Air France-KLM will not branch into the long-haul, low-cost market for the moment, despite Norwegian Air Shuttle’s plans to start flying to three points in the U.S. from Air France’s main hub at Paris Charles de Gaulle Airport this summer with Boeing 787-8s (Aviation Daily, Feb. 22).

                                                                       

“We now focus on the mainline [carriers] because we think that our first duty is to solve the problems of the [group’s] mainlines, mainly by improving their competitiveness problem,” Air France-KLM CEO Alexandre de Juniac told analysts on the group’s earnings conference call last week. “If you develop a long-haul low-cost, it’s very nice business, but it doesn’t solve your mainline problems.”

Nonetheless, he pointed out that the Franco-Dutch group, which recently reported its first full-year profit in years, is “very closely” watching the segment. “It’s not only Norwegian. You have long-haul low-cost in every part of the world,” de Juniac said,  citing Singapore Airlines, Air Canada and Lufthansa as carriers that have started operations with this model. 

He said that initially the long-haul startups were “not convincing,” but that they are becoming increasingly so. 

“So we have to see whether or not, and if it’s possible, to do something in Air France-KLM. But the key priority is to solve the mainline competitiveness problem.”

Meanwhile, Air France-KLM remains committed to growing its short-haul, low-cost subsidiary, Transavia, as part of its ongoing Transform 2020 restructuring plan. The division has two airlines—Transavia Holland, and Transavia France.

The LCC’s total capacity, measured in available seat kilometers (ASKs), is scheduled to increase 15% this year after growing 5.3% in 2015. The main contributors to this year’s capacity growth again will be Transavia France, which last year increased its ASKs by 24.6%, and the March opening of Transavia Holland’s new Munich base. It initially will have four Boeing 737-800s operating 101 weekly frequencies to 18 destinations in summer.

Munich is a relatively expensive airport in terms of charges, though de Juniac maintains the operations there will have lower unit costs than those of Transavia in its home markets. That is because the airline has negotiated a contract for Munich-based crew, particularly pilots, that is less expensive than agreements with Transavia Holland and Transavia France individually. The Munich operation’s only ground staff will be one person coordinating operations, he said. Transavia Holland will manage operations, meaning there will be no additional overhead or administrative costs in Munich. De Juniac also noted that Munich is a high-income area, and that “the price of the average ticket is higher than it could be in other areas of Germany or Europe in which the average purchasing level is probably lower.”

Transavia France last year became Paris Orly Airport’s largest international LCC, according to de Juniac. The LCC was able to grow at France’s second busiest airport, thanks to the transfer of slots to Transavia from Air France. Air France CEO Frederic Gagey believes this was “really a good strategy. It’s clear that by operating this transfer of slots from Air France to Transavia, we have kept our good position into Orly.” This summer, Transavia France will be operating more than 20 aircraft at Orly.

Transavia’s development in Orly will have a limit, Gagey said. The next step is to develop Transavia outside of Paris, and establish French provincial bases.  This, however, requires an agreement with pilots. Discussions are ongoing.  Transavia Holland pilots  signed a new collective labor agreement last year.

The planned ramp-up of Transavia comes despite the fact that the LCC recorded operating losses in 2014 and 2015. Its 2015 loss was €35 million, €1 million less than the loss for 2014. Air France-KLM projects the LCC will break even in 2017.

Transavia’s fleet is set to expand to more than 65 aircraft over the next two years, excluding short-term leases, from 53 aircraft in 2015. Passenger numbers in 2015 rose 5.4% to 10.8 million, and load factor remained stable at 89.9%. Total revenues stood at €1.1 billion, up 4.1%. Unit revenue per ASK decreased by 1.6%, while unit cost per ASK decreased by 1.8%. 

De Juniac intends to bring both Transavia carriers under the direct control of the Air France-KLM holding company and under one management team “to improve the efficiency, to be able to draw all the synergies and to have a more critical mass.” KLM, however, has resisted the move. KLM owns all of Transavia Holland and 40% of Transavia France. “It’s not a short-term or an immediate issue, but it’s probably a midterm issue, and especially if we want to participate into the low-cost consolidation that should happen in Europe,” he said.