Air france international strategy analysis (2014)

AIR FRANCE STUDY

PG28 – Global Strategies

Group 10

December 2014

|

Executive summary

2

Low-cost

competitors

Emerging countries

competitors

On short and medium haul On long haul

Environmental pressure

Liberalization, economy and taxation

Recommendations

Negative impact on Air France

Low growth and low operating margin

#2 Partnerships#1 External growth

International acquisitions Alliances and code sharing

#3 Segmentation

Marketing and organizational

Carry on the current strategy with reinforced risk

mitigation

|

The macroeconomic pressure on the airline industry in France

resulted in a scissor effect between value and volume of sales.

Liberalization Economy Taxation

UE policy on Open

Skies in 1997

Economic crisis in

2008-2010

Chirac tax

UE tax on pollution

Scissor effect : decrease in value VS increase in volume

3

Industry drivers

Air France faces two threats : competition from foreign companies and a

decrease in the revenue per seat.

Conclusions

The airline industry in France has

been driven by three main

macroeconomic drivers.

The liberalisation of the skies in

Europe since 1997 has put an end

to the monopoly of national airlines

(« legacy companies ») and let new

entrants in.

Following the economic crisis, the

airline industry has lost 3,1% of

passengers between 2008 and

2010.

On top of a new UE tax, Air France

suffers from a specific French tax.

Between 2012 and 2014 the

number of passengers carried in

French airport remained stable

while the revenue of French airline

decreased.

This means a drop in ARPU

and/or a loss of market shares to

non-French companies.

6%

0

4%

-2%

2%

-4%

8%

3,0%

20142013

3,7%2,7%

201220112010

6,0%

0,9%

Passengers carried in French airports

Revenue of airlines in France

Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700.

Companies annual reports

|

Over the last 10 years, Air France has lost 6,8% of market shares

while EasyJet and Ryanair have gained 14,6%.together.

4

Market shares of the first ten airlines in France (2001-2012)

Air France is losing market shares to the low-cost companies on the short

and medium-haul segment.

Conclusions

78,8% of the revenue of Air France

comes from the passenger activity

in 2012 : Air France is a dominant-

business firm. So we will focus our

analysis on the passenger activity.

The cumulated market shares of

Ryanair and EasyJet, the two

leading low-cost companies went

from 2% in 2001 to 16,6% in 2012.

In the meantime, Air France lost

6,8% of market shares.

Low-cost competitors stock to 3

factors: small distance flights, cost

reduction and PLF optimization.

Consequently, low-cost airlines

challenge Air France on short

and medium-haul flights.



100,0%

40,0%

0,0%

10,0%

30,0%

60,0%

70,0%

80,0%

90,0%

20,0%

50,0%

2001 2012

Air France

Ryanair

EasyJet

Other

|

The traffic carried by major Middle-East airlines is expected to grow

by 14,7% each year until 2020.

5

Passenger carried by airline (million)

Air France is stricken by the emerging countries companies on the long-

haul segment.

Conclusions

Middle East companies won market

shares in Europe. For instance,

30% of Emirates revenue were

made in Europe in 2012.

Turkish Airlines has multiplied its

number of passengers by 4

between 2003 and 2012.

They benefit from their geographical

position between Europe and Asia

but also from the low growth of

European legacy airlines.

Their strategy is based on high

quality services, acquisition of new

aircrafts and they are linked to the

development of airport hubs.

Emerging countries company use

their geographic location, at the

crossroads of the globalization, as a

competitive advantage via hubs.

Consequently, emerging

countries airlines challenge Air

France on long-haul flights.

Source AirClaims, Press releases

Air Transport Intelligence

http://transit-city.blogspot.fr/2010/06/gulf-new-hub-of-world.html

34

20

81

68

48

166

78

59

28

16

2005 2020*2009 2015*

+14,7%

Emirates

Etihad Airways

Qatar Airways

0

50

100

150B777-300

A340-500

A340-600

A330-200

20072002 2012

B777-300ER

1997

A380-800

A340-300

Fleet plan, Emirates Airlines (in units of planes)

|

Three clusters of players can be distinguished.

