Air France Plays Catch-Up Mulling Options for Short Flights

Jun 26, 2014 12:08 pm ET

(Updates with comments on possible Alitalia investment in last two paragraphs.)

June 26 (Bloomberg) -- Air France, struggling to fix its short-haul business, will review options that may include closing regional bases the carrier created just two years ago.

An internal report on domestic and European operations will be delivered June 30, Air France-KLM Group Chief Executive Officer Alexandre de Juniac said yesterday. Juniac said he and Air France CEO Frederic Gagey would get the findings from Lionel Guerin, who runs the Hop! regional unit and led the review.

Europe’s biggest airline is playing catch-up with its biggest rivals, which already have moved to head off discounters such as Ryanair Holdings Plc. Juniac, who became CEO in July, said the company will press ahead with plans to use leisure unit Transavia as a vehicle to cut costs and halt the loss of traffic to low-fare specialists including EasyJet Plc.

“It’s a formidable project,” he said in an interview in New York. “Transavia will allow us to increase the footprint of Air France-KLM, giving us a low-cost operation that lets us respond to a market that’s the fastest-growing in Europe.”

Transavia, originally a unit of Dutch carrier KLM, is expanding at Paris Orly, the Air France unit’s second hub after Charles de Gaulle, and operates about 50 Boeing Co. 737s.

Labor expenses should be comparable to those at U.K.-based EasyJet, with a different pilot contract than the agreement covering the parent airline, Juniac said separately on Bloomberg Television’s “Taking Stock” with Pimm Fox. Travelers also will be able to redeem Air France-KLM miles on Transavia, he said.

‘Quality’ Unit

“It will be a quality low-cost,” Juniac said. “You work to earn miles and you enjoy with your family taking vacations on Transavia.”

Guerin’s evaluation of Air France’s short-haul flying included studying bases in provincial cities such as Toulouse and Marseille as parent Air France-KLM works to complete a two- year-old effort to restore competitiveness.

British Airways is among the European carriers responding to the discount challenge. The airline has focused its European network on flights that feed lucrative long-haul service while buying Spanish low-cost leader Vueling Airlines SA. Deutsche Lufthansa AG is transferring non-hub short-haul operations to the Germanwings no-frills division.

Premium Service

For long-haul flights, Air France is revamping 44 Boeing 777s with new business seats as it seeks to re-establish itself as a leader in premium service. New first-class berths will follow later in the year.

Air France is still evaluating options for its shrunken freighter fleet. While the cargo business has improved in the past five months, it’s still suffering, Juniac said. All options are on the table: retaining the operation as it is now, finding a partner to help run it, or closing it.

Maintenance is one area where Air France-KLM sees good growth prospects, targeting an increase in third-party sales from one-third to half of the total within five years as other carriers outsource the upkeep of large aircraft, he said.

Juniac also said his airline would be ready to reconsider an investment in Alitalia SpA after Etihad Airways PJSC has finished buying a 49 percent stake, adding that there is no rush to do anything. Air France-KLM owned a 25 percent stake in Alitalia, a fellow member of the Skyteam alliance, and the holding shrunk to 7 percent after it declined to participate in a capital increase amid Alitalia’s resistance to restructuring.

“We could look at making an investment but it’s not a priority for now,” Juniac said in an interview yesterday in New York.

--With assistance from Michael Sasso in New York.