Air France: Is This The Right Flight Plan?

Air France is Europe's biggest airline company--and arguably its stodgiest. It has lagged behind rivals in key areas: controlling costs, starting a frequent-flier plan, and forging meaningful alliances with foreign carriers. Despite Chairman Bernard Attali's efforts to make the state-owned airline more efficient and less bureaucratic, losses continue to grow (chart). Attali pins much of the blame on the European recession. But of Europe's two other big carriers, British Airways PLC remains profitable, while Germany's Lufthansa expects to halve losses this year.

Now, Attali is launching an all-out effort to secure Air France's place in the sky. It's hardly his first such attempt. But this time, success at cost-cutting and at building a critical partnership with a U.S. airline will determine whether the French giant can be privatized, as France's new conservative government hopes. To do that, Air France must hold its own against lower-cost carriers, including archrival BA and a swarm of American airlines. Eight U.S. carriers now fly to France, vs. two in 1985. They have cut Air France's transatlantic market share from 50% to 35%.

ASSET SALES. Determined to slow losses, Attali is drawing up a plan to lay off perhaps 10% of his work force. That follows cuts of 10% over the past two years. Pay is also being slashed. Recently, he got flight crews to accept pay cuts of up to 16%--saving $145 million. "I told them we're not going to stop there," says Attali. "We're in a dangerous crisis--but it's also an opportunity." He is likely to raise cash by selling assets, including the Meridien Hotels Inc. chain.

A U.S. alliance is Attali's other key goal. He needs a partner for "feed" from the U.S. market, especially now that BA has teamed with USAir Inc. Attali is negotiating a deal with Continental Airlines Inc., which he hopes to conclude within two months. It would be a logical extension of a marketing pact he set up last year with Air Canada, now 28%-owner of Continental. All three would tie their routes together--a process on which Air France and Air Canada are now working.

Building a U.S. network is essential, analysts say. And Continental, newly emerged from bankruptcy, may be a better fit for a European carrier than USAir. Its route structure is more extensive than that of USAir, which flies mainly in the eastern part of the U.S. Insiders say Attali aims ultimately to buy equity in Air Canada. He won't buy into Continental: He fears an antiforeign backlash such as BA suffered in an aborted bid for USAir. A planned "open skies" accord between Canada and the U.S. could make an Air Canada stake just as attractive.

Attali won't be buying anything soon, however. Cash is tight, so he may seek--and may get--fresh capital from the French government. Air France may lose a startling $1 billion this year, warns Jacques Godfrain, a French parliamentarian and former executive of UTA, an airline Attali bought in 1990. Insiders deny that. Godfrain's remedy: sell Air Inter, France's biggest domestic carrier, of which Air France owns 72%.

CONNECTIONS. Insiders say Attali might try to sell a minority stake. But he wants to control domestic feed for Air France's flights, virtually all of which are international. He may face a struggle: Europe's air deregulation is letting foreign carriers move in. Last year, BA bought 49% of TAT, a French regional airline. TAT flights now arrive at BA's terminal at Paris' Charles deGaulle Airport and connect with BA service to other European cities. Ironically, Air France has trouble doing the same. Three years after the Air Inter takeover, most Air Inter flights still arrive at Orly Airport.

Air France's boss says he's working to fix that. And he's counting on a new advantage at deGaulle. Next spring, a terminal will open there for France's trains grande vitesse, or high-speed trains. The TGV will whisk passengers at speeds up to 200 mph from the provinces directly to Air France's big hub airport. All airlines there will benefit, but none as much as Air France, which dominates deGaulle.

Attali is also eyeing European partners. In a recent letter to the chairman of Swissair--leaked in the Swiss press--Attali suggested that the two carriers discuss an alliance if Swissair's plan to merge with KLM, SAS, and Austrian Airlines collapses. Such an airline would rival Air France as Europe's biggest carrier. "It's too bad Swissair didn't talk to us first," says Attali. So far, his letter hasn't been answered.

But Attali seems on the right track with Continental. And outsiders applaud his cost-cutting plans, though many doubt he'll cut enough. They're wrong, he says. "We have some surprises in store for our competitors." Attali has made such claims before. Now, he badly needs to be right.

Before it's here, it's on the Bloomberg Terminal.