Alexandre de Juniac, Chairman and CEO Air France-KLM, talks about the need for airlines to adapt to the global stage
The Air France-KLM merger is almost a decade old. What have you learned and how will you develop in the future?
As you know, a full merger is legally and practically impossible. It’s impossible legally because of state regulations. And it’s impossible practically because of the concentration and number of staff at the main hubs—in our case Paris Charles de Gaulle and Schiphol in Amsterdam. And certainly from a customer perspective, we will continue to be operationally independent and based at our respective hubs.
But it is possible to merge some of the key functions such as the commercial, network, and revenue management functions. In fact, two components of Air France and KLM business—cargo and engineering and maintenance—are fully merged. This is the direction that we will continue to move in. We have various brands in our Group. The Air France and KLM brands are well known. But our portfolio also includes KLM cityhopper, CityJet, Transavia (in the Netherlands and France) and most recently Hop!. The aim is to segment the market in the most competitive way—geographically and commercially. I believe that we can do this better—to be totally complementary across all our operations and transparent for our passengers.
Do you see more scope for consolidation in Europe?
I’m not sure if there is scope for further major consolidation at the present time. You have three major players—British Airways/Iberia in IAG, Lufthansa and Air France-KLM. And you also have two major low cost carriers (LCCs) in easyJet and Ryanair. A third—Vueling is developing rapidly under the IAG group.
What is interesting is that in the United States you will have a similar landscape once the DOJ has approved the American-US Airways merger—with three big network carriers and two or three significant low-cost competitors. It seems to be a good balance and economically wise. At last airlines are making some money with a reasonable evolution in yield and capacity. This is quite different from the situation five years ago when the American landscape was devastated.
How about consolidation across political borders?
I’m not sure. Some airlines are taking equity stakes in other carriers. Our friends at Etihad have set the example with their stakes in Jat, Air Seychelles, Aer Lingus, Air Berlin, Jet Airways and others. On the other side of the Atlantic you see Delta investing in Gol, Aeromexico and Virgin Atlantic. So something is happening even within the current legal framework. From a purely economic standpoint, consolidation is a natural evolution for an industry that is capital and labor-intensive. Other industries that are also capital-intensive, such as the oil industry, have consolidated for this exact reason. It has to happen one day in aviation too. But I can also understand why governments want to keep their eye—and even a grip—on the air transportation industry in their country. It is seen as a key sovereignty issue.
Are the alliances a useful substitute for consolidation?
Alliances will continue but we are seeing more opportunistic partnerships, especially on a geographical basis. It is our customers that benefit most from alliances. SkyPriority, available in more than 900 airports over the world, is a major benefit for SkyTeam frequent flyers, for example. Having smoother and seamless IT systems between airlines could lead to even greater benefits particularly as frequent flyer programs evolve. One day the issue of standardizing the on-board product will be on the table.
Can European aviation be sustainably profitable within the European cost structure and regulatory framework?
There are many European carriers that are generating profits. And the situation in the US shows that it is possible to make a reasonable profit in a high cost operating environment. For me the target for European aviation is to reduce its cost structure and take a tough look at how we are organized and do business. LCCs have taught us some new operating rules and the three European legacy carriers are shifting a part of their network into low cost operations. We also have to improve the way we reach the customer across all markets. It isn’t possible to address France the same way as other European markets are addressed, let alone China or India.
So being more multi-national in future will be vital. It is striking to see that the legacy carriers have remained primarily national in terms of their employees. But two groups of carriers are changing that. The LCCs have brought together a truly European workforce. And the Gulf carriers have done the same, but by gathering staff from all over the world. This is radically different from what has been done with the legacy carriers. Internationalizing the workforce is essential and this is true commercially and operationally. Every airline will need Chinese speakers, for example.
How will IATA’s New Distribution Capability (NDC) change the way airlines access the customer?
The digital revolution has triggered two important developments. First, everything has become digitalized or is capable of being digitalized and that includes travel agencies and global distribution systems (GDSs). Second, it has triggered new and paradoxical behavior in customers. On the one hand they are hyper-mobile and rational.
But on the other hand they are hyper-faithful to a brand and hyper-emotional. To illustrate the point, customers want to stick to a brand but do not hesitate to compare prices. They are rational and will spend three days online to choose the cheapest ticket. And then they will pay a few hundred Euros in the last days to buy an upgrade and a nice meal “à la carte” or lounge access. The digital age facilitates the hyper rational element which gives them complete transparency and also offers the temptation of many options that plays to their emotional side.
