France has always been a tough nut to crack for the low-cost carrier. Where are the opportunities to take on Air France and the country's high-speed rail network?

Budget operators cite a variety of hurdles to explain why the French market has traditionally been so challenging for them to enter. Many point the finger at Air France and blame the flag carrier's "stranglehold" tactics, particularly on the domestic front.

Air France dismisses such accusations pointing instead to the country's high-speed rail service, the TGV. Can low-cost operators find a way of breaking through these barriers to entry and penetrate this difficult market?

European low-cost carriers, along with French airport representatives and legislators, used the French Connect forum in Brittany in April to discuss both the potential for low-cost air travel growth in France and the pitfalls of operating in the French market. Jacques Sabourin, the head of French airports association UAF, says passenger numbers in France increased by 4.5% in 2006 to 146.6 million, but notes this is "about half the growth of other European countries". Sabourin points out that low-cost carriers contributed to 53% of this increase, but he worries that the French government is "disinvesting" in the airline sector and that high taxes could discourage future growth.

This point is echoed by François Baccheta, easyJet's general manager France, who calls the country the "European champion of taxes". He adds: "French people pay 20-30% more to fly than people in other countries - this is partly why the market is so depressed."

Baccheta says another key problem facing low-cost carriers in France is a lack of legal protection, which he believes leaves them vulnerable to legal challenges from Air France. "We need clear rules and transparency so we are not spending time facing these stupid challenges. The state is squeezed by Air France lobbying," he says.

Legal fights
One example of a legal challenge mounted by Air France is the complaint lodged in June 2006 with French civil court Conseil d'Etat against Marseille Provence airport's new low-cost terminal, which has become a base for Irish budget carrier Ryanair. Gille Bordes-Pages, vice-president of development at Air France, says this particular legal challenge was mounted because the French carrier does not believe "the minimum service" at airports should cost it more than it does low-cost operators.

"We already pay extra fees for things such as lounges and jetbridges and we don't want to pay twice. That's why we went to court in Marseille - it's not a matter of Air France's dominance or proximity to the government, it's a matter of fairness," he explains.

Bordes-Pages dismisses as fiction comments suggesting that Air France has a "stranglehold" on the French market. "Air France's dominance is like the Loch Ness monster - there's a lot of talk about it but nobody can see it," he says. His response to claims that Air France and its subsidiaries control up to 98% of the French domestic market is that it is impossible to talk about travel between domestic cities in France without mentioning the TGV. While he says a domestic market share figure of between 80% and 90% "sounds realistic" for Air France when the impact of rail is left out of the equation, he quickly adds that failing to mention rail is "like comparing carrots with tomatoes".

When rail services are included the TGV has an 80% domestic market share, notes Bordes-Pages, leaving Air France with 18% and low-cost and charter carriers with around 1.5% of the market. "The explanation is very easy - the high-speed train operates with a high level of subsidies," he says.

Bordes-Pages says there is "no room for any low-cost carriers on routes between Paris and other French cities" because, with some fares as low as €19 ($25.60), the TGV can be cheaper than the taxes charged for travelling the same route by air.

"When low-cost carriers say they are interested in the domestic market, they are lying," he says, adding that easyJet decided to axe its Paris Orly-Marseille service "as soon as it was free to use the slots elsewhere" because it was "losing money on the route". EasyJet replaced the route in 2005 with new flights from Orly to Turin and Pisa in Italy.

However, John Strickland, director of aviation consultancy JLS Consulting, argues that opportunities do exist for low-cost carriers to operate domestically, particularly if they avoid Paris and instead target regional city pairs that are not served by the TGV. "The TGV is present in limited markets and Air France is not proactive in developing services away from Paris. A well-­chosen start by low-cost carriers on domestic routes can be successful," he says, pointing as an example to buzz. Strickland was formerly head of network development for buzz before its acquisition by Ryanair from KLM in 2003. "When buzz operated domestic flights in France, we found that the French public was not averse to the product," he says.

However, Michael Cawley, deputy chief executive of Ryanair, says that while France is a "critically important" market for the Irish airline, the domestic French market is "very difficult". He adds: "We are open to doing domestic routes here, but perhaps not yet." Similarly, Carlos Muñoz, chief executive of Vueling - which recently opened its first base outside Spain at Paris Charles de Gaulle - says the Barcelona-based airline is not looking at launching domestic routes in France "at the time being".

"The three highest traffic domestic routes are Paris to Marseille, Nice and Toulouse, but Air France has a good network and there's also the TGV," says Muñoz. "At some point, domestic routes might become more appealing, but for the next phase we will look at Portugal and maybe Greece. We will build internationally for the next year then we'll re-evaluate." Vueling has based three Airbus A320s at Charles de Gaulle, and is looking at doubling this by next March.

Muñoz boasts that Vueling has a 35-40% market share on its route between Paris and Barcelona, and is "hoping to get close to 5% of the total traffic volume at Charles de Gaulle by the end of 2008". He adds that Air France has a 76% market share at Charles de Gaulle, and admits that the French carrier is "the 800lb gorilla by far". However, he seems unafraid of competing with Air France at its main hub: "We will compete with Air France like we have with Iberia. We've been operating in France for three years and, although Air France is a strong rival, we've done alright."

