Over the past few years, the Air France-KLM group has been in its fair share of turmoil. While KLM is financially stable, the same cannot be said about Air France and its current state of affairs. At Air France-KLM group Investor Day 2019 on November 5, 2019, Ben Smith, the Chief Executive Officer of the group, said that Air France has a “broken operational model” which needs to be fixed in order for the French airline to return to profitability, a process that has been done step-by-step, according to the CEO.

This includes new labor agreements and fleet changes – the aircraft and the configuration inside them are going to see a major overhaul in the coming years.

Current state of affairs at Air France

The latest financial results as of July 31, 2019, for the first half of the year, showcase that Air France is not a profitable airline – its operating loss in H1 2019 was $125 million (€113 million). While the operating margin improved slightly (by 0.8%) to a -1.4%, the vast majority of the improvement was written down to costly union strikes back in 2018.

A wage agreement has been found between Air France and its unions on October 19, 2018. The proposals of the recently appointed CEO Ben Smith were approved by 76% of the workers. Five out of seven worker unions signed the agreement.

In Q3 2019, the airline‘s profit compared to the same period in 2018, dropped by more than $111 million (€100 million), which was as a result of the decision to retire the Airbus A380 early, due to its high operational costs and low operational performance. Air France-KLM estimated that the retirement of the double-decker will cost them $444 million (€400 million). The expenses will be spread throughout the period between Q3 2019 and 2020 when the A380 is set to leave Air France’s fleet. As of November 5, 2019, the carrier operates 10 aircraft of the type.

However, most of the pressure to the group, and Air France in particular, comes from the fact that its domestic and medium-haul, point-to-point services have been put under a lot of pressure from low-cost carriers within Europe.

Struggles in Europe

In 2018, all medium-haul operations across the Air France-KLM group, including Transavia, barely improved. The group increased their capacity (ASK) by 0.8%, while demand (RPK) was up by 1.6%. Revenues in the medium-haul market, measured by RASK, improved slightly, by 1.5%. Point-to-point operations were all decreasing – capacity was reduced by 3.3%, demand followed suit and decreased by 1.4%, while revenues also dropped by 2.6% in FY2018.

Throughout 2019, as of October 31, 2019,  revenues in the medium-haul market were down by 1.1% compared to the same period last year, even if capacity and demand were up – 2.2% and 3.5%, respectively.

Meanwhile, Ryanair, for example, has steadily increased capacity in France. In Summer 2019, it launched two new bases in Bordeaux (BOD) and Marseille (MRS), placing two Boeing 737s per base, according to an announcement by Ryanair dating September 27, 2018. The expansion of capacity has increased further in the Winter 2019 season. The low-cost carrier opened a new base in Toulouse (TLS) with two new aircraft, while also increasing the capacity at the two aforementioned bases by one extra aircraft respectively.

easyJet has also increased its capacity in the country – the British low-cost carrier opened its seventh base in the country, opening a new hub in Nantes-Atlantique (NTE) on April 4, 2019.