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Does Air France-KLM need to rethink strategy?

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Only Air France-KLM and SAS have staff costs higher than fuel costs

The €300 million cost of the recent strike at Air France-KLM is more than double the group’s €130 million operating profit of last year. And despite pilots returning to work this week, no deal has been reached over pilot pay. The airline group may need to rethink its path to viability, news agency Reuters reports.

Squeezed on short-haul by low-cost competition and in long-haul by Middle Eastern carriers, labour costs are also a serious problem. Among European airlines, only Air France-KLM and SAS have staff costs higher than fuel costs.

Overall, Air France-KLM’s passenger unit cost per available seat km, excluding fuel costs, was more than €7 in 2012 – third-highest in Europe behind SAS and Iberia. That compares to just over €1 at Ryanair and €2 at IAG’s Vueling.

Hence Air France-KLM’s plan to develop its low-cost unit Transavia, which in turn led to the strike. Now, instead of developing Transavia, the group may look at buying a ready-made low-cost business, as IAG did with Vueling. Air France may even stop domestic routes altogether, as British Airways did in the UK except on routes feeding Heathrow.

Analysts doubt Transavia can make its target of €100 million a year in underlying profit by 2017 – with or without hubs outside France. In France the public in general are opposed to any sign of economic cutbacks and a wave of strikes is expected to hit the country as the government tries to implement reforms.

“It is still hard to imagine Transavia can be quite as low-cost as easyJet or Ryanair,” said James Halstead, consultant at Aviation Strategy. “Especially if they are running it from France.”

Reuters

[photo courtesy Air France]

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