. A new carbon tax would have been introduced in 2013 if not for the protest by the international community.

Courtesy Etihad Airways

Courtesy Etihad Airways

On the competition posed by foreign carriers, the biggest threat appears to come from cash-rich Middle East airlines. When Lufthansa`s newly appointed CEO Carsten Spohr took over the helm in May, he identified the Gulf carriers as the most daunting challenge for his tenure, and that tackling this would be a priority for him. The Gulf carriers are widely recognized as the big three in the Middle East, namely Emirates Airlines, Etihad Airways and Qatar Airways. Mr Spohr suggested that Gulf carriers are not competing on a level playing field. The rate at which Etihad picked up stakes in European carriers (and around the world) has raised concerns of a Middle Eastern dominance that would be detrimental to their survival. Among the carriers that Etihad has bought into are Air Berlin, Air Serbia, Darwin Airlines and most recently Alitalia. Etihad`s CEO James Hogan defends his airline`s strategy as one of rescuing ailing European carriers on the brink of collapse, though not denying it is at the same time seeking growth through partnership.

Yet, to be fair, European carriers themselves have seen much consolidation among themselves too. Air France and KLM have merged. Lufthansa owns Swiss International. British Airways, Iberia and Vueling make up the International Airlines Group. According to IATA, improved profitability in Europe may be attributed in part to efficiencies brought about by consolidation, not necessarily among airlines within the region itself but also across borders such as the partnership between British Airways and American Airlines and the acquisition of a 49-per-cent stake by Delta Airlines in Virgin Atlantic. But it is a hard fact to swallow when, as an example, Air France-KLM could have had upped their ante in Alitalia and become majority stakeholder but have had their stake reduced substantially instead with the participation of Etihad.

Mr Hogan said: “Gulf carriers are not the cause of Europe’s aviation challenges.” Rather, an airline like Etihad has seized the opportunity availed by the region’s weakness, itself blessed by its rich resources and thanks no less to Europe’s liberal aviation policies for which it (Europe) should be commended.

European carriers have said that the competition has forced down ticket prices and resulted in over-capacity. It is easy to see what happens to margins if costs are not similarly managed, Interestingly Lufthansa sees the answer in low-cost services to be launched to Asia and possibly extended to Australia, packing in more seats in its wide-body jets to lower seat costs which will in turn mean lower fares. The elusive dream of a viable budget long-haul in spite of the failed Hong Kong-London run by Hong Kong’s Oasis Airlines and the short-lived services to London and Paris from Kuala Lumpur by AirAsia X continues to lure. Norwegian Air Shuttle became the latest operator to take up that challenge when it launched services from London’s Gatwick Airport to Los Angles, Fort Lauderdale and New York. But Norwegian’s derring-do is on a different plane as Lufthansa’s strategy aimed at countering the cheap fares offered by the competition, that if you can’t beat them, join them and hopefully beat them at their game.

On that score, Lufthansa may have already been defeated if Mr Spohr is thinking of targeting the Gulf carriers, which have so far deemed it not necessary to go down that road which continues to be lined with the usual financial risks of high costs and low yields, and the traveller’s reservations about the lack of basic creature comforts for the long hours of flying. It is therefore not the safest of bets for Lufthansa.

Mr Spohr has not decided whether Lufthansa would go it alone or join hands with Turkish Airlines. There is a redeeming feature here. Turkish and Istanbul’s Ataturk Airport could be the challenge to Gulf carriers and Dubai International in the race to be the hub connecting Europe and the rest of the world with some help. This is the kind of counter move that can really reshape the competition rather than merely playing the same game that has been mastered by the competitor.

This article was first published in Aspire Aviation.

Extreme luxury: What price prestige?

Courtesy Etihad Airways

Courtesy Etihad Airways

How much more can you stretch luxury? The sky’s the limit, it seems. Etihad Airways’ latest offering dubbed The Residence has been hailed the ultimate in high-end luxury, that is, until another airline betters it.

Only one of its kind to be introduced on each of three Airbus A380 jets planned so far, the three-room suite is a 125-square-feet property made up of a double bedroom, private bath and shower, and a lounge area which is furnished with a leather sofa love-seat complete with ottoman, dining tables, chilled drinks cabinet and a 32-inch flat screen TV. The cabin with private entrance is designed for two guests travelling together. If that’s not impressive enough, the guests will be waited upon by a personal butler trained at London’s Savoy Hotel and by an in-flight chef who will prepare gourmet menu options or create a guest’s favourite dish. The moment a reservation is made, the VIP Travel Concierge Service including a chauffeur service on the days of travel will be offered right through to the end of the journey.

The first flight equipped with this super-class will take off in December, flying from Abu Dhabi to London Heathrow. The price tag is US$21,000 one-way for an eight-hour flight.

Not surprisingly, Emirates Airlines which already offers state-of-the-art showers has indicated its intention to similarly roll out something to match Etihad’s offering. Other well-heeled Middle East carriers such as Qatar Airways may follow suit. However, the competition, if any, is likely to be confined to that region which boasts privately-owned artificial islands for the rich and famous, a ski slope in the middle of the desert, and the superlatives in luxury hotels, shopping malls and high-style living. Of course, some other airlines outside the region are as capable of providing such extreme luxury; but the economics of the markets and routes that they serve just does not add up.

In truth, reaction by industry watchers to Etihad’s Residence is a mix of “wow” and scepticism. Yet if you doubt that there is a market for such extreme luxury, it is understood that some bookings have already been made. The market for the product may be small, but so long as it remains consistent, it is hard to fault the reasoning. It is niche marketing, and Etihad will do well to under-supply. The same principle applies collectively, if other Gulf carriers decide to add to the competition. But that’s beside the point; at that level, prestige overrides economics. For those customers who can afford the price, money is not the issue, and for airlines such as Etihad which can afford to fly the cabin empty, neither is it. Hard, indeed, it is to pin a price on prestige.

Etihad’s initiative has come at a time when the industry is crawling its way gradually back into profitability, almost contrary to what many airlines have been doing thus far to contain costs in the face of rising fuel prices. But it is a different kettle of fish altogether; the super-class’s closest competitor is more likely the private jet. But its introduction may have excited the industry to shift focus back to premium travel, noting that legacy airlines make most of their money at the front of the aircraft. As the global economy improves, there are emerging signs that this is already happening, with major airlines such as Qantas, Singapore Airlines and Cathay Pacific announcing plans to further enhance the experience of flying First and Business Class. Gulf carriers with their propensity to spend big are well positioned to drive the trends.

Courtesy Etihad Airways

Courtesy Etihad Airways

Etihad’s Residence has demonstrated how far one can go, and airlines are upping the ante to set a new benchmark for premium travel, though not necessarily at the same extreme level. Flat beds and oversize TV screens are becoming a norm. It is no longer adequate to have just wider seats and pitch between seats, but more personal space all around. Privacy will also become the new standard. Air France’s new La Premiere suite will provide 3m2 of personal space. Emirates offers private suites in First Class. American Airlines have also revealed plans for hotel-style suites.

The International Air Transport Association (IATA) reported a 3.8-per-cent growth in premium travel in April year-on-year. A company statement said: “The outlook for premium travel markets is broadly positive. Global business confidence continues to signal economic growth, and May data suggests that conditions could be picking-up after a slowdown in Q1. In particular, improvements in advanced economies will help sustain growth in premium travel ahead, as should easing downward pressure from emerging markets like China.”

Who says that the romance of air travel is dead? Not now, as the race among airlines to lure back premium travellers begins to heat up.

This article was first published in Aspire Aviation.