6

Air France is on the way to losing its position as a global leader in the

airline industry in the medium to long-run.

Conclusions

The legacy companies, especially

the US ones, remain the global

leaders in the industry.

However, the airlines of emerging

countries have reached a

threatening size. What is more, their

tremendous growth rate indicates

they should topple the current

leaders within a decade.

The low-cost companies are not big

enough yet to represent a

significant threat, but they rack in

the most profitable activities, with

operating margin growing by over

12% a year.

In this fast-moving environment, Air

France is one of the worse

positioned, with stagnant growth

and almost non-existing growth of

operational result.

Air France needs to react to

become more competitive and

gain market shares again.


Companies annual report

12% 16%

5%

10%

0 8%4%

0

Turkish Airlines

Southwest Airlines

China East. Airlines

EasyJet

IAG

Evolu

tion o

f th

e o

pera

ting m

arg

in Ryanair

China South. Airlines

Emirates

Delta Airlines

UCALufthansa

Air France-KLM

Revenue growth 2012-2013

Low cost company

Emerging country company

Legacy company

Performance of the main airline companies in 2013

*The area of the bubble represents the consolidated revenue in 2013

|

From both CAGE distance and Hofstede model, Air France and KLM

are close, which makes the merger easier.

7

Air France has successfully used international merger to grow externally

by acquiring companies with a low cultural distance.

Conclusions

In 2004, Air France and KLM

merged in a mutual agreement,

which made the company the #1

airline in the world by revenue then.

In 2007, Air France acquired the

Belgian company VLM Airlines.

In 2009, Air France-KLM acquired

25% of Compagnia Aera Italiana

In 2010-2011, Air France examined

bids for JAL and Virgin Atlantic.

Air France has acquired or tried

to acquire companies with a low

cultural distance. This is key in

the success of the integration of

the target to the Air France

operations.

Source Ghemawat, P. (2001). Distance Still Matters. Harvard Business Review (8).

http://geert-hofstede.com/france.html

France and the Netherlands have a low CAGE distance

41 4863 68

867168 67

3853

80

14

Power

distance

Indulgence IndividualismMasculinity Uncertainty

avoidance

Pragmatism

NetherlandsFrance

France and the Netherlands are culturally close (Hofstede)

Analysis

Cultural Different languages but same religion and ethnicity

Admin. Common market and currency, strong institutiins, political friendship

Geographic Low physical distance, same climate and time zone, strong networks

Economic Both rich with similar cost and quality of resource,, similar economies

|

Air France-KLM has co-founded and used the Skyteam alliance to

develop partnership.

8

Air France turns competitors into complements through strategic

partnerships.

Conclusions

Alliances are formed to facilitate

the internationalization process.

Companies cooperate to go around

regulations which ban

transcontinental airline mergers,

and therefore overcome the entry

barriers in other continents.

Code sharing allows Air France to

expand into other markets by selling

tickets to their routes, but having

those flights operated by other

companies. It also reduces costs

and increases brand awareness.

Join ventures make it possible to

split costs and revenues for a

particular route. For example, Air

France formed a joint venture with

Delta and Alitalia for a common

exploration of Transatlantic routes

and they share costs and revenues.

With this self-reinforcing

partnership strategy, Air France

turns competitors into

complements.

Source www.skyteam.com

Air France-KLM registration document 2013

Air France partnerships breakdown by origin

1113 14

19 19 20

5

320

25

22

2014201320122011

1

11

13

2010

14

2009

Skyteam

Other

|

Air France activities are segmented by distance, destinations and

customer segments.

9

Air France segments its passenger offer to deliver optimal value to each

customer segment.

Short and medium-haul flights

Air France Hop ! Transavia

Best and Beyond

For Business

Value cost

For VFR

Low cost

For leasure

Long-haul flights

Conclusions

• Air France fuels the long-haul activity

hub at Paris-CDG. It aims at business

customers travelling to France and

Europe. The service is being

upgraded with the « Best and Beyond

program »: WiFi on board, chef

catering, etc.

