Air france international strategy analysis (2014)


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Air France international strategy is driven by two external threats: the pressure of low-cost competitors on short and medium haul, and the competition from emerging countries' airline on long haul.
Air France response includes : (1) external growth, (2) partnerships and (3) segmentation.
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Air france international strategy analysis (2014)

  1. 1. AIR FRANCE STUDY PG28 – Global Strategies Group 10 December 2014
  2. 2. | Executive summary 2 Low-cost competitors Emerging countries competitors On short and medium haul On long haul Environmental pressure Liberalization, economy and taxation Recommendations Negative impact on Air France Low growth and low operating margin #2 Partnerships#1 External growth International acquisitions Alliances and code sharing #3 Segmentation Marketing and organizational Carry on the current strategy with reinforced risk mitigation
  3. 3. | The macroeconomic pressure on the airline industry in France resulted in a scissor effect between value and volume of sales. Liberalization Economy Taxation UE policy on Open Skies in 1997 Economic crisis in 2008-2010 Chirac tax UE tax on pollution Scissor effect : decrease in value VS increase in volume 3 Industry drivers Air France faces two threats : competition from foreign companies and a decrease in the revenue per seat. Conclusions  The airline industry in France has been driven by three main macroeconomic drivers.  The liberalisation of the skies in Europe since 1997 has put an end to the monopoly of national airlines (« legacy companies ») and let new entrants in.  Following the economic crisis, the airline industry has lost 3,1% of passengers between 2008 and 2010.  On top of a new UE tax, Air France suffers from a specific French tax.  Between 2012 and 2014 the number of passengers carried in French airport remained stable while the revenue of French airline decreased.  This means a drop in ARPU and/or a loss of market shares to non-French companies. 6% 0 4% -2% 2% -4% 8% 3,0% 20142013 3,7% 2,7% 201220112010 6,0% 0,9% Passengers carried in French airports Revenue of airlines in France Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700. Companies annual reports
  4. 4. | Over the last 10 years, Air France has lost 6,8% of market shares while EasyJet and Ryanair have gained 14,6%.together. 4 Market shares of the first ten airlines in France (2001-2012) Air France is losing market shares to the low-cost companies on the short and medium-haul segment. Conclusions  78,8% of the revenue of Air France comes from the passenger activity in 2012 : Air France is a dominant- business firm. So we will focus our analysis on the passenger activity.  The cumulated market shares of Ryanair and EasyJet, the two leading low-cost companies went from 2% in 2001 to 16,6% in 2012.  In the meantime, Air France lost 6,8% of market shares.  Low-cost competitors stock to 3 factors: small distance flights, cost reduction and PLF optimization.  Consequently, low-cost airlines challenge Air France on short and medium-haul flights. Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700. Companies annual reports 100,0% 40,0% 0,0% 10,0% 30,0% 60,0% 70,0% 80,0% 90,0% 20,0% 50,0% 2001 2012 Air France Ryanair EasyJet Other
  5. 5. | The traffic carried by major Middle-East airlines is expected to grow by 14,7% each year until 2020. 5 Passenger carried by airline (million) Air France is stricken by the emerging countries companies on the long- haul segment. Conclusions  Middle East companies won market shares in Europe. For instance, 30% of Emirates revenue were made in Europe in 2012.  Turkish Airlines has multiplied its number of passengers by 4 between 2003 and 2012.  They benefit from their geographical position between Europe and Asia but also from the low growth of European legacy airlines.  Their strategy is based on high quality services, acquisition of new aircrafts and they are linked to the development of airport hubs.  Emerging countries company use their geographic location, at the crossroads of the globalization, as a competitive advantage via hubs.  Consequently, emerging countries airlines challenge Air France on long-haul flights. Source AirClaims, Press releases Air Transport Intelligence 34 20 8 1 68 48 16 6 78 59 28 16 2005 2020*2009 2015* +14,7% Emirates Etihad Airways Qatar Airways 0 50 100 150 B777-300 A340-500 A340-600 A330-200 20072002 2012 B777-300ER 1997 A380-800 A340-300 Fleet plan, Emirates Airlines (in units of planes)
