Already Air Liberté is showing the characteristic flamboyance of its president, Lofti Belhassine, who says that by July the carrier aims to have launched 23 new domestic French routes this year. And while the carrier does not at present have enough slots to launch such an all-out attack on the market, even half of those routes would be impressive and would amount to more than the combined route launches of TAT and AOM.
TAT is still fighting to stem losses although, having abandoned most of its European route network, the carrier is forecasting break even in 1998. AOM has achieved profitability and launched three new routes this year. But it is Air France Europe, formerly Air Inter, that could suffer most from Air Liberté's massive growth.
In January and February, Air Liberté launched five routes from Nice to Paris/Orly, Strasbourg, Lille, Toulouse and Bordeaux. In March and April there are planned launches from Paris/Orly to Biarritz, Toulon, Pau, Perpignon and Mulhouse. Paris to Lyon, Nantes, Brest and Grenoble are destined for May-June launches, with Paris-Marseille and four Corsican operations due to start in July. Prior to the expansion the carrier already operated from Paris/Orly to Toulouse, Strasbourg, Montpellier and Bordeaux.
While Belhassine says there is no financial concern over his mammoth expansion, he readily admits he would prefer another strategy. 'Obviously it is a quick rate of launching which we do not like. But we had no choice because the market was closed and it opens just one year before the entire liberalisation of Europe.'
Air Liberté's board has already agreed in principle to look at a flotation in the second half of 1997, but any moves to go public will depend on financial success in 1996. The Air Liberté group posted a consolidated net profit of FFr13 million (US$2.6 million) on revenues of FFr1.7 billion in the year to 31 October 1995. In 1996 Belhassine forecasts Aquarius group, Air Liberté's holding company, will double its revenue to FFr3 billion and increase net profit to FFr32.5 million. However, this includes the charter operations and the holiday company.
The French domestic market was finally fully liberalised by the French authorities on 1 January 1996 under the European Union's third package. Prior to this competition on domestic trunk routes was restricted to the six main routes - between Paris/Charles de Gaulle and Marseille, Strasbourg, Toulouse, Montpellier and Bordeaux and between Paris/Orly and Nice. AOM has been allowed to fly on the Nice route since 1994 and in 1995 Paris/Orly-Marseille and Paris/Orly-Toulouse were opened to TAT and Air Liberté was also given rights for Paris/Orly-Toulouse.
But the independents have had to struggle constantly against the state's protection of Air France Group, a battle which culminated last year in the opening of Paris/Orly to domestic and European scheduled operations. Even then an annual slot capacity cap of 250,000 was quickly imposed for 'environmental reasons'. But the fray has hurt all the players in the market, comments one Paris-based independent consultant. 'It is damaging because they all lose energy fighting each other. And the fight with the internationals next year will be much more fierce. When Air France concentrates on the small players, they are easy prey. Lufthansa and British Airways will be much harder,' he says.
In February the fratricide over fares discounting and access to both routes and airports again focused on Orly. But this time the dispute was over who occupies the more modern terminal.
Air France Europe is resident at Orly West, which also hosts AOM and until recently held TAT. The French airport authority forced TAT to move to Orly South and informed AOM they too should pack up and move to the South terminal by the end of March. AOM refused and chairman Marc Rochet complained to Aéroports de Paris and to the European Commission, which was investigating the matter at presstime. 'ADP want to push us into a full terminal and at the same time open Orly West for the Air France Group,' says a frustrated Rochet.
TAT is equally annoyed. Commercial director Bernard Lalanne says that Orly South not only lacks facilities like car hire, but has reached its maximum capacity of 12-13 million passengers annually, restricting further growth. Orly West, however, can take about 5 million more passengers before reaching its 17 million capacity, says Lalanne.
The political agenda here is clear, says a French airline analyst. 'Air France Europe want to be alone. They want a political and psychological victory over the independents. The chairman of Air France [Christian Blanc] is forcing decisions on a political level under the threat of his resignation,' he says.
But while many French independents are accustomed to scaling the political obstacles that are routinely thrown in their way, the economic situation is more worrying. The recession in France continues to drag on and the tourist industry was damaged last year by a combination of the bombing campaign in Paris, the strength of the French franc against most European currencies, France's refusal to back down on its South Pacific nuclear tests, and the crippling public sector strikes at the end of the year.
Current GDP growth forecasts for 1996 are in the 1.5 per cent range, half the level economists estimate is needed to cut into the unemployment rate which was hovering at around 11.5 per cent at the end of 1995. A 2.5 per cent increase in GDP is expected in 1997, although there are ominous signs worldwide of another downturn towards the end of that same year.
Yet France represents the largest domestic market in Europe: Iata reports there were 20.8 million domestic passengers in 1993 and forecasts this should reach 26.4 million by 2000 and 33.7 million by 2010. And this despite an established high speed rail network.
So while the potential is there for the French players, they have little time in which to become strong competitors before the French domestic market is opened to other European Union carriers on 1 April 1997.
Fortunately there is a realisation on the part of Air Liberté's competitors - Air France Europe, TAT and AOM - that the clock is ticking and efforts are being made to restructure.
As the incumbent, state-owned Air France Europe's task is not to expand but to maintain market share and transform itself into a leaner, more efficient operation. It will be fully integrated into Air France's European operation - the Centre de résultats also known as Air France Europe - on 1 April 1997. Until then, and possibly even after, the domestic operations and some European routes like Paris/Orly-London/Heathrow will be branded as Air Inter Europe. An earlier merger is prohibited under the 1994 European Commission ruling on Air France's FFr20 billion state aid package.
As a result 1996 looks likely to be a difficult year for Air France Europe as it tries to restructure, renegotiate labour contracts, revamp its inflight products and educate the public about its 'new role', which could change again next year. 'For Air France Europe, we have to manage a very quick change in a very fast time. You must remember, two years ago, we were told we would have only one new competitor a year,' says Christian Boireau, executive vice president at Air France Europe.