Aside from the threats posed by Air France and the high costs associated with operating in the French market, some low-cost carriers believe a further challenge is that France is much more of an inbound than an outbound market. "Fundamentally, France is Europe's most inbound market and is dictated to by people who want to visit France," says Cawley. This sentiment is mirrored by Karim Makhlouf, chief commercial officer at central European budget carrier SkyEurope Airlines, who says it is "difficult to stimulate traffic" in France because "only 12% of people travel outside the country".

However, this is strongly disputed by Muñoz: "I don't see Paris as an inbound-only market. It's a very strong origin and destination market with a good mix of people coming in and going out," he says, although he adds as an aside that this observation relates to Paris and "may not apply to the rest of France".

Traffic flows
Meanwhile, Bordes-Pages agrees that Makhlouf's 12% outbound traffic figure could be accurate for low-cost carriers targeting beach resorts. But he says the figure in no way reflects Air France's findings: "I disagree with this figure for Air France. We're nearly at 50/50 [inbound/outbound] with about 45% of our customers coming out of France for business or holidays."

Despite the apparent drawbacks of operating in France, Vueling's choice of Charles de Gaulle as its first base outside Spain is just one example of how low-cost airlines are pursuing the perceived potential of the French market regardless. Ryanair sees potential for a future base at Paris Beauvais airport, according to Cawley. "Realistic expansion [at Beauvais] can be contemplated, and we will be basing aircraft there within the next two years, if not sooner," he says.

The carrier has already established a base at Marseille and is planning further growth from the airport later this year. In addition, Makhlouf says SkyEurope is keen to increase its capacity in the French capital and "find new opportunities outside Paris".

So is Air France worried about facing low-cost competition in its market? The launch earlier this year of Air France-KLM Group's new French medium-haul leisure carrier, Transavia France, would seem to suggest that it is taking the low-cost threat seriously. Transavia France is 60%-owned by Air France the remainder is owned by KLM's Dutch subsidiary, Transavia. The carrier began operating Boeing 737-800 services in May from Paris Orly to Porto in Portugal, and it plans to add destinations throughout Morocco, Tunisia, Spain, Italy and Egypt to its network.

Transavia France will not operate on any routes served by Air France, nor will it operate domestically. The carrier is designed "to complement our offering", says Bordes-Pages. "This is our answer to low-fares holiday traffic." However, he insists that Air France is not concerned about competition from carriers such as Vueling. "We're not afraid of Vueling," says Bordes-Pages, adding the carrier has not yet become profitable.

Martin Saxton, director of commercial planning at Flybe - which operates numerous routes between the UK and France - believes the future of low-cost growth in France will depend on changing the French mentality towards air travel. "We need a culture change to get people to consider air travel for region-to-region travel because at the moment it's seen as very expensive," he says, adding that support for air services from the regulatory system is necessary.

Makhlouf agrees that a change in public opinion is needed. "There is huge potential for low-cost development in France - the low-cost mentality is a couple of years behind the UK and Germany," he says.

Strickland believes there are still some markets within France that can be exploited profitably, but cautions that this will "require lobbying on the cost side". He adds that new French President Nicolas Sarkozy is expected to encourage a "certain amount of competition", and advises airlines to watch developments in this area closely.

The train versus the plane
When questioned on its perceived dominance in the French market, Air France consistently says the country's high-speed rail service, the TGV, is what has prevented low-cost carriers from penetrating the domestic market. However, others believe there are gaps for low-cost carriers to exploit in the TGV's network. So who is right?

Gille Bordes-Pages, vice-president of development at Air France, says the fact that the French rail network is so well-established and heavily subsidised by the government makes it a formidable competitor on travel between domestic cities. "In France, when a passenger gives €1 [$1.30] to [French rail operator] SNCF, the government also gives €1, so the level of subsidies is very high," he explains. "To face such competition as the TGV you must have a strong argument." He points as an example to Air France's La Navette air shuttle service, which links Paris Orly with Bordeaux, Marseille, Nice and Toulouse. "La Navette is a good answer for business travellers who want to travel from Paris to Marseille and back in a day."

So strong is Air France's belief in the threat posed by the TGV that the airline is planning to establish its own domestic rail service when the French rail system is deregulated. Bordes-Pages says the rail service would target cities located relatively close to Paris, such as Angers, which are not currently served either by the TGV or by air. "We will do this as soon as deregulation occurs - we expect this to happen between 2012 and 2015," he states. "The focus at the moment is on very short domestic distances. We don't, for example, want to operate between Paris and Marseille." Air France is looking for a joint venture partner to launch the project.

However, John Strickland, director of aviation consultancy JLS Consulting, believes there is still "some scope for low-cost carriers to come in and compete" with rail. He adds that Air France is "missing the point" that larger low-cost carriers "could make it work".

Spanish low-cost carrier Vueling, which has made Paris Charles de Gaulle its first overseas base, does not appear too concerned about the TGV. "The TGV is already in place so we know what we're dealing with, unlike in Spain where the high-speed train network is still developing and is therefore less certain," says chief executive Carlos Muñoz.

But with this month's launch of high-speed rail services from Paris to Frankfurt, Munich and Stuttgart in Germany, together with the expectation of further pan-European rail links in the future and rising passenger environmental concerns over air travel, can airlines really afford to ignore the threat of rail?

Source: Airline Business

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