Paris Air Show

A successful union, not yet consummated

 - June 11, 2007, 10:17 AM

Three years after they merged, Air France and KLM say the combination has paid off. At a press conference to announce the 2006-07 result here in Paris last month, chairman Jean-Cyril Spinetta reported strong increases in revenue and income. The joint French/ Dutch operation is profitable, and the share price has risen 70 percent this year. “By every standard, it’s been successful,” added vice chairman Leo Van Wijk.

Spinetta and Van Wijk were the architects of this unusual amalgamation, which created the world’s largest airline by revenues, with an employee count of 100,000. Both carriers retained their individual identity, traditions and labor agreements.
The reasons were practical as well as cultural. International Air Service Agreements signed by France and The Netherlands did not provide for a cross-border airline merger. The recent transatlantic “Open Skies” pact begins to change all that, though Air France KLM currently has no plan to rebrand and consummate the union.

Air France KLM’s greatest strength is probably the twin hubs at Paris-Charles de Gaulle (CDG) and Amsterdam Schiphol (SPL), both of which have room for expansion. The carrier seems to have coordinated schedules and marketing well–for example, the revenue derived from premium passengers who changed planes at CDG or SPL rose 16 percent last year. It serves 248 destinations with a fleet of 561 aircraft, and carried 70 million passengers last year.

Three years ago, some observers criticized the merger for failing to attack labor costs in the face of competition from the low-cost carriers. Last month, though, Van Wijk noted that the merger’s synergy targets of ?1 billion ($1.33 billion) over five years were being met, and a new cost-saving program worth ?1.4 billion ($1.86 billion) was being launched. The vice chairman also revealed that Air France KLM had achieved a return on capital employed (ROCE) of 6.5 percent. “That’s good, but it’s still just below the cost of our capital. We’ve set an ROCE target of 8.5 percent by 2009-10,” he added.

Cost savings have prompted the Air France part of the operation to ditch its entire fleet of 18 B747-400s (including five freighters). During the Paris Air Show this week, the carrier appears likely to sign with Boeing for 18 more 777s as their like-for-like replacement–13 of the -300ER versions and five 777 freighters. Last year, Spinetta noted that in addition to the fuel savings achieved by two engines instead of four, the heavy maintenance checks on a 777-300 would take only 8,000 man-hours, versus 60,000 hours for a 747-400.

At last month’s press conference, Spinetta also announced that Air France would be ordering 18 new Airbus A320/321s and leasing 12 more, to replace 20 of its oldest A320s. The airline has also exercised two of its four options for A380s, making 12 on firm order, with deliveries starting in 2009.

Air France KLM now has a 26-percent share of the Europe-Africa passenger market, 24 percent of Europe-Latin America, 12 percent of Europe-Asia and 10 percent of Europe-North America. But while the long haul looks good, the carrier certainly faces stiff competition within Europe, not only from EasyJet and other low-cost airlines, but also from high-speed trains.

A week ago, French TGV and German ICE trains began operating joint service between Paris and Frankfurt, Strasbourg, Stuttgart and Munich. By the end of the year, journey times to Frankfurt will have almost halved to 3 hours 50 minutes. Meanwhile, the French domestic TGV network has already taken market share from the airlines, especially Air France.

Last year, Spinetta attacked a campaign by French national railway company SNCF that informed travelers of the relative CO2 emissions of going by air, car or train. According to the Web site, an airliner traveling between Paris and Lyon generates 30 times more CO2 than a TGV. “The figures on the Web site are patently false,” Spinetta declared. “The CO2 generated by an A320 on French domestic routes is 20 to 40 percent lower than given in this database. They must have computed the figures using a mid-sized aircraft that does not exist.” Moreover, Spinetta noted, the Paris-Strasbourg TGV service will consume additional energy because it goes faster, and “all of the additional electricity will need to be seen as being derived from fossil fuels.”

However, Spinetta conceded last month that environmental issues “are a legitimate concern.” Air France-KLM supports the European Union policy of introducing an emissions trading plan for airlines in 2010-11.