Air France/KLM will buy $20 billion worth of aircraft

Posted on March 20, 2009 by Matthieu Desiderio

As the airlines are deeply affected by the crisis, Air France-KLM is ready to do a huge $20 Billion order for the acquisition of a hundred of medium capacity long-haul planes.

A sector strongly affected by the crisis

All the constituents of the air activity are strongly affected by the economic crisis. The freight activity is the most affected, with a drop off 23,3% over one year according to IATA (International Air Transport Association, which gathered 93% of airlines statistics). The passenger traffic decreased as well, less 5,6 % in January, still according to IATA. Worse, Business classes are empty while airlines make the biggest margins on their high yield passengers.

No company avoids this crisis: profits are inevitably impacted, whatever the size, the markets, or the main region of activity of the companies. So, Lufthansa announced a decrease of 64% of its net profit in 2008, Cathay Pacific lost 870 million Euro in 2008, and the low cost Aer Lingus announced a net 107,8 million Euro loss in 2008. Globally, IATA announced a global losses of 6 billion Euro for the industry in 2008.

A strategy: reduction of capacity

With a sector in chronic overcapacity, which used to runs with annual increases of traffic (except after September 11th, 2001 and the first war in Iraq), the sudden and unexpected fall off the traffics will probably make big damages, which will result in bankruptcies and concentrations.

Already, the companies try to adapt themselves by reducing capacities. American Airlines announced that their passenger-miles offer (ASM) is down by 6,5% this year (9% for Domestic routes, 2,5 % for the International ones), Delta Airlines wish to reduce their International offer by 10%, and Air France – KLM cut their offer by 3,4% for this Summer season compared to 2008. At the same time, the staff cuts are now common. Actually, airlines privilege “sweet” solutions like non-replacement of retirements or voluntary departures. For instance, Air France – KLM plan to decrease in 3 % its workforce, using these methods.

A380: an anti-crisis aircraft

A380 is a plane which does not know the crisis. Singapore Airlines with 7 A380s and their fabulous commercial success give the proof: the load factor of their A380 exceeds 90%, while the companies aim an average rate of 75 % today! By reducing the number of flights and even increasing the capacity, the jumbo will allow to realize 15 % savings by passenger on a Paris – New York journey, according to Air Franc,e which might plan to merge its 2 late afternoon Paris – New York flights into only one operated by an A380.

Besides, all the companies which operate the plane increase market shares on the routes operated by their A380s because of the general craze it creates.

Finally, in a context of overloaded airports, like Heathrow, where the prices of slots reach peaks (e.g. 30 million Euro per pair for the last transactions), gains for a airline by cutting a daily round-trip is substantial.

However, in a context where financing is particularly hard, airlines seem to have difficulties in financing the aircraft. For example, Air France – KLM would have difficulties in obtaining the long terms loans they need to pay their whole order, and Emirates would postpone some deliveries as well.

Long-terms strategies?

Air France would announce at the end of this Summer a $20 Billion bid for the acquisition of a hundred of medium size long-haul planes (A350 or B787). There is in fact nothing new, as this order has been planned for ages. It was postponed for various reasons, including specifications not being supplied by the manufacturers.

Planes would be delivered in 2014-2015 (first stage would be replacement of Air France A340 and KLM MD-11), a perfect timing for the company which indeed hopes that at this moment the crisis will be past, with a potential increase of fuel prices, and thus the competitive advantage of a young fleet, mechanically burning less fuel.

Finally, ordering aircraft in this period of economic slump is probably the best way for Air France to make the bill fall… Especially since the financing of those will be probably easier to settle, as usual in the sector; 20% will be to pay at signature, and the remaining 80 % on delivery.

References

Article: Tourner autour du globe en Airbus A380, Le Figaro, Feb. 16, 2009: here
Article: Commentaire “Questions autour de la méga-commande d’Air France-KLM”, par Vincent Lamigeon (Challenges): here
Website: International Air Transport Association, IATA: here

Jean Plateau

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