Air France Isn't out of the Weather Yet

The airline is holding up better than its rivals, but losses loom

Air France Chief Executive Jean-Cyril Spinetta was in a buoyant mood as he flew into New York's John F. Kennedy International Airport on Nov. 7 aboard the Concorde's first commercial flight in over a year. The supersonic jet is back in the skies after being grounded for modifications following a deadly crash in July, 2000. And Air France so far has weathered the global airline crisis better than many of its brethren, because it is less dependent on transatlantic traffic, which has declined sharply since September 11. In fact, the French flag carrier is poised to pick up market share as weaker rivals stumble. "Concorde's return to service attests to our confidence in our future," says Air France's CEO.

But Spinetta's ride may soon get a lot bumpier. The state-controlled carrier does not have much flexibility to steer through the current turbulence. With national elections coming up next year, France's Socialist-led government is sure to block efforts to lay off any of the airline's 53,800 workers. British Airways PLC (BAB ), meanwhile, has shed 13% of its workforce this year, while Lufthansa is talking with unions about putting employees on a four-day workweek.

Although Air France revenues are running 10% below last year's, company managers say they can stanch the red ink by putting a freeze on hirings and delaying aircraft purchases. But the numbers look ominous. Anthony Bor, an analyst at Merrill Lynch & Co. in London, expects the carrier to post a $283 million loss for the fiscal year ending in March on revenues of $10.9 billion. And the losses could widen sharply if its pilots decide to strike in support of their demands for a big salary hike.

DELTA ALLIANCE. Air France is hardly a basket case. It has picked up passengers stranded by the collapse of Swissair and Sabena. And it stands to benefit from the new Open Skies agreement the U.S. and France signed in October, which will allow it to deepen its alliance with Delta Air Lines Inc. "In a period of crisis, our competitive advantage is strengthened," says Chief Financial Officer Philippe Calavia.

Still, the French airline can no longer count on the strategy it has followed in the past four years, which saw revenues soar 50%. Building on its roomy Paris hub, Air France has courted high-fare-paying business travelers by offering more connections than any other carrier between short-haul European routes and longer flights to the U.S. and other destinations.

The challenge now will be reducing costs. Layoffs appear to be out of the question. And the carrier can't easily eliminate flights without disrupting the quick connections through Paris that are its key selling point. Merrill Lynch estimates that operating margins will average only 6.3% this year, compared with Lufthansa's 9.4%. Cost-control is likely to take on new urgency now that the British discount carrier easyJet Airline Co. (EJETF ) wants to start flying out of Paris' Orly airport. "A long-haul carrier like Air France cannot offer serious competition to a low-cost short-haul carrier," says Ray Webster, easyJet's chief executive.

Air France claims that cost reductions already in place will save more than $300 million over the next year. But what if more cuts are needed? Calavia says the company might put employees on reduced work schedules. The Socialist government would probably fight such a move, though. The Concorde will keep flying, too--even though Air France admits that with fewer business travelers willing to pay the nearly $9,000 roundtrip fare, the supersonic jet loses money on every trip. Looks like Air France may yet need a new flight plan.

By Carol Matlack in Paris

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