It's Au Revoir To The Air France Of Old

Sipping tea in his high-rise office that commands a stunning view over Paris, Bernard Attali says lots of foreign airline executives have been dropping by lately--but not to admire the scenery. They want to do deals with Air France, of which Attali is chairman. Currently, several U.S. carriers are seeking alliances, he says. Attali is enjoying the attention. "It feels good," he says. "We are very courted."

The courtship may seem surprising: Rivals have long sneered at Air France as a ponderous, high-cost ward of the French state. But in the global partnering game that is the new rage of airline strategists, Air France may be Europe's prize catch. That's especially true now that archrival British Airways PLC plans to team up with USAir Inc. Air France is the Old World's biggest carrier, with Europe's fattest home market. From its uncrowded hub at Charles De Gaulle Airport, it flies to more than 100 cities in Europe and beyond--an enticing network for a U.S. airline eager to spread its wings.

Yet Attali had better not play too coy with suitors. Profitless Air France, which he is struggling to wean from its culture of state ownership, needs a U.S. partner at least as much as Americans need it. And U.S. carriers don't have that many potential allies left.

Attali may soon heed that message. Air Canada, with which he signed a marketing pact recently, seems eager for him to join its bid for Continental Airlines Inc. It invited an Air France executive to sit in on its presentation to Continental's board on Oct. 6--when it raised its bid to $425 million. Air Canada appears to lead the now four-way race for bankrupt Continental. Air France's European network could help tip the scales against a rival bid led by Germany's Lufthansa.

THE WOOING GAME. If Continental doesn't lure him, many analysts think Attali could sign up with United Airlines Inc. Eager to expand in Europe, United is trying to build a Paris hub but is hitting against a protectionist French government. "I'm betting on a deal with United within three months," says Keith McMullan, managing director of Avmark International, a London airlineconsultancy. United refused to comment on a possible deal, but an executivesays, 'We're always talking and anticipating." American Airlines Inc., too, is wooing Attali. It wants a "code-sharing" pact to coordinate flights--but Attali says he's wary of American's aggressive chairman, Robert L. Crandall.

Air France's weak finances give Attali cause to fear domination. It recently reported a $300 million loss for the first half--double the combined losses of the past two years. The major cause, he says, is "unfair" price-slashing by U.S. carriers that boosted capacity to Paris. Air France gets 25% of its revenues across the Atlantic, where U.S. rivals forced it to cut prices up to 40% this summer. Eliminating a competitor and gaining American "feed" are why the French carrier needs a U.S. partner. "We will definitely do a deal with a U.S. airline--no doubt about it," says an Air France executive.

CULTURE-BOUND. Attali faces similar pressure in Europe. Partial deregulation in January will let European airlines cross borders at will, and--within limits--fly inside any country. Last month, BA bought into a French airline, TAT, an ominous move for Air France.

Attali, who joined Air France four years ago from a state-owned insurance company, is launching a new plan to trim the airline's bloated costs, which are far higher than those of the U.S. and many European competitors. He'll lop off 1,500 jobs--3% of the total--on top of 3,500 cuts previously planned. He'll also cut airplane orders and try to loosen work rules. Attali says the moves will boost cash flow by $600 million and enable the airline to turn a profit by 1994--a year later than he had forecast a few months ago.

Most observers find Attali's moves far too modest. Because of Air France's longtime culture as a protected public service, some airline executives think its 45,000-person operation may be too fat by 20% to 30%. Meanwhile, rivals that are already lean continue to cut staff--4,600 at BA last year, for example. Yves Stephan, head of the Air France pilots' union, says the latest cuts should have come last spring, when losses grew on the North Atlantic. He suspects that France's September referendum on European unity led the government to postpone bad news that might be blamed on the continent's new borderless market.

"Air France's high costs should have been addressed years ago," says Hans Mirka, senior vice-president/international of American Airlines Inc. But he adds, "Attali is certainly doing more than his predecessors did."

Attali has plenty of incentive. European trustbusters in Brussels will no longer let the French government fill the airline's coffers, as it has done in the past. Nor does the government want to: Air France is among state companies likely to be privatized, "but not until we make a profit," says Attali.

One key to Air France's profitability is tuning itself into its markets better. In contrast to BA, marketing has always flown in the rear cabin at Air France. Typically, the airline's technical staff decided which airplanes to place on which routes and then ordered marketers to fill them. The government, too, had its say, obliging the airline for political reasons to serve provincial French towns and former overseas colonies.

Attali is changing things. Over the past two years, he has slashed 30% of his service to French towns--despite screams from local officials. In January, he put a new marketing vice president, Christian Boireau, in the pilot's seat, with carte blanche on scheduling. To protect market share on key routes, Boireau has decided to match rivals' new capacity. Thus, Air France will add a Paris-Madrid flight on Nov. 1, simply because Iberia Air Lines is adding one. That may cause over-capacity, "but it will make others think twice" before expanding, says Boireau.

He also launched a frequent-flyer program in June: He wishes it had come sooner. He has switched the advertising focus to the consumer instead of the airline. The new slogan: "Ask us for the world." And he is training employees to "listen better." Boireau admits the old "noncommercial culture" lingers on. "But we must change," he says. "The old days are over."

The days are also gone when Air France can make it alone. In seeking alliances, Attali says, he has been following "concentric circles." First, he tightened his grip on France by acquiring its biggest domestic carrier, Air Inter, in 1990. This year, he has moved into Europe, buying stakes in Belgium's Sabena World Airlines and Czechoslovakia's CSA. Now, he says, he's turning to North America.

`LEAVE HIM.' Attali thinks Air Canada will help him boost U.S. traffic, thanks to Canada's forthcoming "open skies" agreement with Washington. The partners will connect flights, starting in April. For example, a San Francisco-to-Paris customer could fly Air Canada to Toronto, switching to Air France across the Atlantic. The partners say Air France might buy equity in Air Canada later. Although analysts think the deal may help, "the record of simple marketing agreements has not been very good," says Philip Baggaley, airline analyst at Standard & Poor's.

The question is whether Attali can stay around long enough to pull off his strategy. Air France has been run by a series of political appointees, most lacking airline experience, who enjoyed the view from the chairman's office and then moved on. France's Socialist rulers seem sure to lose elections next March. Despite his reputation as the most hard-nosed manager at the airline in years, the right could dump Attali--whose twin brother, Jacques, was President Francois Mitterand's longtime chief of staff. "Just leave him for a few years, give him a free hand," pleads Bertrand d'Yvoire, an airline consultant in Paris. Even if that happens, Attali will have both hands full trying to assure Air France's survival as a global player.