Inhale, exhale. Inhale, exhale. Anybody got a spare inhaler handy? Air France needs more air.
France's new prime minister, Lionel Jospin, declares himself to be in favour of the 'respiration' of Air France. So what precisely does this mean? Will Air France's capital be opened up and the airline freed from its state owners' clutches? Will it be given a 'breather' before its planned privatisation proceeds? Or will the airline's privatisation plan be scrapped?
The enigma posed by France's new socialist prime minister Lionel Jospin is the only prognosis available at the moment as to whether Air France's planned privatisation will proceed. And Jospin's declaration proves only that he wants to keep his options open.
The prime minister's caution is understandable. Installed in office in early June, Jospin needs to devise a proposal that combines the socialist pre-election anti-privatisation war cry with their subsequent statements that there may be exceptions made for state companies facing international competition and the national flag carrier.
Air France Group Chairman Christian Blanc's plan was to offer 30 per cent of the company to employees in exchange for salary reductions; float 30 per cent on the stock exchange; and set aside 10 per cent for alliance partner Delta Air Lines with Air France buying a part of Delta in exchange. This would have left the state holding 30 per cent.
One banker declares that privatisation remains the only means by which the airline can develop, 'unless the French are willing to inject another US$2-3 billion in a couple of years time'.
A further injection of state aid into Air France is unlikely to be accepted by the European Commission or the French nation, however, as 'the government needs the money for other key issues', states an analyst.
Air France has already received FFr 20 billion (US$3.4 billion) in state aid - the final tranche was cleared by the European Commission on 16 April. The aid was used to 'reduce Air France's debt from FFr35 billion in mid-1994 to FFr14 billion last year. We also had to pay redundancies, restructuring costs and deficits through cash flow and asset sales', explains Air France's deputy chief executive officer, Patrice Durand.
EU approval for state aid was given in return for the previous government's pledge that Air France would start privatising 'once the company's economic and financial recovery has been achieved'.
France's new communist transport minister, Jean-Claude Gayssot, however, declares that the Commission has no right to rule whether a company should be public or not. He points out that Air France has regained profitability as a public company, so why should it be privatised?
Moreover, the moment at which Air France can be deemed to have recovered financially remains open to interpretation. The carrier's finances certainly seem to be heading in the right direction. The airline posted a net profit of FFr 211 million ($36 million) for the year to March 31 1997, returning to the black for the first time since 1989, and is targeting a net profit of FFr500 million this year, says Durand.
The tough restructuring purge introduced by Blanc on his arrival in 1993 seems to be slowly pulling Air France out of the mire. As well as improved finances, productivity per employee has increased by some 50 per cent over the last three years. Earlier this year Blanc unveiled plans to cut costs by a further 15 per cent over the next three years, on top of a 20 per cent reduction in the previous three years. The airline is also gradually plugging the gaps in its alliance strategy and now boasts a strong newly-restructured hub at Paris/Charles de Gaulle.
Yet the airline still has a plethora of problems to resolve. The European /domestic arm, Air France Europe, lost FFr671 million last year, and is not expected to break even until 2000. And the airline still needs to tackle the thorny issue of union unrest.
Indeed, Durand concedes that this year's overall net profit is in danger of being undermined by strikes. The social unrest centres on the merger between Air France and Air France Europe and the imposition of lower working conditions at the latter. The merger process started on 1 April and is due to be completed by 1 September. 'The start of the year has been marked by social unrest . . . we need better understanding from some of our employees - the strikes cost Air France and Air France Europe each FFr 200-250 million last year,' claims Durand.
One banker sees Air France's main problem as the 'confrontation between management and those who work for the company' due to their 'lack of understanding of where the money comes from'. Durand agrees. 'We need to ensure that certain employees adjust their behaviour to market and competition realities. We really need to make all pilots understand that they can't shoot down their own airline and jobs'. While the pilots have been at the forefront of the most recent strikes, Air France Europe ground staff have not been involved in industrial action since April.
Air France Europe pilots have been resisting management endeavours to impose the mainline carrier's 20 per cent lower wages and 15 per cent higher productivity levels. The lower working conditions are necessary 'to implement wages that are more consistent with market rates', states Durand.
A spokesman for SNPL, the largest Air France and Air France Europe pilots' union, maintains that despite recent strike action pilots 'are always ready to accept concessions if they are shown that they are necessary.' The unions claim that Blanc has failed to prove why further concessions are needed.
The complaint over Blanc's failure to communicate the company's needs is echoed throughout the unions. 'We need clear indications on which way the company is heading,' declares Gerard Marquaille, secretary general of Spaf, the pilots' union formerly dedicated to Air France Europe cockpit crew.
Blanc desperately needs to reinstate a dialogue with the unions. The social unrest has come at a crucial time, when the airline needs to build a united front against increased domestic competition from British Airways' French subsidiaries. BA has now merged TAT and Air Liberté, and is set to make further inroads into Air France's markets.
Durand is quick to point out, however, that 'competition should now be more reasonable', as Air Liberté has dropped the extreme pricing strategy adopted prior to its bankruptcy last year.
In response Air France is looking at sharpening its domestic strategy. High internal costs and a lack of suitable aircraft may push Air France further towards the idea of franchising. 'We have neither the planes nor the costs to fly secondary routes, so franchising on these routes is an option that we're obviously favouring', says Durand. Indeed, Air France's new executive vice-president marketing , John Powers, was the man who developed the franchising concept at BA.
