It was not more than seven months ago when Benjamin Smith was appointed CEO of Air France-KLM group. The situation upon his arrival was challenging, as he faced the problems left by his predecessor, Jean-Marc Janaillac.
However, since Smith’s arrival we have seen a major changes in the group, ranging from cutting the A380 fleet to closing down Joon, their millennial targeted subsidiary. Overall the changes seem to have had a positive impact on the group’s performance, turning around its negative profits from 2017 and leading to a net income of €411 million in 2018.
The changes at Air France
Air Canada’s ex COO has brought a breeze of fresh air to Air France, and has rapidly implemented some major fixes for the struggling airline. His first major success, in October 2018, was reaching a deal with the unions which ended months of strikes. This crucial move laid a foundation for developing the stability of the airline.
The next major change came in November, when the airline announced its plans to reduce its A380 fleet by 50% (5 out of 10 in the Air France fleet). The main reason this decision was reached was to do with inefficiency of the four engined aircraft, particularly on routes to Singapore and Beijing. The airline failed to make profit with the A380, and decided to operate using the 777’s instead. Other considerations included the outdated cabin layout with no lie flat seating in business class.
Probably the most groundbreaking decision came in January 2019, and that was to close down their subsidiary Joon. The idea behind Joon was to attract younger, millennial customers through a modernized approach to the client. An example of this was the “smart casual” uniform of the Joon staff, often complemented by trainers, or their rather strange dance inspired safety video.
Joon is being reabsorbed into its parent company, mainly due to the lack of efficiency and unsatisfactory financial performance. Joon seems to have failed to attract the millennials, who preferred to choose low cost carriers such as Ryanair instead. The complete closure of the airline will take place on the 28th of June 2019.
What changes are on the horizon for Air France going forward? Smith’s main decisions so far have been focused on improving efficiency and eliminating factors which were having a negative impact on profits. The group’s focus is on the simplification and modernization of the airline. In coming years, we could well see new routes opening, cabin design modernizations and a focus on new aircraft models.
The effect on financial performance
Despite a 2.83% increase in total revenue (€26.5 billion) in 2018, the cost of revenue has gone down by 0.8%. This has resulted in a net income of €411 million. The cost-cutting measures have failed to reduce the CASK of the network carriers (Air France + KLM) last year, mainly due to high oil prices.
The CASK was at €6.3 cents, much higher than Lufthansa’s of €5.6 cents. Such a difference indicated that there is still much work for Air France to do if they want to catch up to one of their main rivals in Europe. Overall, the investors seem support the changes made at Air France-KLM. Since July 2018 Air France’s market cap is up 40%.
The direction in which Air France-KLM is headed seems to be clear, and it has so far proven to be a good one. What’s your opinion about the transformation, and what should the group do in order to further improve their performance? Let us know in the comments.