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HOW do you turn a giant loss-making company around? Two ways: by improving its money-making capacity, and by cutting costs, of course.
It sounds simple and easy. But, as the 19th-century Prussian military philosopher Carl von Clausewitz wrote in his famous treatise On War, “in war everything is simple, but even the simplest things are very difficult”.
The same applies to business economics. And exactly how difficult is something the management and employees of airline Air France-KLM is experiencing right now (the two carriers merged in 2004).
First, the general background. Times are tough for many traditional air carriers, because of a combination of factors.
To begin with, the economic crisis has meant that some potential travellers (especially those going on holiday) either stay at home or take their vacation nearby. Others prefer the cut-throat cheap carriers like EasyJet, Ryanair or – in the South African context – Kulula, Mango or FlySafair.
Even corporate travellers, who can afford the traditional carriers’ higher prices, nowadays are migrating towards the cheaper ones.
In other words, income is down. Something, as the saying goes, will have to be done.
So let us look at the second option: to cut costs. In the short term, buying second-hand aircraft will be cheaper, but in the long term, it will probably add to costs. Older aircraft are more expensive to keep in the air in terms of maintenance and fuel consumption, which means that buying aircraft second-hand cannot be a durable option.
Then there is the cost of fuel, which typically makes up more than 30% of airline operating costs. One may reason that fuel prices have dropped during the last few months, but the Wall Street Journal this week reported that European carriers are not really benefiting, due to large fuel-hedging contracts to protect themselves against oil-price volatility.
For instance, Ryanair “has 90% of its fuel cost locked in for the fiscal year ending in March”, according to the newspaper.
The natural alternative is personnel costs. No wonder panic broke out among employees before Air France-KLM announced this week that profit was down 17%. Figures of up to 7 500 lay-offs were bandied about, and trade unions growled ominously.
As it happened, these reports were highly exaggerated. Although it may still happen, not a single employee will – for the time being – be put out to pasture.
But this is no thanks to the destructive approach of the pilots in the Air France part of the combined company.
In order to take on the challenge of the cheaper airlines like Easyjet and Ryanair, Air France-KLM decided recently to use its own cheap branch, Transavia, as a battering ram to tackle the competitors. But for Transavia to compete, its personnel costs - especially regarding pilots and cabin attendants - had to be cut.
This elicited great anger among the Air France pilots. And therefore, being red-blooded Frenchmen and women, they went on strike.
Management’s knees buckled, and the plans were cancelled. But this means Transavia’s capacity to take on the cheap airlines has been drastically curtailed.
And in addition, the two-week strike meant that not a single Air France plane took to the skies. This cost more than €400m in lost revenues.
Bigger isn't always better
In other words, the Air France strike weakened the combined company’s survival chances even more.
This, of course, reminds one of so many strikes in South Africa, such as the strike in the Post Office or that of the Western Cape farm workers. To strike in an environment where automatisation is already eating up jobs is – like the pilots´ strike in France – folly.
Nevertheless, especially the KLM side of the company has traditionally operated like a big family. No one was ever laid off. For instance, during the big crisis of 2008-09 when the passenger market went belly up and far fewer flights took place, pilots were used as waiters in first and business class lounges, clearing passengers’ tables rather than putting them out on the street.
What can we learn from all of this?
First, big is not necessarily efficient or profitable. The merger, which made Air France-KLM the biggest airline in Europe after Lufthansa, did have some advantages, such as synergy and easier access to markets. But these could just as easily have been reached by cooperation agreements.
On the contrary, some studies show there is a point where size starts working against efficiency and profits. Size may stroke managers’ vanity, but it is not necessarily the answer.
Second, do not engage in frivolous strikes which may adversely affect your employer’s competitive edge – and, therefore, also your own employment. Sometimes, when times are hard, it is extremely short-sighted not to accept a step backwards, especially if the alternative is unemployment.
In the end, keeping a cool head is important for having clear skies to both management and workers - as the present experience of Air France-KLM shows.
