Air France plans low-cost startup to counter long-haul challenge

[TOULOUSE] Air France-KLM Group said it's examining a range of options for entering the low-cost, long-haul travel market in a move that would parallel developments at German rival Deutsche Lufthansa AG.

Europe's largest airline has been working on plans for the venture for more than a year as it seeks to respond to competition from carriers including Norwegian Air Shuttle ASA, French Blue and more traditional foes such as Lufthansa, Chief Executive Officer Jean-Marc Janaillac said in an interview.

Expanding into the no-frills long-haul market would mark a departure for Air France-KLM, which has so far focused efforts to develop a lower-cost model on short-range European routes. Mr Janaillac told Bloomberg Television Tuesday the company can no longer ignore the emerging threat from a range of contenders.

"The issue is we have new competitors, so how do we address this situation?" he said. "We're not going to discuss it publicly because we have many possibilities we're studying, and we've not yet decided what options to put together in order to cope with the arrival of new, long-haul, low-cost carriers."

Mr Janaillac said Air France-KLM must weigh the advantages and pitfalls of each option, especially in light of the widespread opposition among pilots and other employees to the growth of the cut-price Transavia division in Europe.

The Air France-KLM plan would follow in the footsteps of Lufthansa's expansion of its Eurowings discount operation, which while taking over non-hub European flights from the main brand is also opening up about 10 long-haul leisure routes using a seven-strong fleet of Airbus Group SE A330 wide-body jets.

Mr Janaillac didn't say which markets the new business might serve and what aircraft it would fly, or make clear if it will take over routes from the main Air France and KLM operations. All of the Eurowings services are new, operating from Cologne to overwhelmingly leisure-oriented destinations such as the Dominican Republic, Mauritius and Cuba.

The long-haul discount model remains relatively unproven, with low-cost airlines traditionally sticking to intensive short-haul timetables that maximize the utilization of their aircraft.

Among European carriers, Norwegian Air has the most ambitious plans, with orders for 42 Boeing Co 787 Dreamliner jets that it's deploying on routes that mix leisure and business traffic, such as Paris to New York, Los Angeles and Fort Lauderdale, priced from 179 euros one-way.

XL Airways serves Paris-New York from 435 euros return, while La Compagnie, which offers cut-price business tickets, is doubling frequencies between the cities. In the holiday market Groupe Dubreuil's French Blue connects Paris with the Dominican Republic and the Indian Ocean island of Reunion, while its Air Caraibes brand and the Corsair SA arm of TUI AG plan to start serving Cuba.

Mr Janaillac said Air France-KLM should remain profitable this year after ending four years of operating losses in 2015. The CEO, who took over in July, said he's still working on a wider strategy to be made public on Nov 3, when the new long-haul plan could be announced.

The executive said he'll apply lessons from his previous post in charge of bus company Transdev in seeking to repair relations with workers. His predecessor Alexandre de Juniac sought to push through productivity measures in the face of union opposition, leading to strikes by pilots and cabin crew, courtroom clashes and violent confrontations that made headlines around the world.

French newspaper Le Monde reported this week that Air France was considering three options for a low-cost long-haul service, including the purchase of an established carrier.

BLOOMBERG