• Hop ! Is the grouping of three

regional airlines: Britair, Regional and

Aorlinair after Air France sold CityJet

and VLM in order to streamline its

offer.. It aims at VFR (Visiting Friends

and Relatives) for point-to-point

regional flights (no hubs) in France

and Europe. Air France tries to

develop an original « value cost »

positioning with Hop !.

• Transavia aims at leasure flights

towards european and mediterranean

destinations. It is a direct competitor

to EasyJet and Ryanair.

• As a result, Air France PLF rose to

83,8% and Transavia revenue

increased by 10,7% in 2013.


Air France annual report 2013

Emerging country competitors

Low-cost competitors

|

Air France should carry on the current strategy and reinforce mitigation

against 4 main risks.

Sig

nif

ican

ce

Possibility of appearance

Low

Medium

High

Low Medium High

Risk Evaluation Matrix Risks

1

2

4

3

10 Source Porter M. (1996), What is strategy ?, Harvard Business Review

Cook Jr V. J. (2008), Why Airlines Mergers Don’t Work, Tulane University - A.B. Freeman School of Business

Air France annual report 2013

Recommendations

1

2

3

4

Straddling Trade-offs

Cannibalization Exclusivity

Failure of

partnership

Engagement in

alliances

Adverse regulation

or taxation

(Lobbying)

|

Conclusion

11

Low-cost

competitors

Emerging countries

competitors

On short and medium haul On long haul

Environmental pressure

Liberalization, economy and taxation

Recommendations

Negative impact on Air France

Low growth and low operating margin

#2 Partnerships#1 External growth

International acquisitions Alliances and code sharing

#3 Segmentation

Marketing and organizational

Carry on the current strategy with reinforced risk

mitigation

|

A teamwork by

12

Anastasia Shornikova Juliette Marion Mathieu Santoni

Miguel Mello Stéphane Nasser

BACKUP SLIDES

| 14

Table 1. Deep-dive analysis of the first 10 airlines operating in France



65

70

75

80

85

90

-7,0 -6,0 -5,0 -4,0 -3,0 -2,0 -1,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 10,0 11,0

Air France

EasyJet

PL

F in 2

01

2 (

in %

)

Market shares evolution 2001-2012 (volume, in %)

Royal Air Maroc

Aigle Azur

Transavia*

Regional CAE*

British Airways

Brit Air*

Lufthansa

Ryanair

Legacy company

Regional company

Low-cost company

| 15

Table 2. Details of the risk anaysis

1. The failure to integrate a new acquisition is medium in possibility of appearance, since most of merger and acquisition

fail, but Air France has experience in the field. It can be mitigated with a CAGE/Hofstede analysis priori to the acquisition.

2. Straddling is the main risk in the current Air France strategy. It is significant in impact and very likely, since it happened

to a great number of company which tried to straddle between two segments (see the Continental Lite case). Air France

can mitigate this risk by isolating the different activities and letting them run on their own, and develop their own value

architecture fitted to their specific value proposition.

3. Cannibalization is another striking risk. The low-cost offer by Hop ! and Transavia could cannibalize Air France main

operations. We consider this risk only moderate in significance, because in the end, it is still better to be cannibalized by

its own offer than by its competitors. The risk is likely to appear, but can be mitigated by dedicating specific airports and

destinations to each activity, e.g. opening secondary airports in province. Air France already enforces this policy.

4. Failure of a partnership is always a possibility. The significance depends on the nature of the partner – is it a strategic

one or not. However, this risk is low, because airlines tend to all become interdependent. This risk can furthermore be

mitigated by multiplying contacts with potential partners within structures such as alliances. Being a cofounder of the

Skyteam Alliance, Air France is fine from this perspective.

5. Adverse regulation or taxation is a current issue for Air France, with the enforcement of the UE tax on airplane

pollution. But such a risk strikes the industry as a whole, and will not target Air France specifically. The problem lies in

national regulation, like the Chirac tax. Given that Air France competitors are mostly headquartered in Ireland or the UK

they ill not have to pay this tax, which in the end, puts Air France at a competitive disadvantage. Lobbying has proven to

be inefficient, so there is no actual way to mitigate this risk.

| 16Design by Stéphane Nasser