Air France KLM to immediately cut costs by €1 billion

Air France (AF) KLM Group on Thursday revealed its three-year “transformation plan” to bring the company back to profitability by cutting costs immediately by €1 billion ($1.27 billion) and rapidly reducing debt by €2 billion to €4.5 billion by the end of 2014.

The group said it will increase capacity by a little over 5% on a cumulative basis.

At AF, the plan includes freezing pay raises in 2012 and 2013. At KLM, plans include moderating wages, freezing new hires, implementing additional productivity measures, reducing overhead costs and making changes to the network. Negotiations with social partners are on-going.

The plan, which was initially outlined in November, builds on three priorities: restoring competitiveness through cost-cutting; restructuring the short- and medium-haul operations; and rapidly reducing debt. 

The company disclosed that in 2011 its short- and medium-haul network losses were around €700 million. “The long-haul operations, also subject to increasing competition, cannot alone offset these losses,” AF KLM said.

The company wants to restore its medium-haul business to breakeven by 2014 through a better utilization rate of aircraft and assets. It also wants to “significantly” improve productivity in all employee categories and extensively outsource some activities. It did not provide more detailed information but stressed its short- and medium-haul network remains “indispensable” to the group’s development.

The quasi-stable capacity growth between 2012 and 2014, affecting both passenger and cargo operations, will lead to a reduction of its fleet and, consequently, its investment program, from more than €6 billion between 2009-2011 to below €5 billion over the next three years. Aircraft deliveries will be deferred and options will not be exercised without detailing which orders will be affected, it said. The investment reduction will not affect ongoing operational safety and customer service programs.

Thursday’s statement did not mention layoff plans, although it is widely expected that job cuts, mainly at AF, will be announced after the upcoming French presidential elections.

For the six months ended Sept. 30, 2011, the group posted a net loss of €183 million, reversed from a €1.03 billion net profit in the year-ago period when earnings benefitted from a €1.03 billion gain from the sale of part of its holding in Amadeus.