Air France plans new long-haul arm

Bloomberg

Air France-KLM Group said it will create a new long-haul unit to fend off Persian Gulf rivals, simplify short-haul operations and work more closely with staff as new Chief Executive Officer Jean-Marc Janaillac seeks to put his stamp on a company riven by internal strife as its market share ebbs.
The group will establish a French arm parallel to Air France aimed at turning a profit in “ultra-competitive” long-haul markets, Janaillac, who took over July 4, said on Thursday, adding that the carrier, named Boost, “will not be low cost.” The unit will get 10 jets by 2020, with new routes comprising a third of flights. In the point-to-point market, services will operate only under the Hop! and Transavia brands from next year, with the Air France and KLM names dropped, the company said. Transavia will limit operations to the French and Dutch home markets rather than seeking to compete with low-cost carriers elsewhere.
Janaillac also said Air France-KLM will seek to foster improved career develop to help improve “internal cohesion” at a company that has been torn by labor discord in recent years.
Oddo Securities analyst Yan Derocles said the nine-point strategic plan, which envisages revenue of 28 billion euros ($31 billion) by 2020 and an annual cost reduction of at least 1.5 percent, was a underwhelming. “It’s all stuff that was put in place by the previous management,” he said. “The only new element is Boost, but it’s not clear how that will be profitable. And they haven’t even negotiated the creation of the new airline with unions.”
Shares of Europe’s biggest airline by passenger traffic fell as much as 5.3 percent and were trading 3.3 percent lower at 5.25 euros as of 9:24 a.m. in Paris. The stock has lost a quarter of its value this year, reducing the company’s market value to 1.58 billion euros.
Janaillac said the Boost business will draw pilots from Air France on a voluntary basis, though terms have yet to be agreed with unions that have vehemently opposed previous attempts to restructure operations. Air France-KLM said third-quarter operating profit slumped 16 percent to 737 million euros ($818 million) as terrorist attacks in Paris and other French cities depressed tourist demand and overcapacity across European markets weighed on air fares. Analysts had forecast a figure of 735 million euros.
Conditions remain tough amid geopolitical and economic uncertainty, concern about France as a destination and pressure on unit revenues, a key pricing measure, the company said.
Air France-KLM provided no specific guidance for full-year earnings, reiterating only that the drop in unit revenue, combined with a negative currency impact, will more than outweigh fuel savings. Free cash flow will be between 600 million euros and 800 million euros, it said, having previously suggested a range of 600 million euros to 1 billion euros.
Industry-wide capacity grew as much as 8 percent this summer, with no improvement in the commercial environment, Chief Financial Officer Pierre-Francois Riolacci said in a media briefing.
“There’s lots of uncertainty surrounding the economic rebound, and the geopolitical situation has been worrying, especially with the consequences of terrorist attacks on European destinations, particularly France,” Riolacci said, while adding that the company is content with analyst forecasts suggesting it will remain comfortably profitable for the year.
Riolacci will be replaced as group CFO by Air France unit chief Frederic Gagey when he stands down later this year, with Gagey in turn succeeded by Franck Terner, who was previously executive vice president for engineering and maintenance at the parent company.
Janaillac also becomes chairman of Air France, as well as holding down the same role at Air France-KLM. The former bus company boss became CEO after predecessor Alexandre de Juniac quit after three years in the job following a series of high-profile clashes with unions.