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A Zone of Turbulence
September 2013 | Companies and Markets

In early May, Air France officially announced that its low-budget carrier has been put up for sale and that the airline is planning for big cuts over the next two years. World Economic Journal tried to figure out what is shaking Air France. The problems here began long ago, and with each passing year, Air France – a member of the SkyTeam alliance – kept trying different tricks to remain aloft.

The French newspaper La Tribune called Air France’s acquisition of CityJet a strategic mistake. Founded in 1994 in Ireland, the airline was 100 percent bought out by the French for flights from Paris to Dublin. Perhaps management had big hopes for this French-Irish combination, otherwise so much money wouldn’t have been invested into the airline family’s new member. In addition, in order to strengthen their position in London, in 2007 a record high sum of €190 million was spent to purchase the financially troubled Belgian company VLM, which a year later began operating under the unified brand CityJet. For 13 years, Air France nursed its child. Almost immediately after it was brought into the family, VLM started to pull the “parents” down. According to experts, last year alone CityJet’s losses totaled €17 million. The unfavorable financial situation also affects employees. For the past six years, according to air-journal.fr, employees have faced a wage freeze, tiny social benefit payouts, and non-competitive working conditions.

As a CityJet representative told WEJ, as a result of all the turmoil, “last year shareholders started searching for new investors among the many interested parties. After an extensive selection period, shareholders settled on a few potential owners. For reasons of confidentiality, we cannot release their names at this time.” According to information on latribune.fr, two buyers have already been found: ASL Aviation, a major shareholder in air transportation, and Europe Airpost.

On May 18, French pilots unhappy with the course of events planned to go on strike, but management settled the conflict within the company.


HOP! – A New Twist!

At the beginning of this year, when it became clear that CityJet had to be sold, while regional transportation had to be maintained at all costs, a decision was made to form HOP!, a new carrier. The new unit merges three current regional airlines – Brit Air, Airlinair, and Regional – and will aid in the financial recovery of Air France-KLM, which hopes to lift its regional airliners out of the red by 2014.

HOP! will have fewer aircraft and a less sizeable staff than the three companies that compose it. The new airline will operate a fleet of 98 Embraer, Bombardier, and ATR aircraft, with capacities for 48-100 people.

Plan B: Lay-Offs

In 2012, Air France was €6.5 billion in debt, which is why it decided to tighten its belt. An official spokesperson for Air France told WEJ: “The Air France-KLM Group in 2012 confirmed a new plan for reform and economic development, which consists of several points. The goals are quite clear: return to medium-range flights within three years, increase freight traffic efficiency, and increase profitability on long-haul flights.

“After evaluating the team, we decided to make changes to the employment contracts, such as changing the duration of the work day and approving plans to quit of one’s own volition. It’s worth noting that we reached the desired results with respect to personnel. We cannot say that the airline is resorting to new austerity measures today; rather we are simply adhering to the new plan.”

The Chairman of Air France’s Civil Aviation Navigators’ Union, Jean-Marc Quattrochi, thinks somewhat differently: “The management of Air France has developed an extensive transition plan that will win back customers and return to competitiveness. The reduction in flight crew should only happen by staff quitting of their own volition. Since the layoffs will take place voluntarily, the company will provide a good severance package and social benefits to these employees, according to French law. Layoffs will begin at the end of this year.” Should we expect strikes?

According to the Air France spokesperson, at the end of the year, the company is planning to lay off “voluntarily” 500 employees and 400 flight attendants, in addition to sending people on indefinite leave. “This will not affect our schedule, as the layoffs are planned for after the end of the summer season and we will have enough people to service the aircraft. There is no direct connection between the reductions in staff and the number of owned and leased craft,” said the Air France employee.

If the airline is able to do this gently and solve all of its financial problems without any strikes, it will come out as victor in this tricky game. Few flight crew members would agree to quit on their own (but at the request of the company) and be left without a job, even with a great severance package. On the other hand, if the new transition plan and economic development work, Air France will be out of the red and its business will grow effectively in the future. They were already saved from financial ruin once by the French government (in 1994), which gave them 20 million francs. And now nobody wants the national giant to pull the Sky Team alliance down. A policy of forced savings is always a double-edged sword.

Text: Ann-Marie Vidal


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