Af kl-adapting to survive cannesairlinesforum-2005-eng
1. Adapting to survive Solutions implemented by ”legacy carriers” Jean-Cyril Spinetta Cannes Airlines Forum – 28 October 2005
2. With an average price estimated at 57 dollars per barrel in 2005, the airlines’ fuel bill has rocketed 2005 Results Estimate Net income, USD bn $47 * $38 Average oil price 0 Source : IATA * : May 2005 scenario ** : September 2005 scenario $38.30 9/11 SARS, Iraq war $57 ** 1 + 54% to 97 billion euros
3. What differentiates the legacy carriers? Of which ~ -1270m€ in cancellation of ta x credits and ~ -1340m€ in asset revaluation and ~ -360m€ in restructuring costs Of which ~ -610m€ in restructuring costs Net income per airline (€m) - IATA 04-05 -8 885 million € +545 million € CO DL UA BA IB AZ AF-KL LH SK AA NW AS US +945 million € A contrasted situation A stricken industry EUROPE USA
4. Organization by hub 1980s: USA 1990s: Europe 1980 Atlanta 1986 Washington USA Hub model Medium-haul/Medium haul Domestic Hubs Atlanta, Chicago, Dallas, etc. European Hub model Long-haul/– Medium-haul Intercontinental Hub CDG, Frankfurt, Schiphol Middle East Hub model Long-haul/Long- haul Dubai 1991 Schiphol 1992 Frankfurt 1996 CDG 1981 Dallas A recent model The economics of density 2000s: Gulf 2000-01 Dubai
5. Basically, a hub is a model of cost reduction Flight connections generate 50-150% of additional traffic Increased frequencies and/or aircraft capacity A more attractive product / lower unit costs Point-to-point traffic Connecting traffic The economics of density
6. Hubs: an efficient use of resources 59 medium-haul flights arrive 21 long-haul flights depart Air France Hub at CDG Summer 2005 1,319 origin-destination combinations The economics of density Medium-haul flights arrive Before 0930 local time Los Angeles Marseille Bordeaux Dublin Tel Aviv Madrid Cincinnati . . . . Paris Atlanta Mumbai Long-haul flights depart Between 1015 and 1100 . . .
7. Bigger aircraft thanks to traffic complementarity Three-class configuration – compared to “economy class” seat Leg length of 5,000 NM +30 % A 380 The economics of density A 330 Between the A380 and the A330 30% difference in seat cost Base 100
8.
9.
10.
11. A cost reduction strategy forms part of an overall strategy Diametrically opposed strategies among the biggest European carriers … whose consequences are already very significant Traffic levels RPK long-haul, April 98-Sept. 05 Traffic growth (RPK Long-haul) IATA 98 IATA 2004
12.
13. Air France has resolutely opted for growth Because we have scope for growth at Roissy … which is not the case at the other major European airports To win market share … and offer an increasingly attractive network To generate the necessary productivity gains
14. Air France – KLM’s strategy of “profitable growth” Balanced growth integrating the 2 parts of the equation PROFIT REVENUE COSTS = - Nor unrestrained growth Uncontrolled growth likely to lead to cost slippage Neither downsizing Brings results in the short term, but difficult to sustain over the longer term
15. Which until now has borne fruit Operating profit (€ million) (before aircraft disposals) Turnover (€million)
16. Trend in Alliance models Degree of cooperation Synergies Commercial partnership ATI (large-scale price harmonization) Joint venture (on joint network components) Low Moderate High Total (FFP, Lounges etc.) Commercial alliance (code-share: free-flow, seat blocks etc. Revenue and costs sharing Revenue sharing
17. European majors are gaining ground 500 2 500 4 500 6 500 8 500 Sept-01 Mar-02 Sept-02 Mar-03 Sept-03 Mar-04 Sept-04 Mar-05 Sept-05 and a 3% drop in traffic (RPK) over 4 years for smaller European airlines KLM Air France British Airways Lufthansa Iberia Swiss Alitalia 27% more traffic (RPK) in 4 years for the 4 European majors... Long-haul RPK, seasonally adjusted
18. Air France – KLM, an effective combination… Summer season 2005 schedule Because Air France and KLM are remarkably complementary Long-haul Medium-haul AF-only destinations KLM-only destinations 49 32 30 111 57 45 24 126
19.
20. … while strengthening our positions on our respective domestic markets KLM - increased revenue on the French market Air France – increased revenue on the Dutch market Top 5 KLM-only destinations: +19% Top 5 AF-only destinations : +48% 2 nd quarter 2004-05
21.
22.
23. Instant sensitivity of our market share to the slightest shift in prices % Air France and industry sales on Italy-North America routes in 2004-2005, monthly data All airlines Air France -14€/ticket -20€/ticket Source: BSP
24. Successive cost-cutting plans at Air France … 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Target (€m) Achieved (€m) Performance 2003 Three Billion Plan Competitiveness 2007 84 102 313 331 457 463 70 88 176 186 280 300 200 215 590 * 800 * * Includes gross savings on costs linked to switch to zero commissions
25. … combined with large-scale productivity gains Overall productivity at Air France from September 01 to September 05 180 200 220 240 Sept-01 Dec-01 Mar-02 Jun-02 Sept-02 Dec-02 Mar-03 Jun-03 Sept-03 Dec-03 Mar-04 Jun-04 Sept-04 Dec-04 Mar-05 Jun-05 Sept-05 +21% productivity in 4 years (seasonally adjusted) EASK/EPT 000s
27. … have kept costs under control Net operating costs / EASK (Air France) (ex currency, inflation, oil prices and fees) 2001-02 = 100
28.
29.
30. The hub acts as a rampart against the low-costs Example of the Paris – Geneva route AF AF LX U2 U2 Evolution du nombre de fréquences sur Paris - Genève 0 2 4 6 8 10 12 S3 à W04-05 S05 AF AF LX U2 U2 AF: N° of frequencies stabilized easyJet: cut from 4 to 3 frequencies Swiss: services discontinued Frequencies on the Paris – Geneva route Summer 2005 Summer 2003
31. We cut our costs… but cost of jetfuel rises (€m) Jetfuel spend before hedging Jetfuel spend after hedging +459 +419 +440 Hyp: 61,9 $/bl 1 € = 1.24 $ 65,6 $/bl 1 € = 1.25 $ 63,4 $/bl 1 € = 1.25 $ 61,9 $/bl 1 € = 1.25 $ +450 +140 % of turnover ( ) (13%) (15%) (21%) est (15%) est (22%) est (18%) est Forward price at 26/08/05 (10.5%) (11.5%) Air France Group
32. Jetfuel hedges: a temporary cushion Price of Brent $ / barrel Forward price at 7/10/05 Market price Real price after hedging
33. Taxes and fees have also risen sharply! In 4 years, Air France’s total bill has risen by + 40% EASK = ASK + 2.36* ATK + 22% for EASK
34. Like for like, ADP is 20% more e xpensive than LHR or SCH. Fraport is 15% more e xpensive but with a pricing structure that is more beneficial for the hub € / Pax Ratio of costs / Pax 2004 Note: Traffic Pax 2004, 2004 figures estimated e xcept for Schiphol and Fraport (Annual report 2004) Source: BCG analyses Pax 2004 44.3 66.4 51.1 75.3 Benchmark BCG 7 Fees/ Pax Fees + security/ Pax Like-for-like/ Pax