Air France has already signed a global franchise agreement with Brit'Air, covering all of the French regional's intra-European services and 10 routes currently operated by Air France Group carriers. The services use Brit'Air cabin crew and aircraft and carry Air France flight numbers.
French regional Air Littoral, meanwhile, operates routes such as Toulouse-London under the Air France-Air Inter Europe Express name, but this stops short of a fully fledged formal franchise arrangement. Air Littoral's recent signing of a franchise arrangement with Lufthansa may put an end to this relationship.
Air France has found a further strong domestic weapon in the shape of the 'Navette' or shuttle system introduced from Paris to Marseilles, Nice and Toulouse in October 1996.
Air France's efforts to defend its own backyard are being echoed overseas. The carrier has finally boosted its formerly underdeveloped alliance strategy with a string of global tie-ups. 'What's been missing at Air France is a view of how to develop in the global airline industry,' claims one analyst.
On the north Atlantic Air France now boasts a promising ménage à trois with Delta Air Lines and Continental Airlines after signing letters of intent for broad cooperation with both carriers at the end of last year. The airlines intend to codeshare on direct flights between the US and France and on points beyond each of their hubs, subject to government approval.
Kintz predicts that if Air France succeeds in developing its alliance with Delta and Continental, it will have 'one of the most powerful alliances' in Europe.
So why two US partners? Air France claims that the two partners will ensure extensive coverage of the US and that there is no overlap between the two partners' US networks. One analyst, however, accuses Air France of opting for a 'confused' US partnership policy, particularly as Delta already has a European alliance with Swissair, Sabena and Austrian Airlines. Full implementation must await the signing of a new working US-France bilateral, he adds.
As well as its burgeoning US ties, Durand claims that the carrier is 'laying the groundwork' with Asian and European airlines.
The carrier has signed a codeshare arrangement with Air-India, effective November 1997. The agreement will initially be limited to five destinations but will expand as Air-India gains more third-country rights.
Elsewhere, an agreement with a Chinese carrier is rumoured to be on the cards, following a visit to China by Blanc and French president Jacques Chirac in mid May.
Closer to home, European ties are slowly strengthening. Finnair has 'had some meetings with Air France discussing possible scenarios' for cooperation, reveals Finnair's assistant vice-president international relations, Ronny Ronnqvist.
Alitalia is 'studying possibilities for enhanced synergies' with Air France, after the pair starting codesharing in April 1997 on flights between Paris and Bologna, Florence, Turin and Venice and on Lyon-Milan and Strasbourg-Lyon-Rome.
While Air France may be wholeheartedly throwing itself into developing new alliances, it is taking a more cautious approach when it comes to network and fleet expansion.
Over the next few years, the carrier will limit itself to increasing frequencies on existing routes as opposed to opening new routes. 'Air France will review its investment and its fleet and regain market share lost during recent troubled times. There will be some changes in the route network but none of great importance . . . we have neither the means nor the fleet to expand our route structure,' states Durand.
But if France's new environment minister gets her way, Air France may not get the chance to expand at saturated Paris/CDG airport. Rumour has it that the new minister intends to cancel the construction of two new runways at Roissy. Work has already started on one runway, expected to be operating in 1998, with the second due to follow in 2001.
The move would be fatal for Air France and for the development of the newly revamped CDGhub.
The airline completed the redesign of its hub at Charles de Gaulle's terminal two in March 1996. Air France has invested FFr100 million in restructuring its hub with a more streamlined network incorporating five connecting banks and additional non-stop flights.
The traffic results clearly underline the hub's viability. In February 1997 passenger numbers were up 21 per cent on the previous year. Connecting traffic almost doubled with 40 per cent more passengers and 32 per cent more baggage. Load factors reached an average of 81 per cent on long-haul flights and 67 per cent on medium-haul flights. Passenger revenue increased by 10.5 per cent.
A fundamental element of the new hub's success has been the new state of the art origin and destination yield management system which has contributed to a double-digit increase in yield. The original architect of the new hub was former employee, Rakesh Gangwal, who was brought in from United Airlines and is now with US Airways.
'I don't know if Air France would still exist if they hadn't had Gangwal. He did a lot for Air France, even if they were opposed to it at the time,' declares one French analyst.
Gangwal was also instrumental in recentralising functions from the so-called result centres or 'Centres de résultats' (CDR). The first functions to be centralised were from the cabin crew CDR in November 1996 after cabin crew complained of disparity in working conditions, says one analyst. Blanc had originally restructured the company into 11 CDRs in 1993 to 'break up the technical structure and bring back peace to the company', he adds.
The four 'functional' CDRs, namely for Air France Industrie heavy maintenance, IT, cargo and line maintenance, are still in place but the remaining geographical CDRs have been replaced by 'Centres de Ligne'. These retain responsibility for sales activities but the other functions have been recentralised within Air France for greater overall management control.
Air France is clearly getting its act together internally - with a healthier balance sheet and a stronger organisational structure - and externally, with an emerging alliance portfolio. And whatever the French government decides over Air France's privatisation, the plan is unlikely to scupper all the progress made so far.
Meanwhile Blanc knows the carrier must make a supreme effort to communicate a change in corporate culture to its Air France Europe employees and put that longstanding conflict behind it once and for all.
Source: Airline Business