The need for restructuring is reflected in the financial situation at Air France Europe, which lost FFr500 million ($98.9 million) on revenue of FFr11 billion last year. This was coupled with a 7.5 per cent fall in traffic over 1994 to 15.8 million passengers. In order to bring the company into line with Air France, the 1995 financial year will be stretched to 15 months, ending on 31 March 1996. Air France Europe aims to improve its results by FFr1 billion by April 1997, of which one third will come from purchasing savings, one third from increased labour and fleet productivity and the remainder from increased revenues, Boireau says.
Supplier contracts are being renegotiated and, at presstime, Boireau was trying to piece together a labour settlement with the pilots. Talks faltered in January with the carrier asking for a 15 per cent productivity increase, but the pilots demanding a no-redundancies guarantee and an equity stake. New talks were due to begin in March and both sides have 15 months under French law to negotiate a new deal. Boireau is confident the pilots know that there must be significant new working practices. 'I believe the pilots do understand the necessity for change. They understand the world is changing,' he says.
Boireau says the use of aircraft which are too large for the French domestic market has been responsible for some of the financial damage. Beginning in June, the airline will take delivery of nine A319s, which will replace four A330s and five Fokker 100s being used in the meantime. Air France Europe's fleet already includes five A321s and 35 A320s and Boireau says this fleet commonality has already benefited the carrier to the tune of FFr200-250 million. He estimates the arrival of the A319s will bring further savings of FFr100 million.
In March, using the Air Inter Europe brand, Air France Europe took over some of Air France's UK-France routes including the thrice daily London/
Heathrow to Paris/Orly service and those from London/Heathrow to the French regions - the test run for Air France Europe. Success could mean it will take on several European destinations for Air France. The implications of failure are not being discussed.
At home Air France Europe risks losing more market share to its hungry independent competitors. On Paris-Nice, Air France Europe held 52 per cent of the market in 1995, with Air France holding a further 20 per cent. But this still left about 27.5 per cent for AOM, says Boireau. On Paris-Toulouse, a market of about 2 million passengers annually, Air France Europe says it maintained 61 per cent of traffic with just 45 per cent of the capacity following TAT's entry onto the market last October.
But these percentages are still a far cry from the near monopoly of the past. When Air Liberté cut its fares in 1995, Air Inter, as it was then known, had no choice but to follow, says Boireau. 'Of course [discounting] costs us in our yields. But it is less costly than to do nothing,' he smiles wryly. Yields fell 1 per cent in 1995.
But TAT and AOM have both suffered losses in the past few years and are taking a cautious approach to liberalisation. TAT, in which British Airways holds a 49 per cent stake, has withdrawn its previous strategy of expansion in Europe, and says it must concentrate on boosting its 12 per cent market share to 20 per cent on both Paris/Orly-Marseille and Paris/Orly-Toulouse while focusing on its secondary/tertiary route network and its Toulouse hub. Still with a big deficit, TAT can barely afford any expansion let alone a rapid one.
TAT's venture into Europe was ill-advised because its brand name was not well known enough even within France, says Lalanne. 'Jumping from a regional to a European airline was too big a step. This [focus on domestic routes] is a more rational step,' he says.
Lalanne says the total deficit now stands at FFr600 million ($119 million), and that break even should occur in 18 months' time with the 1997/98 results. The carrier believes it can triple its revenue from the current FFr1 billion over the next three years. TAT has reduced overall costs by 20 per cent and improved productivity and fleet utilisation. Some 70 senior pilots have taken voluntary redundancy, a package the Paris-based consultant claims TAT could afford to sweeten due to a 'generous financial allocation' by British Airways.
TAT was due to boost its six daily flights to Toulouse and seven to Marseille to nine apiece from 1 April. At the same time it planned to replace its Fokker 100s with Boeing 737-300s on Orly-London/Heathrow and Marseille-London/Gatwick. The carrier also services Lyon-Gatwick. Lalanne readily admits TAT's strategy differs markedly from Air Liberté's. 'If you think in terms of financial parameters, [Air Liberté's strategy] must be very dangerous for them,' he says.
Despite AOM's early entry into the domestic French market, with Orly-Nice, it is cautious over further expansion. The airline carried 1.2 million domestic passengers in 1995 and Rochet predicts an increase of 60 per cent in 1996. AOM's strategy is to concentrate on the domestic market. Last year it launched Paris-Marseille and Paris-Montpellier and in February Toulon, Pau and Perpignon joined its route network, all using MD-83 aircraft.
The carrier is now under the control of the Consortium de Réalisation which manages the assets of troubled state bank Crédit Lyonnais. Despite the very public offer from a consortium led by Lofti Belhassine to buy AOM, the chairman of the CDR has said the sale will not happen for two to three years, allowing the carrier time to consolidate its financial success. AOM's parent, AOMFinance, made a profit for the first time in four years of FFr27 million on turnover of FFr3.15 billion in the year to 31 December 1995. The airline made a profit of FFr 34.1 million on revenues of FFr3.1 billion.
Profitability is certainly desirable in a market that could soon be subject to even more competition. However not all the French competitors are likely to last the distance. TAT's Lalanne believes that only Air France Europe and TAT, with BA's backing, will survive. 'I do not believe in the quick success strategy. I do not think the market is ready for that; developing airlines on low fares is not enough here in France,' he says.
But others are hoping the extravagance of Air Liberté - which serves free champagne to even its economy passengers - will not lead to its demise. 'If Belhassine fails there will be no real French private airline in France. AOM belongs to the national bank and TAT is controlled by the British,' remarks the independent consultant.
Source: Airline Business
