Air France-KLM Unveils Turnaround Plan

January 12, 2012

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Air France-KLM announced a pay freeze for French staff and cutbacks in its fleet as part of a three-year plan to end financial rot at Europe's largest airline by revenues.

The belt-tightening, coming in the wake of a series of staff strikes, is the first stage of a politically sensitive turnaround plan expected to be completed after French presidential elections, now 100 days away.

The Franco-Dutch group pledged to cut debt by EUR€2 billion (USD$2.56 billion) by end-2014 and said it would shrink its fleet by shedding more than EUR€1 billion from a planned expansion project.

The plan will also involve a combination of immediate and longer-term cost reduction measures, Air France-KLM said in a statement on Thursday.

"We needed to take these measures because our debt position and costs per unit were running too high, and because of losses on our domestic and European routes... We do this to avoid getting into trouble later," said Peter Hartman, chief executive of KLM, the group's Dutch subsidiary.

Shares in the group rose over 7 percent as investors bet on firm action from Jean-Cyril Spinetta, restored as chief executive in addition to his role as chairman last November, following months of underperformance compared to its rivals.

Unions are expected to hit back at the plan which calls for a general pay freeze at Air France during 2012 and 2013 combined with "wage moderation" at the Dutch sister airline KLM.

The measures are part of a EUR€1 billion package of immediate cost cuts that also include a continued hiring freeze.

Air France-KLM scaled down plans to grow capacity over the three years from 2012 to 2014 in an effort to improve the demand per available seat, a method of pushing up average revenue.

"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," a statement said.

To shrink its fleet and keep capacity in line with its more modest forecasts, Air France-KLM said it would defer deliveries of several Airbus and Boeing aircraft including two Airbus A380 superjumbos.

It pledged to cut planned investments in 2009-2011 from EUR€6 billion to less than EUR€5 billion by deferring deliveries and scrapping some purchase options.

But it reassured Airbus that it would maintain an order for 25 of its latest model, the A350. The future jet competes with the Boeing 787 for which Air France-KLM confirmed a similar-sized order last week.

A longer-term transformation plan will generate an additional EUR€1 billion in free cash flow over three years, the airline said. It did not set out the impact on jobs.