October 12, 2016 / 5:37 PM / 2 years ago

Air France-KLM CEO targets high costs, lack of trust with new project

BERLIN (Reuters) - Three months after taking over at Air France-KLM SA (AIRF.PA), Jean-Marc Janaillac says the loss-making airline has big problems, including high costs, an unwieldy corporate structure and a lack of trust among different parts of the company.

Jean-Marc Janaillac, Chairman and Chief Executive Officer of Air France-KLM, attends a news conference at the IFTM Top Resa show in Paris, France, September 20, 2016. REUTERS/Jacky Naegelen

“What is striking is the fact that we are working in an industry that is growing and we are not growing at the pace of the industry,” Chairman and Chief Executive Janaillac told a small group of reporters in Berlin.

“In terms of competitiveness we are lagging behind our competitors and our cost structure is still too high,” he said. “We still have work to do.”

Franco-Dutch Air France-KLM has struggled in recent years with weak demand and overcapacity across the industry. It has been striving to cut costs to compete better with deep-pocketed Gulf airlines and fast-growing European low-cost carriers.

Janaillac is due to unveil a new project called “Trust Together” in early November to answer questions about the company’s future strategy, map out goals and plans for how to compete in an increasingly difficult global market.

Janaillac said the company also had key strengths, such as its brand names and two important hubs, but it still needed to increase productivity, lower costs and streamline its structure.

He said he was not expecting the lack of trust he found between parts of the organization after the 2014 pilot strike and between parts of Air France and KLM, which merged in 2004.

Janaillac gave no specific details of the “Trust” project and declined to confirm the company will enter the long-haul low-cost market, but he expected months of negotiations with unions representing pilots and key staff to enable further actions, with a goal of wrapping up those talks in late January.

“The goal is to restore confidence and trust where it’s lacking, and secondly to clarify some strategic options,” he said, citing specific questions about how Air France-KLM planned to compete with low-cost carriers and others.

The big challenge will be the company’s ability to negotiate with its myriad unions to implement any changes. Plans by the previous CEO Alexandre de Juniac met with fierce resistance from unions and triggered costly strikes.

“The target will be how much cash flow do we need to buy planes to allow us to grow,” Janaillac said. “We’ll discuss with the different unions to know how we will achieve these targets.”

Company officials said the airline’s low-cost unit Transavia was doing well in Munich, where it began operations in March, and should reach one million passengers in its first year.

The French part of Transavia has 28 aircraft, but is authorized to acquire up to 40 aircraft, which may point to an avenue for potential future growth for the airline.

Asked about the need for consolidation, Janaillac said the issue was that Europe was clinging to “flag” carriers.

“We are not in the United States. We are still different countries. We have rules within Europe where a non–European carrier cannot have the majority of European carriers. That means that consolidation is going to be difficult,” he said.

The United States has even stricter controls on foreign ownership of its airlines.

As a result, he said Air France-KLM saw more promise in developing joint ventures like the one it already has with U.S. carrier Delta Air Lines (DAL.N).

“Joint ventures allow us to work in these countries and to have a kind of global system of airlines without having to consolidate by buying other companies,” he said.

Reporting by Andrea Shalal, editing by David Evans

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