WSJ
WSJ
Air France-KLM’s Cuts Don’t Mean Takeoff
Air France-KLM is taking additional steps to cut costs, but given mounting pressure from competition it still looks a long way from finding a route to recovery
By
Thao Hua
June 16, 2015 12:20 p.m. ET
Deeper cuts at
Air France-KLM won’t address the group’s underlying injuries.
In an effort to battle rising competition, the Franco-Dutch company Monday
said it would step up its restructuring program. Besides dropping some unprofitable routes and reducing frequency on others, it is considering delaying deliveries of certain long-haul aircraft. It also aims to trim another €80 million ($90 million), or less than 1% of its 2014 total operating cost, elsewhere.
This still looks too little too late. Stalling its aircraft deliveries may boost cash flows in the short-term, but merely pushes the expense further down the line. Meanwhile, rising employee expenses—the largest portion of its operating cost base—have overshadowed any cost reductions elsewhere.
Employee costs increased 1.7% in the first quarter, on a constant currency basis.
Ongoing costly labor disputes remain a big hurdle to sustainable improvement, further complicated by
the French government’s 16% stake in the company. From 2016, the government will have double voting rights under a new French law.
Air France-KLM is doing what it can by cutting capacity, but the company also needs to extract more revenue from existing routes. The problem is that it is most exposed to weaker markets and doesn’t have sufficient growth in stronger markets. High capacity in Africa, Brazil, Japan and Russia, for example, has been a drag on profitability.
Meanwhile, pressure from competition shows little sign of abating. Its Asia business continues to be pummeled by Gulf carriers. And the growth outlook also looks tough across the Atlantic.
Air France-KLM has benefited from a four-way joint venture with Alitalia and Delta, which directs
trans-Atlantic traffic through Paris and Amsterdam. But
Alitalia is now 49% owned by Etihad and Delta has plans to boost capacity of its own through a separate
joint venture with Virgin. According to HSBC, the North Atlantic partnership generated $3 billion in revenues for Air France-KLM in 2013.
Shares in Air France-KLM fell 4% Tuesday on the back of its latest restructuring move. At about four times earnings before interest, taxes, depreciation, amortization and rent, it trades at a discount to
Lufthansa on six times and British Airway’s parent on five times, HSBC notes. But Lufthansa has a strong balance sheet and a more diversified revenue stream while IAG is further along in trimming its cost base.
Despite its efforts, Air France-KLM could still be in for more bruising.