  6. 6. | Three clusters of players can be distinguished. 6 Air France is on the way to losing its position as a global leader in the airline industry in the medium to long-run. Conclusions  The legacy companies, especially the US ones, remain the global leaders in the industry.  However, the airlines of emerging countries have reached a threatening size. What is more, their tremendous growth rate indicates they should topple the current leaders within a decade.  The low-cost companies are not big enough yet to represent a significant threat, but they rack in the most profitable activities, with operating margin growing by over 12% a year.  In this fast-moving environment, Air France is one of the worse positioned, with stagnant growth and almost non-existing growth of operational result.  Air France needs to react to become more competitive and gain market shares again. Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700. Companies annual report 12% 16% 5% 10% 0 8%4% 0 Turkish Airlines Southwest Airlines China East. Airlines EasyJet IAG Evolutionoftheoperatingmargin Ryanair China South. Airlines Emirates Delta Airlines UCA Lufthansa Air France-KLM Revenue growth 2012-2013 Low cost company Emerging country company Legacy company Performance of the main airline companies in 2013 *The area of the bubble represents the consolidated revenue in 2013
  7. 7. | From both CAGE distance and Hofstede model, Air France and KLM are close, which makes the merger easier. 7 Air France has successfully used international merger to grow externally by acquiring companies with a low cultural distance. Conclusions  In 2004, Air France and KLM merged in a mutual agreement, which made the company the #1 airline in the world by revenue then.  In 2007, Air France acquired the Belgian company VLM Airlines.  In 2009, Air France-KLM acquired 25% of Compagnia Aera Italiana  In 2010-2011, Air France examined bids for JAL and Virgin Atlantic.  Air France has acquired or tried to acquire companies with a low cultural distance. This is key in the success of the integration of the target to the Air France operations. Source Ghemawat, P. (2001). Distance Still Matters. Harvard Business Review (8). France and the Netherlands have a low CAGE distance 41 48 63 68 86 7168 67 38 53 80 14 Power distance Indulgence IndividualismMasculinity Uncertainty avoidance Pragmatism NetherlandsFrance France and the Netherlands are culturally close (Hofstede) Analysis Cultural Different languages but same religion and ethnicity Admin. Common market and currency, strong institutiins, political friendship Geographic Low physical distance, same climate and time zone, strong networks Economic Both rich with similar cost and quality of resource,, similar economies
  8. 8. | Air France-KLM has co-founded and used the Skyteam alliance to develop partnership. 8 Air France turns competitors into complements through strategic partnerships. Conclusions  Alliances are formed to facilitate the internationalization process. Companies cooperate to go around regulations which ban transcontinental airline mergers, and therefore overcome the entry barriers in other continents.  Code sharing allows Air France to expand into other markets by selling tickets to their routes, but having those flights operated by other companies. It also reduces costs and increases brand awareness.  Join ventures make it possible to split costs and revenues for a particular route. For example, Air France formed a joint venture with Delta and Alitalia for a common exploration of Transatlantic routes and they share costs and revenues.  With this self-reinforcing partnership strategy, Air France turns competitors into complements. Source Air France-KLM registration document 2013 Air France partnerships breakdown by origin 11 13 14 19 19 20 5 320 25 22 2014201320122011 1 11 13 2010 14 2009 Skyteam Other
