Defensive Strategy

Defending Air France

30 Sep 2014  

Air France, one of the world’s great airlines, is under attack. The recent two-week pilot strike was a financial and customer service disaster. The bigger problem is that Air France appears to be unable to defend its business; new competitors are stealing customers at an alarming pace.

The financial results for Air France – KLM have been terrible. The company lost €814 million in 2009 and things have gotten worse since then, with losses of €1,559 in 2010, €589 in 2011, €1,028 in 2012 and €1,705 in 2013.

Air France

The basic problem is that Air France is facing very tough competition. In Europe, discount carriers such as EasyJet and Ryan Air have become dominant players. Air France – KLM has lost share; people simply aren’t willing to pay more for a short flight. How bad can a fifty minute flight to Düsseldorf be?

On long-haul routes, where business travelers are still willing to pay more, carriers such as Emirates and Qatar are stealing share with a unique, premium product.

This is a classic case of an established, comfortable company failing to react to competitive threats. In the 2000s, the head of Air France believed the discount carriers would stumble so he didn’t see the need to respond. Employees focused on protecting their benefits and wages, even as the company lost money.

So Air France didn’t defend and now the carrier is in trouble.

The company’s most recent strategy has two parts. To compete for travelers in Europe, Air France will expand its discount brand, Transavia. By doing this, Air France – KLM will be able to slow the growth of discount carriers. At the same time, the company will use the Air France brand to compete for international travelers, where service is critical and passengers are willing to pay for quality service.

I’m skeptical of the strategy. Transavia is a late entrant to the discount air market in Europe; it won’t be easy to steal share. And it will be difficult for a premium airline like Air France to run a discount division.

Things aren’t going too well so far. After learning about the new strategy Air France pilots, concerned about potential wage cuts, went on strike and shut down the airline for two weeks. Faced with massive losses and unhappy customers, Air France on Thursday announced that it was scaling back the new plan. On Sunday the pilots agreed to return to work but the labor dispute is still not settled. Look for more employee conflict ahead.

Fighting tough competitors is not easy but in a free market if you can’t push back new entrants you will lose share and struggle. The employees at Air France – KLM can do more work for less money or they can see jobs vanish. The company cut 8,000 workers in the past several years. With current trends, there are more cuts ahead.

1 Response

  1. Rohan says:

    Hi Prof Calkins, Just a related note about the high end airlines – I wonder if any of the uber successful high end airlines are actually profitable.

    For instance, Singapore Airlines has been wide lauded at being excellent but I understand they get access to subsidies. Emirates and Etihad have pretty generous budgets.

    I’m just finding it hard to think of a premium career that does it well. Air France is, of course, a far cry…

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