-Fin24
* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.
It sounds simple and easy. But, as the 19th-century Prussian military philosopher Carl von Clausewitz wrote in his famous treatise On War, “in war everything is simple, but even the simplest things are very difficult”.
The same applies to business economics. And exactly how difficult is something the management and employees of airline Air France-KLM is experiencing right now (the two carriers merged in 2004).
First, the general background. Times are tough for many traditional air carriers, because of a combination of factors.
To begin with, the economic crisis has meant that some potential travellers (especially those going on holiday) either stay at home or take their vacation nearby. Others prefer the cut-throat cheap carriers like EasyJet, Ryanair or – in the South African context – Kulula, Mango or FlySafair.
Even corporate travellers, who can afford the traditional carriers’ higher prices, nowadays are migrating towards the cheaper ones.
In other words, income is down. Something, as the saying goes, will have to be done.
So let us look at the second option: to cut costs. In the short term, buying second-hand aircraft will be cheaper, but in the long term, it will probably add to costs. Older aircraft are more expensive to keep in the air in terms of maintenance and fuel consumption, which means that buying aircraft second-hand cannot be a durable option.
Then there is the cost of fuel, which typically makes up more than 30% of airline operating costs. One may reason that fuel prices have dropped during the last few months, but the Wall Street Journal this week reported that European carriers are not really benefiting, due to large fuel-hedging contracts to protect themselves against oil-price volatility.
For instance, Ryanair “has 90% of its fuel cost locked in for the fiscal year ending in March”, according to the newspaper.
The natural alternative is personnel costs. No wonder panic broke out among employees before Air France-KLM announced this week that profit was down 17%. Figures of up to 7 500 lay-offs were bandied about, and trade unions growled ominously.
As it happened, these reports were highly exaggerated. Although it may still happen, not a single employee will – for the time being – be put out to pasture.
But this is no thanks to the destructive approach of the pilots in the Air France part of the combined company.
In order to take on the challenge of the cheaper airlines like Easyjet and Ryanair, Air France-KLM decided recently to use its own cheap branch, Transavia, as a battering ram to tackle the competitors. But for Transavia to compete, its personnel costs - especially regarding pilots and cabin attendants - had to be cut.
This elicited great anger among the Air France pilots. And therefore, being red-blooded Frenchmen and women, they went on strike.
Management’s knees buckled, and the plans were cancelled. But this means Transavia’s capacity to take on the cheap airlines has been drastically curtailed.
And in addition, the two-week strike meant that not a single Air France plane took to the skies. This cost more than €400m in lost revenues.
Bigger isn't always better
In other words, the Air France strike weakened the combined company’s survival chances even more.
This, of course, reminds one of so many strikes in South Africa, such as the strike in the Post Office or that of the Western Cape farm workers. To strike in an environment where automatisation is already eating up jobs is – like the pilots´ strike in France – folly.
Nevertheless, especially the KLM side of the company has traditionally operated like a big family. No one was ever laid off. For instance, during the big crisis of 2008-09 when the passenger market went belly up and far fewer flights took place, pilots were used as waiters in first and business class lounges, clearing passengers’ tables rather than putting them out on the street.
What can we learn from all of this?
First, big is not necessarily efficient or profitable. The merger, which made Air France-KLM the biggest airline in Europe after Lufthansa, did have some advantages, such as synergy and easier access to markets. But these could just as easily have been reached by cooperation agreements.
On the contrary, some studies show there is a point where size starts working against efficiency and profits. Size may stroke managers’ vanity, but it is not necessarily the answer.
Second, do not engage in frivolous strikes which may adversely affect your employer’s competitive edge – and, therefore, also your own employment. Sometimes, when times are hard, it is extremely short-sighted not to accept a step backwards, especially if the alternative is unemployment.
In the end, keeping a cool head is important for having clear skies to both management and workers - as the present experience of Air France-KLM shows.
-Fin24
* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.
