The Air France-KLM group is paying a high price for underestimating the robust growth of low-fare carriers in the European market, including on French domestic pairs. And, adopting the broad view, it is now obvious that the group's French arm still retains, to some extent, the outdated mindset of a flag carrier. The government owns a minority 15.7% stake in the company and—behind the scenes—remains very influential.

Alexandre de Juniac, Air France's newly appointed chairman/CEO, recently unveiled a turnaround plan that is expected to lead the way back to profitability within the next three years. Looking beyond rather conventional cost-cutting measures, more decisions are scheduled to be announced in late spring, shortly after France's presidential election. The time frame clearly indicates political interference: Outgoing President Nicolas Sarkozy is doing his best to sidestep negative economic views and to curtail or avoid more job cuts. Though this approach is somewhat of an anomaly for private enterprise, the majority of company executives—most of whom are right-wing voters—have no other option than to agree.

In other words, the airline's true recovery plan has to come later. At this “early” stage, the red ink confirms the incongruity between robust traffic results and mounting losses. Last year, Air France-KLM carried 59.5 million passengers, a 7.8% increase, and achieved an 83% load factor. Capacity increased 6.5%, thanks to realistic predictions. Cargo, however, decreased 1.7%. Such numbers should have produced significantly better financial results but, obviously, costs remain too high.

Most of the problems are related to the aggressive low-fare strategy of Ryanair and EasyJet. Other emerging competitors, such as Spain's Vueling, also undermine the legacy airlines. Air France's short-haul network, including domestic routes, reportedly lost an estimated €800 million last year ($1.04 billion at current exchange rates). The already strong and rapidly growing EasyJet—although a British carrier—is now considered the second-largest “French” domestic carrier. And Ryanair is inaugurating many new routes from France, including to southern European and north African destinations.

Air France's executives in the past several years have repeatedly underestimated the business impact of emerging low-fare competitors, all the while staunchly maintaining that most customers would opt for full-service travel—although average flight time is about 60 min. on domestic routes and slightly longer to cross-border destinations. The executives used every possible delaying tactic to counter Ryanair and fiercely opposed subsidies granted by chambers of commerce to promote their regional airports and attract more traffic. Similarly, Air France opposed low-rate, low-cost terminals based on Ryanair's and its peers' requests for rock-bottom airport costs and 25-min. aircraft turnaround time.

Now, Air France's Ryanair-inspired “bases” established at regional airports are expected to be the backbone of a counterattack. Fares as low as €50 ($65) could attract more passengers but certainly not support efforts to restore profitability. Airline financial analysts believe that Air France is dwelling in the past and that job cuts at the airline are mandatory if it is to succeed.

People are waiting to see how the situation shakes out post-election. Some analysts fear that job cuts will occur, followed by a strong social protest.

De Juniac has remained silent on the issue, but he may face some in-house opposition because his stance differs from that of the incumbent management team. Similarly, the group's Dutch arm is remarkably quiet. KLM, in an effort to assuage local sensibilities, has decreed that a newly decided pay freeze will be “moderate.”

Unless de Juniac has an ace up his sleeve, more drastic measure will be needed to haul Air France back into a secure profitable position. And, of course, without bailout funding in sight, the once easy solution of picking taxpayers' pockets is off the table. The European Commission is watching.