Air France-KLM seeks to deepen cost cuts

Air France-KLM Group, Europe’s largest airline, is asking managers to identify more savings for 2011 as part of an effort to catch up on competitiveness with its main European rivals.

The Paris-based carrier needs to deepen cost cuts beyond the €500 million ($693m) in savings earmarked for this year with improved productivity and procurement, Chief Executive Officer Pierre-Henri Gourgeon told journalists today. Air France, which is targeting operating profitability in 2011, last raised its savings target from €470m in July.

“Our competitiveness can be improved, and must be, compared with our biggest rivals,” the CEO said at the briefing.

Air France-KLM has plunged 54 per cent in Paris this year, the worst performance on the Bloomberg EMEA Airlines Index, as the airline struggles with high fuel costs and sluggish business-class demand. Gourgeon said his company is at a disadvantage to Deutsche Lufthansa AG and British Airways Plc because of currency exchange rates and higher welfare charges.

British Airways, a unit of International Consolidated Airlines Group SA, is benefiting from "competitive devaluation of the pound," Gourgeon said. Lower government social charges at Lufthansa give the German airline the equivalent of a €500m advantage, he said.

A hiring freeze at Air France-KLM and attrition should cut headcount by 1 per cent to 2 per cent a year, Gourgeon said.

Air France-KLM said September 5 that it will trim planned capacity increases next year after cutting growth for the current winter timetable to 2.7 per cent from 5.1 per cent in July. In May, the carrier announced a 10 per cent seat reduction in its joint venture with Atlanta-based Delta Air Lines Inc.

The airline has said it intends to divide a planned $20bn order for about 100 new long-range jetliners between Boeing Co’s 787 and the Airbus SAS 350. Gourgeon said the carrier will discuss the potential order at a board meeting September 15, and will seek as many options as possible, with fewer firm orders for maximum flexibility.

The carrier, which is switching its accounting to the calendar year, earned €122m in the 12 months to March 31, its first operating profit in three years, before posting a €145m loss for the quarter ended June 30.