Cost-Cutting, Restructuring At The Core Of The Plan
The Board of Directors of Air France-KLM has examined a proposed
transformation plan for the group to be implemented over three
years (2012-2014) which will focus on three priorities set out on
November 9th last year: restoring competitiveness through
cost-cutting, restructuring the short- and medium-haul operations
and rapidly reducing debt.
At its meeting held on January 11th, the Board of Directors
first examined the Group’s growth prospects for the next
three years. Given the uncertain economic environment and the
ongoing imbalance between transport supply and demand, the Board
deemed it necessary to opt for quasi stable capacity for the Air
France-KLM Group in both passenger and cargo. Consequently, over
the next three years (2012-2014), the Group will only increase
capacity by a little over 5% on a cumulative basis.
This will lead to a shrinkage of the Group’s fleet with an
attendant reduction in the investment program, with the exception
of spending targeted at the ongoing improvement in operational
safety and client service. The investment program will be reduced
from over 6 billion euros over the period 2009-2011 to below 5
billion euros for the coming three years. This decision has
led the Group to adjust its medium-term fleet plan combining,
amongst others, the deferral of aircraft deliveries and the
non-exercise of options.
The directors also considered as a key priority the reduction of
the Group’s net debt by two billion euros to some 4.5 billion
euros ($2.5 - $5.6 billion U.S.) by end December 2014. Over the
period 2012-2014, two billion euros in net cash flow will be
generated through a combination of immediate actions and a
New cost cutting measures amounting to some one billion euros
($1.2 billion) will be implemented immediately. They include a
freeze on general pay rises in 2012 and 2013 at Air France and a
policy of wage moderation at KLM. The hiring freeze introduced in
September 2011 will also be pursued. Additional productivity
measures, a further reduction in overhead costs and network
adaptations will complete the measures. These measures, the
components of which have already been fully identified, will be
implemented with immediate effect, in compliance with regulations
concerning the information or consultation of the Group’s
The board said that these improvements on their own, however,
are not sufficient to guarantee the durable restoration of the
Group’s competitive position and financial strength. The
Board of Directors therefore decided to implement a transformation
plan, encompassing all its businesses, with a target of generating
an additional one billion euros in free cash flow over three years.
The return to a satisfactory level of profitability will require a
significant improvement in productivity in all parts of the Group,
which will imply the renegotiation of the employment rules
contained in the existing collective agreements. Negotiations with
the organisations representing the various categories of employees
concerned will begin rapidly.
Although the passenger business will be the primary focus with
the restructuring of the short- and medium-haul operations, cargo
and maintenance will also have to redefine their conditions for
profitability. The short and medium-haul network remains
indispensable to the Group’s development, assuring not only
its presence throughout Europe, but also feeding the long-haul
operations of the two hubs, Paris-CDG and Amsterdam.
Since the financial crisis of 2008-2009, the structural decline
in unit revenues has led, despite the NEO plan, to deepening losses
in this business, estimated at some 700 million euros in 2011. As
the financial results of recent quarters demonstrate, the long-haul
operations, also subject to increasing competition, cannot alone
offset these losses.
According to an Air France-KLM news release, the board
determined that to restore the medium-haul business to break even,
the Group must work on the following structural measures:
- Better utilization rate of aircraft and assets.
- Significantly improved productivity in all employee
- Redefinition of certain activities, potentially leading to more
extensive outsourcing in some areas.