Air France president Jean-Cyril Spinetta is perhaps not quite the traditional French civil servant that his background might suggest. It is true that Spinetta, like his predecessors, is indeed a product of France's Ecole Nationale d'Administration - the famous training ground for the country's top public servants. And in many ways he still has the patrician air of a government official. But that impression is misleading. This Air France leader is equally fond of quoting the sayings of that most-admired of US capitalists, General Electric boss Jack Welch. Among his favourite books he names From Worst to First, the story of the turnaround at Continental Airlines written by its charismatic chairman Gordon Bethune. In short, Spinetta is among the new breed of French businessmen, combining the Anglo Saxon market-orientated business culture with the French social model of capitalism.
His enthusiasm for Bethune's transformation of Continental is fitting. Spinetta too has been responsible for seeing through an equally unexpected turnaround. While Air France may not have been the worst airline in Europe, it lagged far behind its big competitors Lufthansa and British Airways. How times have changed. Nearly three years after taking up the reins, Spinetta has much to boast about. While the recent Concorde crash has cast a shadow over the airline for the time being, the fundamentals are impressive. Air France is now challenging to be among the the most profitable carriers in Europe. It has secured a major US partner in the form Delta Air Lines and launched a global alliance. Not least, the airline's turbulent relations with its workforce, appears to have cooled down.
However, boasting of such achievements is not in Spinetta's nature. He prefers to put the spotlight on the workforce. "Our business is a service business. If you want to be successful and profitable you have to convince and motivate all employees."
Christian Blanc, Spinetta's immediate predecessor, was also arguably from the new mould of French businessmen - although here the similarities end. Blanc may have been more dynamic, but he lacked the political skill and quiet diplomacy that Spinetta has made his hallmark. Blanc had regular run-ins with the unions and the government, which had led to threats of resignation before he actually quit in September 1997. That came after the newly-elected socialist government refused to back him up against the unions in a show-down over privatisation. He demanded that the government relinquish a majority shareholding in the national carrier. The government refused and so effectively backed the unions against Blanc.
Patient negotiator
In contrast, Spinetta is renowned by airline staff for his patience, a quality he found useful in the first year of his tenancy when, after a pilot's strike and months of negotiation, he struck an amicable deal which saw pilot's salaries reduced in return for shares in the airline.
This deal helped make the airline more competitive by bringing pilot's salaries into line with rivals such as British Airways and Lufthansa. However, for Spinetta the agreement had other important consequences. The deal, and the initial public offering (IPO) which followed, gave Spinetta the opportunity to introduce the stakeholder concept into the airline. "The IPO was very important because 80% of employees are now shareholders," he says.
While his predecessor resigned over the ownership issue, Spinetta, demonstrating his more pragmatic nature, says he is comfortable with the situation of a partial sell-off. That is, in any case, unlikely to change under the current transport minister Jean-Claude Gayssot, a member of the French Communist Party. Yet, Spinetta emphasises that the carrier is now free to make its own business decisions.
At the time of Blanc's resignation, some commentators felt that the government's refusal to relinquish control would hinder its chances of striking an alliance deal with Delta. However, the doubters were proved wrong and the alliance is considered one of the strongest in the airline industry. Korean Airlines joined in July, and together with the third co-founder AeroMexico the four carriers officially launched their global alliance under the brand name Skyteam.
While Skyteam may not yet have the global reach of the Star Alliance, Spinetta is keen to add new members. Air France has more than 40 bilateral partnerships, including post-colonial ties (and often small equity stakes)to a swathe of national carriers across Africa and the Pacific. However, Spinetta is careful to emphasise that it will not be growth for growth's sake. He jokes that there are no plans to become the next International Air Transport Association (IATA). "If you have too many airlines it is very difficult to offer a seamless service. I think if you have more than 10 airlines it is difficult to work efficiently." He points out the importance of an integrated information system and adds that with more than 10 airlines it "becomes impossible" to manage.
Alliance opportunities
Meanwhile, it's almost a case of who is not rather than who is on the menu. Following the demise of the KLM-Alitalia virtual merger, the Italian flag carrier is being hotly tipped to join Skyteam. Air France had been in strong contention to win Alitalia's hand in marriage before KLM emerged as the winner of the beauty contest three years ago. And Spinetta does not deny speculation of renewed interest now that the KLM deal is dead. "If we were interested in 1997 then clearly we are interested in the year 2000," he says. Neither does he believe that the Italian Government's majority shareholding of Alitalia will obstruct any deal, pointing out that if an alliance is agreed "it will be with the agreement of the Italian Government."
He also dismisses the argument that Milan is too close to Paris to operate an effective two-hub system. In particular, he points out that the distance between Paris and Milan is further than that between London and Amsterdam, making a non-too-oblique reference to the proposed merger between BA and KLM. He hints that the idea of an alliance with BA still has interest for him, but adds "it takes two" to reach an agreement.
On the other side of Europe, Air France has had a co-operation agreement with Russia's Aeroflot for the last three years, mainly concentrating on cargo and maintenance. There are no plans for Aeroflot to join Skyteam, although Air France is working with the Russian carrier to extend its co-operation. Spinetta says: "Maybe one day it will be on the cards," adding, "Russia is a huge country. I'm sure there is huge potential for development."
In the meantime, Skyteam's next move could be in South America. "We consider the Brazilian market is a strong one for Skyteam," Spinetta says. "We are seeking an alliance with a Brazilian partner." Last year, Air France signed a codeshare agreement on the Paris-Sao Paolo route with Brazilian carrier TAM Meridionais and Spinetta says, "we are working with TAM. We will see." Delta already has a codeshare and blockseat agreement with Transbrazil, so TAM is not necessarily the only item on the shopping list. Spinetta expects any agreement with a Brazilian carrier to be reached after an expected restructuring of the ailing Brazilian airline industry.