  9. 9. | Air France activities are segmented by distance, destinations and customer segments. 9 Air France segments its passenger offer to deliver optimal value to each customer segment. Short and medium-haul flights Air France Hop ! Transavia Best and Beyond For Business Value cost For VFR Low cost For leasure Long-haul flights Conclusions • Air France fuels the long-haul activity hub at Paris-CDG. It aims at business customers travelling to France and Europe. The service is being upgraded with the « Best and Beyond program »: WiFi on board, chef catering, etc. • Hop ! Is the grouping of three regional airlines: Britair, Regional and Aorlinair after Air France sold CityJet and VLM in order to streamline its offer.. It aims at VFR (Visiting Friends and Relatives) for point-to-point regional flights (no hubs) in France and Europe. Air France tries to develop an original « value cost » positioning with Hop !. • Transavia aims at leasure flights towards european and mediterranean destinations. It is a direct competitor to EasyJet and Ryanair. • As a result, Air France PLF rose to 83,8% and Transavia revenue increased by 10,7% in 2013. Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700. Air France annual report 2013 Emerging country competitors Low-cost competitors
  10. 10. | Air France should carry on the current strategy and reinforce mitigation against 4 main risks. Significance Possibility of appearance LowMediumHigh Low Medium High Risk Evaluation Matrix Risks 1 2 4 3 10 Source Porter M. (1996), What is strategy ?, Harvard Business Review Cook Jr V. J. (2008), Why Airlines Mergers Don’t Work, Tulane University - A.B. Freeman School of Business Air France annual report 2013 Recommendations 1 2 3 4 Straddling Trade-offs Cannibalization Exclusivity Failure of partnership Engagement in alliances Adverse regulation or taxation (Lobbying)
  11. 11. | Conclusion 11 Low-cost competitors Emerging countries competitors On short and medium haul On long haul Environmental pressure Liberalization, economy and taxation Recommendations Negative impact on Air France Low growth and low operating margin #2 Partnerships#1 External growth International acquisitions Alliances and code sharing #3 Segmentation Marketing and organizational Carry on the current strategy with reinforced risk mitigation
  12. 12. | A teamwork by 12 Anastasia Shornikova Juliette Marion Mathieu Santoni Miguel Mello Stéphane Nasser
  14. 14. | 14 Table 1. Deep-dive analysis of the first 10 airlines operating in France Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700. Companies annual reports 65 70 75 80 85 90 -7,0 -6,0 -5,0 -4,0 -3,0 -2,0 -1,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 10,0 11,0 Air France EasyJet PLFin2012(in%) Market shares evolution 2001-2012 (volume, in %) Royal Air Maroc Aigle Azur Transavia* Regional CAE* British Airways Brit Air* Lufthansa Ryanair Legacy company Regional company Low-cost company
  15. 15. | 15 Table 2. Details of the risk anaysis 1. The failure to integrate a new acquisition is medium in possibility of appearance, since most of merger and acquisition fail, but Air France has experience in the field. It can be mitigated with a CAGE/Hofstede analysis priori to the acquisition. 2. Straddling is the main risk in the current Air France strategy. It is significant in impact and very likely, since it happened to a great number of company which tried to straddle between two segments (see the Continental Lite case). Air France can mitigate this risk by isolating the different activities and letting them run on their own, and develop their own value architecture fitted to their specific value proposition. 3. Cannibalization is another striking risk. The low-cost offer by Hop ! and Transavia could cannibalize Air France main operations. We consider this risk only moderate in significance, because in the end, it is still better to be cannibalized by its own offer than by its competitors. The risk is likely to appear, but can be mitigated by dedicating specific airports and destinations to each activity, e.g. opening secondary airports in province. Air France already enforces this policy. 4. Failure of a partnership is always a possibility. The significance depends on the nature of the partner – is it a strategic one or not. However, this risk is low, because airlines tend to all become interdependent. This risk can furthermore be mitigated by multiplying contacts with potential partners within structures such as alliances. Being a cofounder of the Skyteam Alliance, Air France is fine from this perspective. 5. Adverse regulation or taxation is a current issue for Air France, with the enforcement of the UE tax on airplane pollution. But such a risk strikes the industry as a whole, and will not target Air France specifically. The problem lies in national regulation, like the Chirac tax. Given that Air France competitors are mostly headquartered in Ireland or the UK they ill not have to pay this tax, which in the end, puts Air France at a competitive disadvantage. Lobbying has proven to be inefficient, so there is no actual way to mitigate this risk.
  16. 16. | 16Design by Stéphane Nasser