These behaviors require our commercial and marketing services to think very differently. NDC will help. It is an ongoing process but it will create a new bridge between the airline and passenger. But NDC has to be properly managed and controlled so that our partners—travel agents and GDSs—are fully supportive. Remember these partners are so important to the legacy business model. But we need to cope with reality otherwise new players will do it in our place. If we get it right, it can make a big difference to the profit margin.
From your two years in politics, do you believe that politicians understand that aviation is a key economic driver?
They understand what air transport brings in terms of tourism and business. And they understand the impact that it has on the wider economy. But I am not sure that they understand aviation as a driver of employment and a key employer in its own right. They don’t see the direct and indirect contribution to employment. Air France is actually the major private employer in the Paris region. We have more than 40,000 staff linked to the two main airports in Paris—Charles de Gaulle and Orly. And often politicians do not see this.
The University of Strasbourg has done a major study and has come up with all the relevant figures—not only direct employment figures but also where our employees spend their money, including taxes. As an airline we have a big supply chain and we have a lot of companies working for us. So the economic footprint of the airline is huge and unknown to most politicians. Airlines have to make decision leaders aware of their economic and social footprint.
Can we get them to understand the importance of an initiative like the Single European Sky (SES)?
It is a key priority and it is such an obvious tool for improvement that it will continue to move forward. It is taking a long time because of national resistance but we will get there. We must keep pushing and keep explaining—and not just to politicians but to our customers as well. It shouldn’t be just in the hands of the specialists and the technicians, because this is a program that is for everyone in Europe. That should be explained clearly. It is not about air traffic control alone. SES will serve the European economy and all of its citizens in their day-to-day life.
After the progress made on environmental matters at ICAO, has the EU decision to restart their emissions trading scheme (ETS) put us back to square one?
There is no doubt that starting up the EU ETS as if nothing happened at ICAO is detrimental to European air transport. The airline industry in Europe is in bad shape and there shouldn’t be an additional burden on it especially in relation to its transport competitors. But at a higher level, there is no need for such a regional effort. Aviation—airlines, airports and the aerospace industry—has handled the environment issue properly.
We have set targets and we have been transparent about those targets and our reasonable strategies for achieving them. More and more people want to travel by air. We have tackled the environmental issue in a reasonable manner that allows the industry to grow and emissions to come down. That is the goal of the ICAO process. And that should be the focus of Europe. I expect some countries to react. The United States, the Gulf carriers, China and other major players, objected to the EU ETS. And I would be surprised if this action does not trigger a similar response.
There are plenty of anniversaries at the moment. Air France is celebrating 80 years of business, KLM is celebrating 94 years and there has been 100 years of commercial aviation. Looking forward from the perspective of this great history, what will we be talking about in 20 years’ time?
I think the major airline players will have to successfully manage the consolidation that will inevitably happen. Ultimately, there will be a handful of major global airlines that will have strong partners in each continent. There will also be consolidation in Africa. This will be the new continent for air transport in the years ahead and we must properly integrate Africa into the global system. The size of the industry and these major players will bring about some interesting innovations. The industry will need to develop new aircraft, for example. I think shorter travel times will be the most important consideration. So we may be talking about faster aircraft rather than bigger aircraft—even if we know that it is technically very difficult.
Another critical point will be infrastructure. European airports, airports in the Northeast of the United States and also those on parts of the coast of China are very congested. We will have to find new ways of approaching and taking off from airports. At the moment, the development programs to cope with the increase in demand are not in place. In China, they are trying to develop quickly but in Europe and the United States there is serious opposition to airport development because of noise and other environmental issues. So perhaps the industry will have to develop not only faster aircraft but also aircraft that are less noisy and use biofuels which is essential for drastically reducing CO2 emissions.
How do you motivate your 100,000 Air France-KLM staff worldwide?
There is no secret. We designed a credible and exciting future for the company. Air France-KLM aims to be back as one of the top three airlines in the world by 2016 in terms of the number of aircraft, the quality of our product, and customer service. We have to stick to the value that the two main brands—Air France and KLM have in their DNA. This is a European approach to the quality of life and luxury concepts. We are transforming the company and for this we need to make the Air France-KLM dream continue for our employees by painting a bright future that can be reasonably achieved.
And what would those staff say about your leadership?
I am focused on the customer, our group’s fast transformation, and results. I want to dramatically increase our focus on the customer. We need to be able to change and adapt quickly. And the reason that we do this is to deliver results. In the digital world you need to be similarly focused on all three to be successful.
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