Monday, January 16, 2012

Air France-KLM Implements Cost Savings

Air France-KLM has announced that it will reduce investment and impose €1 billion of cost savings, effective immediately. The austerity measures will include a wage and recruitment freeze in an attempt to turn around its revenues. The decision comes as the company says it’s seeking to reduce net debt from €6.5 billion to €4.5 billion by the end of 2014. The Franco-Dutch carrier is the largest in Europe by revenues.
The root-and-branch restructuring will put Air France-KLM’s new management team in a new dispute with its French unions ahead of the forthcoming presidential elections in the country. In October, chief executive Pierre-Henry Gourgeon was ousted by the company’s board in a brutal coup, as the airline was losing ground with Lufthansa and International Airlines Group (IAG), its two largest European rivals. Jean-Cyril Spinetta, who helped create the airline in a 2004 merger, was reinstated as chief executive.
Although all flag airlines in Europe are struggling with the higher cost of fuel and are braced for a slowing of economic growth, Air France has been doing rather badly due to its labour costs and high debts. Shares in the group have dropped 71% in the last year, but rose ahead of the restructuring announcement on Thursday by 7.5% to €4.29. Spinetta met the airline’s board members on Wednesday to get approval for the plan before telling staff representatives. He said that they have to adjust capacity for the coming few years, whether it’s passengers or cargo. The offer of transport is more than demand and weighing down on carriers.
Spinetta didn’t announced any job cut but said the €1 billion in cost-cutting measures will be effective immediately. This includes freezing pay and recruitment at Air France. A policy of wage moderation will be implemented at KLM, which recognises that the French half of the carrier has a worse performance. Speaking to French unions, the carrier said that a substantial improvement in productivity throughout the group will be needed to achieve a satisfactory level of profitability. This implies the renegotiation of employment rules, which were included in existing collective deals with staff. The unions and airline have been in a dispute over changes to working practices as of late.
The group says further plans will be carried out later to generate another €1 billion in cash flow for three years. They plan to cut capacity expansions between now and 2014, which will lead to its fleet shrinking. Capacity is anticipated to rise by just over 5% during the period, which means the airline will defer some Airbus and Boeing orders for long-haul planes. Additionally, the group had spent €6 billion on its 2009-2011 investment programme, but says its investments for the next two years will be less than €5 billion.