Air France-KLM to Expand Low-Cost Carrier Businesses
August 20 2015 - 1:00PM
Dow Jones News
AMSTERDAM—Air France-KLM SA is set to spur its European foothold
in the low cost market by growing its existing French and Dutch
budget carriers to counter rising low cost competition in Europe,
after a costly pilot strike last year derailed plans to launch a
European low cost airline.
To enable European growth, a new round of investments to buy up
to 20 aircraft is expected to be announced in the coming weeks,
coming on top of a €1 billion ($1.11 billion) investment announced
year. That has largely been reserved for 17 aircraft, Air
France-KLM's low-cost airline Transavia's chief executive, Matthijs
ten Brink, said Thursday in an interview with The Wall Street
Journal.
Europe's largest airline by traffic said it strongly feels the
urge to quickly move forward with its expansion in the low-cost
segment by opening operational bases outside France and the
Netherlands, as stronger European competitors continue to
expand.
The Franco-Dutch airline group currently has two separate budget
carriers, Transavia France and Transavia Netherlands, and initially
had plans to launch a Transavia Europe brand. Last year, those
plans were abandoned after a pilots' strike that cost the company
€425 million.
A year later, the need for the creation of a new airline, which
should have enabled a simplified structure and lower cost base, has
evaporated.
"Now we have been given an additional year to fix things
internally, there is no need to create a new airline," Mr. Ten
Brink said.
"Basically, the argument to launch a new airline was to not
suffer from the legacy we carried in the Netherlands and partly in
France. We weren't ready to take on the competition battle in
Europa," he added.
Meanwhile, Transavia Netherlands in July reached a deal on new
labor agreements with its pilots, meant to push down costs, and has
booked significant progress with streamlining and simplifying the
overall Transavia brand, and enhancing the IT infrastructure,
investing "tens of millions," Mr. Ten Brink said.
Air France-KLM Chief Executive Alexandre de Juniac said in
mid-July the airline aims to open its first operational base
outside its home markets in the first half of 2016. Without
providing further details while he emphasized that the pilots'
unions in France had expressed willingness to reopen
discussions.
A deal is likely to be signed in the coming weeks by Transavia
executives, the chief executive of Transavia Netherlands said,
adding that deals with French trade unions still need to be reached
first.
The expansion doesn't come without risk for the Transavia
airlines, as both are loss making and are expected to return to
profitability by 2017. Europe's largest budget carriers, easyJet
PLC and Ryanair Holdings PLC, currently do manage to post a profit
out of their low-cost airline businesses.
"The growth we add must contribute to our profitability target,"
Mr. Ten Brink said. The operational base expansion requires a fleet
expansion. Earlier this year the company announced the purchase of
17 Boeing 737-800 airplanes meant for growth within its home
markets. New aircraft for bases in Europe could be bought from
Boeing Co., but could also come from "befriended airlines," Mr. Ten
Brink added.
After the airline moved away from creating a European low-cost
unit, it has rapidly increased its French budget unit. Because of
this fast expanding growth and intensive competition in France,
revenue has come under pressure, Mr. Ten Brink said.
Air France-KLM faces fierce competition from low-cost carriers,
which are expanding rapidly across Europe. Boosting its own
low-cost activities is one of the measures it is taking to address
competition within Europe. A strong European network could
furthermore stimulate traffic for Air France-KLM's long-haul
flights, addressing competition from carriers from Gulf states on
intercontinental flights.
The Franco-Dutch airline is in the midst of an overhaul. It is
making efforts to trim costs as its cost base is higher than those
of other European airlines. Last July, Air France-KLM recorded a
second-quarter loss of €79 million ($86.7 million), larger than the
€11 million loss it posted last year in the same period. Revenue
grew 3% to €6.64 billion from €6.45 billion in the second quarter
of last year.
Write to Ellen Proper at Ellen.Proper@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
August 20, 2015 12:45 ET (16:45 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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