Air France shifts flights to discount arm to fix Europe woes

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(Sept 11): Air France-KLM Group will transfer swathes of its short-haul operation to leisure unit Transavia, more than doubling the size of the low-cost arm within three years in a bid to end decades of European losses.

The switch, which parallels moves at Deutsche Lufthansa AG, will seek to lift group operating profit by as much as 10 percent annually through 2017, Europe’s biggest airline said today in a statement prior to an investor briefing.

Chief Executive Officer Alexandre de Juniac’s strategy envisages the development of Transavia -- once the charter brand of KLM -- into a leading low-cost carrier, taking over many French short-haul operations outside the Paris Charles de Gaulle hub. Transavia will have a fleet of 100 single-aisle planes carrying more than 20 million people a year by 2017, the company said, versus 41 jets and 8.9 million people now.

“The strategic plan we are launching today will be supported by two main levers -- growth and competitiveness, combined with financial discipline,” de Juniac said.

Air France-KLM rose as much as 3.7 percent and was trading up 23.7 cents, or 2.8 percent, at 8.71 euros as of 9:50 a.m. in Paris, where it’s based. The stock has added 15 percent this year, valuing the company at 2.62 billion euros ($3.4 billion).

Evolutionary’

De Juniac is seeking to boost profit after Air France-KLM’s earnings before interest, tax, depreciation and amortization reached 1.86 billion euros in 2013, with a figure of 2.5 billion euros targeted for this year.

The company said that the operating-profit growth goal specified today refers to earnings before interest, tax, depreciation, amortization and rentals, a measure not mentioned in recent statements. It’s also targeting adjusted net debt equal to less than 2.5 of operating profit by 2017.

The targets are part of a wider plan dubbed Perform 2020, which follows on from the Transform 2015 strategy that made progress is lowering debt and slashing costs, partly through thousands of job cuts.

The new plan, while positive, “looks more evolutionary” Rob Byde, an analyst at Cantor Fitzgerald in London who rates Air France-KLM “hold,” wrote in a note, adding: “The key element missing is a headline profit target or range.”

EasyJet, Ryanair

De Juniac is seeking to turn historically money-losing short-haul operations profitable while fending of the challenge of discount specialists led by EasyJet Plc and Ryanair Holdings Plc. Today’s moves follows Lufthansa’s strategy of backing short-haul flights away from its Frankfurt and Munich hubs into the Germanwings low-cost division.

The transfer of flights to no-frills units should bring down fixed costs and ultimately allow airlines to apply a low pay scale while for so-called point-to-point services that don’t feed passengers onto lucrative long-haul flights.

Air France’s pilot unions are planning a strike from Sept. 15 through Sept. 18 to protest the plan, arguing that flight crew should get the same wages throughout the company. Lufthansa has already been gripped by a series of walkouts at its mainline business and at Germanwings over the changes there.

Transavia, which will aim to post an operating profit by 2018, had 30 aircraft based in the Netherlands and 11 in France at the end of 2013, according to the Air France-KLM website, serving medium-haul leisure passengers and tour operators.

The Dutch arm currently serves more than 90 destinations around the Mediterranean rim from Amsterdam, Eindhoven and Rotterdam, while the French business offers more than 30 routes from Paris Orly. The division employs about 2,050 people.

Transavia will also add new bases in other European countries, while passenger growth at Air France-KLM’s hub operations will be limited to between 1 percent and 1.5 percent per year through 2017.

Air France is also reconstructing its cargo business, saying last week that the specialist freighter fleet will be trimmed to five planes by the end of 2016 from 14 at the end of last year with the aim of eliminating losses by 2017.