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Air France vs. the 'Low Cost' airlines of Europe

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  1. Presentation of PPR and Puma
  2. Presentation of the operation
  3. Decision and Executive Summary

According to the International Association of Air Transport, the growth prospects for the aviation sector are pegged at between 5 and 6% this year. However, traditional airline companies experienced losses between $4 to $5 billion. The primary reasons for this decline in profit are increase in the prices of jet fuel, market shares being 'eroded' by the 'low cost airlines'. The growth profit announced by the air transport association in its report will be true, but will be poorly distributed.

The 'low cost' airlines will now benefit from the ?eroded' market shares of the traditional companies in Europe and America. 'Low Cost' airline operators are increasing in number and this has triggered a price war around the world. This calls for a restructuring of the airline industry and its ancillary services.

The Air France-KLM group, a European airline giant, has also been facing problems from 'low cost' airlines such as Ryanair and EasyJet, which are the principal 'low cost' airlines in Europe. The European air travel market is getting increasingly segmented due to the presence of these LCCs. The first 'low price' airlines were born in Europe in the nineties, with Ryanair and EasyJet entering the aviation sector.

The concept was to connect cities that were not too distant for low prices. Certain companies used this concept to infiltrate new markets. Their objective was to propose prices lower than the ones proposed by the traditional companies to attract customers and increase their market shares. Thus, some 'low cost' airlines managed to hold market shares between 15 and 20% in the European territory.

The traditional airline companies experienced heavy losses due to these 'low cost' airlines and had to reformulate their strategies in order not to be evicted from the European market. Air France-KLM did not hesitate to compete with the 'low cost airlines' by proposing increasingly gravitational tariffs, even if it meant being overdrawn. This was to establish a foothold on the short haul routes, irrespective of the losses.

The company intends to offset the losses incurred by this stratagem with the long haul flights, where it had always held a relative monopoly. The Air France-KLM group succeeded in this experiment and preserved its competitiveness. It compensated for its high prices with a higher quality of service, in comparison to the 'low cost' airlines.

However, the comparative advantage of quality against the price seemed to blur with Ryanair practicing an integral 'low cost' policy. This policy looked at keeping the prices really low with minimum service. EasyJet, on the other side, was trying to improve the quality of its service, while still keeping the prices lower than Air France-KLM. Its motto was to provide value for money.

Despite the strong growth in passenger traffic, as well as its seat load factor (which is about 75% on average), Air France-KLM failed to retain its market shares in short haul flights. It has saved itself from collapsing by compensating for its experiment through the long hauls and the internal network.

So, will the Franco-Dutch company consider reorganization? Will it reorganize in order to reduce its operating costs? If it succeeds in bringing down operating costs, will it reduce prices? Can it put up with the detriment in the quality of the proposed services on the short hauls?

Tags: Air France-KLM restructuring, Low cost Carriers, Ryanair, EasyJet

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