In Asia, Spinetta says Air France is interested, along with Delta, in the forthcoming offering of shares in Thai Airways. The latter is in the Star Alliance but has been seen as a potential target for other alliances since Singapore Airlines joined Star. He also picks out South Asia as an area of interest. Another IPO, this time at Air India, is being considered as a potential target. As with Aeroflot, Spinetta picks out the opportunity of access to a huge market as a key attraction.
Network fundamentals
Despite all this activity, or rather potential activity, Spinetta is keen to emphasis that alliances are not the be-all and end-all of the airline industry. At the end of the day, he says, an airline's job is to sell tickets and keep people satisfied. "Load factor, yield and profit" are key, he says. "Some airlines have bad results, but people say they have good alliances. This is stupid. If you have good results, you have good alliances."
Air France has, of course, had good results of late, not only achieving operating results that are among the best in Europe, admittedly in a tough year, but also beating most of the competition when it comes to yields. Interestingly, while the likes of BA have been rapidly falling out of love with the transfer passenger philosophy, Spinetta has other ideas. "We are convinced that to have a good yield you need to have both point-to-point and transfer traffic." To back this up, he points to traffic revenue figures lying on his desk, which show that traffic revenue rose 7% year-on-year, while load factor was up 3-4%, over the April-May-June period.
A crucial advantage for Air France, particularly when it comes to transfer traffic, is that it simply has more space to play with than its main rivals. With a fourth runway to be commissioned by year-end at Charles de Gaulle (CDG), Spinetta has the luxury of a hub which is developing faster than its main rivals'.
With advantages like this, could it be argued that Spinetta is simply in the right place at the right time? It is noticeable that he has followed many of the policies of his predecessor, Blanc - such as developing the alliance, striking a competitive deal with the pilots, and taking the airline closer to the private sector. However, while he may have had the same policies, there have to be doubts that Blanc would have had the same success as Spinetta in bringing these ideas to fruition.
The latter's pragmatism has allowed him to make the necessary changes while keeping the employees on board - something which, as has already been mentioned, Spinetta sees as crucial to achieving success in this industry.
Spinetta is optimistic that the run of good form will continue, pointing out that the pessimists have been proved wrong before. "In 1998, when our IPO was imminent, everyone said there would be a big downturn in the industry. Frankly, I never ever thought that the downturn was here." He points to the financial results of airlines on both sides of the Atlantic in the latest June quarter as a sign that the industry "is on an upward trend". He adds: "It is very difficult to imagine a decrease in traffic trends when the [world] economy is on an upward trend."
Spinetta, a keen supporter of the single European currency, believes that integration within Europe will further boost traffic. He cites the rising number of cross border mergers as a source of traffic growth as people increasingly travel across Europe on business. He also sees benefits from the Internet, but is typically cautious about making predictions on Internet use, saying only that it may turn out to be between 10-25% of Air France's ticket sales in the next four-five years. "There is not an old economy and a new economy," he opines. "They are one and the same. All you are doing is selling something to somebody."
Low cost threat
One potential threat to this rosy picture comes from the low cost sector, although this has yet to affect Air France to the extent as it has hit the likes of BA. Spinetta seems unperturbed by the threat, and like his counterpart at Lufthansa, Jurgen Weber, is sceptical of BA and KLM's if you can't beat them, join them approach. He warns: "I'm not sure from a strategic point of view that majors should decide to launch low cost carriers." He says Air France would only go down this road if it would be profitable, which he thinks is unlikely. He also sees a period of consolidation lying ahead for the low-cost sector. "One or two will survive, not 10 or 20," he says. He is "sure the market is there" but that the majors and low-cost carriers are "two different jobs."
While Spinetta is proud that there has not been a pilot's strike for two years, a new deal is due to be signed mid-2001. As ever, this is a potential troublespot. Spinetta admits that the French union's appetite for strife is still alive. "It is true that there is a problem in France," he says, adding that there is a national tendency "to strike, and then sit down and hold discussions." However, often the problem "is based on image and is not linked to reality." he cites the example of an Air France strike in Nice in April last year. Although this was a local problem he bemoans the fact that the media gave the impression that the whole of Air France was on strike, when 90% of services ran as normal.
The picture at Air France looks relatively rosy as it continues to grow out of its CDG hub. The airline has followed a policy of buying into franchise partners, which Spinetta says is aimed to improve the feeder service into Paris. With the SAir Group's purchase of Air Littoral and plans to merge AOM and Air Liberté, he feels the consolidation process in France "is finished."
A major change for this hub strategy will come in six to seven years, when Air France is due to take delivery of its first Airbus A3XX 'superjumbos'. Air France was the first European customer for the proposed aircraft, with an order for 10 (and an option for four) announced at the Farnborough Air Show. Even with the extra capacity planned for CDG, Spinetta sees further space constraints by the end of the decade, (which must also worry BA, which is already struggling at Heathrow). With this in mind he cites "environmental reasons" as a key reason for his decision. He is also attracted by what he estimates as a 15-20% cost saving and, he sees the aircraft as a marketing opportunity, although perhaps not to the same degree as Virgin's Richard Branson. He sees the aircraft operating on five key routes out of Paris - New York, Los Angeles, Miami, Montreal and Tokyo.
By the time these aircraft come into service, Air France's fortunes could well have changed again, but for now Spinetta can look back with satisfaction at his first three years as president. The formula, he says, is not complicated: "My job is to listen to people, it is really very simple."
Source: Airline Business
