Air France-KLM to Expand Low-Cost Carrier Businesses

AMSTERDAM—Air France-KLM SA is set to spur its European foothold in the low cost market by growing its existing French and Dutch budget carriers to counter rising low cost competition in Europe, after a costly pilot strike last year derailed plans to launch a European low cost airline.

To enable European growth, a new round of investments to buy up to 20 aircraft is expected to be announced in the coming weeks, coming on top of a €1 billion ($1.11 billion) investment announced year. That has largely been reserved for 17 aircraft, Air France-KLM's low-cost airline Transavia's chief executive, Matthijs ten Brink, said Thursday in an interview with The Wall Street Journal.

Europe's largest airline by traffic said it strongly feels the urge to quickly move forward with its expansion in the low-cost segment by opening operational bases outside France and the Netherlands, as stronger European competitors continue to expand.

The Franco-Dutch airline group currently has two separate budget carriers, Transavia France and Transavia Netherlands, and initially had plans to launch a Transavia Europe brand. Last year, those plans were abandoned after a pilots' strike that cost the company €425 million.

A year later, the need for the creation of a new airline, which should have enabled a simplified structure and lower cost base, has evaporated.

"Now we have been given an additional year to fix things internally, there is no need to create a new airline," Mr. Ten Brink said.

"Basically, the argument to launch a new airline was to not suffer from the legacy we carried in the Netherlands and partly in France. We weren't ready to take on the competition battle in Europa," he added.

Meanwhile, Transavia Netherlands in July reached a deal on new labor agreements with its pilots, meant to push down costs, and has booked significant progress with streamlining and simplifying the overall Transavia brand, and enhancing the IT infrastructure, investing "tens of millions," Mr. Ten Brink said.

Air France-KLM Chief Executive Alexandre de Juniac said in mid-July the airline aims to open its first operational base outside its home markets in the first half of 2016. Without providing further details while he emphasized that the pilots' unions in France had expressed willingness to reopen discussions.

A deal is likely to be signed in the coming weeks by Transavia executives, the chief executive of Transavia Netherlands said, adding that deals with French trade unions still need to be reached first.

The expansion doesn't come without risk for the Transavia airlines, as both are loss making and are expected to return to profitability by 2017. Europe's largest budget carriers, easyJet PLC and Ryanair Holdings PLC, currently do manage to post a profit out of their low-cost airline businesses.

"The growth we add must contribute to our profitability target," Mr. Ten Brink said. The operational base expansion requires a fleet expansion. Earlier this year the company announced the purchase of 17 Boeing 737-800 airplanes meant for growth within its home markets. New aircraft for bases in Europe could be bought from Boeing Co., but could also come from "befriended airlines," Mr. Ten Brink added.

After the airline moved away from creating a European low-cost unit, it has rapidly increased its French budget unit. Because of this fast expanding growth and intensive competition in France, revenue has come under pressure, Mr. Ten Brink said.

Air France-KLM faces fierce competition from low-cost carriers, which are expanding rapidly across Europe. Boosting its own low-cost activities is one of the measures it is taking to address competition within Europe. A strong European network could furthermore stimulate traffic for Air France-KLM's long-haul flights, addressing competition from carriers from Gulf states on intercontinental flights.

The Franco-Dutch airline is in the midst of an overhaul. It is making efforts to trim costs as its cost base is higher than those of other European airlines. Last July, Air France-KLM recorded a second-quarter loss of €79 million ($86.7 million), larger than the €11 million loss it posted last year in the same period. Revenue grew 3% to €6.64 billion from €6.45 billion in the second quarter of last year.

Write to Ellen Proper at [e-mail]

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August 20, 2015 12:45 ET (16:45 GMT)

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