Air France Regional Bases Said to Face Cuts as Rivals Bite

Air France-KLM Group is reviewing provincial bases in southern France created just a year ago as Europe’s biggest airline grapples with losses that caught it by surprise, two people familiar with the matter said.

The airline is considering a reduction in frequencies to some destinations, and shutting routes with the biggest losses outright, said the people, who asked not to be identified because the considerations aren’t public. Air France (AF) is also reviewing prices, the people said. Frederic Gagey, chief executive officer of the French unit, will present his strategy to the central employee committee tomorrow, they said.

The domestic overhaul is part of a broader restructuring under new CEO Alexandre de Juniac that aims to trim the cargo business and overhaul operations at home and in Europe that have lost money for years. Air France announced plans in June to cut 2,600 job through voluntary departures, joining western European rivals that are also slashing thousands of positions as competition from low-cost carriers intensifies.

“Air France is behind its competitors in terms of restructuring, that’s why they need further measures,” said Yan Derocles, an analyst at Oddo Securities in Paris. “While the most recent results started showing the fruits of some of their initial moves on short-medium haul traffic, Air France is still one or two years behind the competition.”

Photographer: Balint Porneczi/Bloomberg

An Air France aircraft, part of the Air France-KLM Group, takes off from Toulouse-Blagnac airport in Toulouse, France. Close

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Photographer: Balint Porneczi/Bloomberg

An Air France aircraft, part of the Air France-KLM Group, takes off from Toulouse-Blagnac airport in Toulouse, France.

Laying Groundwork

The French carrier’s shares have advanced less than 1 percent this year, and traded at 7.06 euros at 10:09 a.m. in Paris. The performance compares with a 75 percent gain at British Airways Parent International Consolidated Airlines Group SA. (IAG) Deutsche Lufthansa AG (LHA), which announced yesterday that CEO Christoph Franz plans to leave next year, has lost 1.7 percent since the start of 2013.

At tomorrow’s meeting, the airline won’t give specifics on proposed steps, instead presenting the business case for the changes, and providing employees with at least some financial information to make the case clearer, two of the people said.

The first announcements are for internal distribution only and the airline has no immediate comment, according to an official at the Paris-based airline.

Discussions with workers will lay the groundwork for an Oct. 4 meeting between management and employees at which measures will be formalised, the people said. Management is also expected to tell the employee group that a fleet of all-cargo planes should be cut from 13 to four, they said.

No Turnaround

Air France established bases in Marseille, Nice and Toulouse less than a year ago, betting that local planes and crews would avoid commutes and save money, as well as expand its offerings to a local population eager for new routes.

Whereas flights to cities including Istanbul and Athens proved popular, losses mounted on heavier-than-expected competition from EasyJet Plc (EZJ) and Ryanair Holdings Plc.

While the airline had factored in a return to profit last year at the local operations, instead it suffered a loss that was a multiple of the expected gain, one of the people said. There are no plans to close bases outright, the person said.

The carrier has rebuilt domestic and regional offering around the Transavia low-cost subsidiary created by KLM, which flies non-hub services using Boeing Co. (BA) 737s to transport mainly leisure fliers provided by tour operators. Its Hop! unit, formed last year from disparate regional airlines, offers point-to-point services with a fleet of 98 regional planes.

While Air France may seek ways to redistribute some traffic, the feasibility would need to be explored given the vastly different roles of Transavia and Hop!, said Helene Abraham, Hop! Executive Vice President for Commercial.

“Our ambition is to serve business traffic offering more frequencies than anybody else,” she said in an interview yesterday in London at a low-cost airline conference.

To contact the reporter on this story: Andrea Rothman in Toulouse at aerothman@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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