Groupe Air France

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Groupe Air France

1, square Max Hymans
75757 Paris Cedex 15
France
(1) 4323 81 81
Fax: (1) 43 23 97 11

State-Owned Company
Incorporated: 1933 as Société Air France
Employees: 64,800
Sales: FFr57.6 billion

Air France is the largest airline in Europe, and one of the largest in the world. Its fleet of approximately 125 aircraft, which includes seven supersonic Concordes and numerous Airbus and Boeing planes, flies to 224 destinations in 106 countries. It is the world’s second-largest international passenger carrier and a key deliverer of air freight. Besides direct air transport operations, Air France has substantial interests in hotels, tour operating, catering, computer reservations systems, and other areas.

Air France emerged in the early 1930s, when the possibilities for large-scale commercial air transport were swiftly expanding. Recognizing the benefits likely to arise from coordination and an end to competition, four private French air transport companies—Air Union, SGTA, CIDNA, and Air Orient—merged in August of 1933 and took over another enterprise, Aéropostale, to create Société Air France.

The new company soon became France’s most prominent airline and expanded steadily during the 1930s, as the demand for air transport grew. The company created extensive networks for carrying passengers, cargo, and mail in various parts of the world until, by the start of World War II in 1939, Air France was recognized as one of the world’s leading air carriers.

The outbreak of the war and the German occupation of much of France ended this period of expansion for Société Air France and crippled the company’s chances of maintaining its services. Most of the airline’s activities were suspended until the war ended in 1945.

The end of World War II also sparked a wave of support within the French government for nationalization of key industries as the best method of harnessing the country’s resources to rebuild what had been destroyed during the war and strengthen the French economy. Considered one of the country’s main connections with the rest of the world, Air France was a prime target, and in 1948 Société Air France became the Compagnie Nationale Air France, with the French government holding the bulk of the company’s stock.

Nationalization allowed Air France access to much greater financial resources than had previously been the case, both through the government’s injection of capital and the benefits of government backing in securing loans. Thus, aided by a period of global economic growth, rising demand for air transport, and dramatic improvements in aircraft technology, the company was able to sustain a long period of expansion.

During the 1950s and 1960s Air France developed an extensive network of tourist paths, increasing both the number of routes it served and the frequency of flights. The company improved its operations by using the fastest and newest propeller aircraft, including the Super Constellation, a plane capable of flying up to 500 kilometers per hour. These changes enabled Air France to expand its network from a total of 250,000 km in 1953 to 325,000 km in 1960.

The development of commercial jet aircraft, which afforded larger capacity and shorter journey times, during the 1960s enabled Air France to undertake another important improvement in its operations. The company began using Caravelle and Boeing 707 jets and in 1962 became involved in a joint venture with British Airways to develop a supersonic jet aircraft, the Concorde, at an estimated cost to each partner of between £75 million and £85 million.

By 1970 Air France’s network had grown to 500,000 km, and its acquisition of new jet aircraft, including the Boeing 727 and 747 and the Airbus 300, ensured its position as one of the world’s leading international carriers. In the mid-1970s the company began using the newly developed Concorde for commercial flights. The Concorde project, however, proved far more expensive than originally expected: by 1982 it had cost the French and British governments a total of nearly £1.8 billion, more than ten times the original estimates.

Throughout the 1980s the world airline industry, which had remained relatively stable for decades, showed signs of change. Deregulation of the U.S. industry in the early part of the decade radically altered conditions in one of the key airline markets, while the prospect of a single European market emerging in the 1990s compelled European airlines to examine their operations, build alliances with other carriers, and diversify their business bases.

Like other airlines, Air France was affected by the changing conditions. In 1987, amid widespread rumors that he would be responsible for preparing the company for privatization, Jacques Friedmann, former head of the Compagnie Générale Maritime et Financiére, was appointed chair of Société Air France by the conservative French government of Jacques Chirac. A plan to sell 15 percent of Air France’s stock on the Paris stock exchange, though, was postponed indefinitely in October.

The government deregulated the domestic French airline market by allowing charter companies to compete against Société Air France and a private carrier, Air Inter, for domestic routes. Air France responded to this change by fighting for control of Air Inter against Union des Transports Aériens (UTA), Air France’s main private rival. Both companies increased their stakes in Air Inter, but the dispute ended in a stalemate with Air France and UTA each holding 35 percent of the company.

Meanwhile, Air France was building alliances with other European airlines to branch out into other industries. Among such collaborations was its investment of 25 percent of the capital to develop a joint computer reservations system called Amadeus with the German airline Lufthansa, the Spanish carrier Iberia, and Scandinavian Airlines. The consortium estimated the cost of developing the system at $300 million.

In September of 1988 the newly elected Socialist government chose Bernard Attali, a prominent Socialist, to take over for Jacques Friedmann as chair of Air France. Widely regarded as a political move, the replacement was officially linked with the crash three months before of a new Air France A320 Airbus at the Mulhouse air show, in which three people were killed.

The change in leadership removed the immediate possibility of privatization for Air France, but the company continued to seek acquisitions and new alliances. In July of 1989 Air France paid FFr240 million for a 35 percent stake in TAT, a regional passenger carrier and parcels and express delivery company based in Tours. TAT was the fourth-largest air carrier in France.

In September of 1989 Air France signed a cooperation agreement with Lufthansa in response to the changing conditions and to moves by British Airways, then the largest Western European airline, to build new alliances in Europe and America. The accordance entailed cooperation in all aspects of management and operations, including joint negotiations with aircraft manufacturers, harmonized aircraft acquisition programs, joint development of new long-distance routes, and the establishment of permanent management structures between the two companies.

Air France made another crucial strategic move in January of 1990, when it bought 70 percent of UTA from Chargeurs S.A., giving it authority over UTA’s extensive network in tropical Africa and the South Pacific as well as control of Air Inter, which dominated the French domestic airline industry. The takeover made Air France the largest airline in Western Europe. The European Commission’s (EC) competition commissioner, Sir Leon Brittan, tried to block the takeover on the grounds that it would restrict competition. After ten months of negotiations, though, he approved the deal on the condition that the French government allow independent carriers to compete on several routes and that Air France sell its 35 percent holding in TAT.

In late 1990, however, the expansion that Air France and other airlines were planning was put to a halt. The Iraqi invasion of Kuwait pushed oil prices sharply higher and ultimately caused a huge dent in passenger demand. Citing soaring fuel costs and higher insurance premiums, Air France launched an economy drive and spending freeze in September, stopping all ground investments that had been planned for 1990, canceling all nonessential building and computer investments, and suspending recruitment.

Air France continued to look for international alliances, and in September of 1990 signed a commercial agreement with USAir, a leading domestic airline in the United States, to cooperate on transatlantic routes. A worsening economic and financial climate, however, was limiting the possibilities for expansion. In November, a few days after the EC approved the UTA takeover, UTA and Air Inter announced that they were no longer making a profit. After years of growing profits, Air France recorded a loss of FFr668 million for 1990. The group estimated that the crisis in the Persian Gulf had cost it FFrl.7 billion in 1990 alone.

In early 1991 the EC responded to the worsening position of the airlines by suspending its restrictive competition rules, allowing them limited state support and more flexibility in pricing and assessing costs. Bernard Attali illustrated the extent of the problem in the April 12, 1992, issue of the Guardian: “We are in a period of very great crisis. It is the greatest crisis ever in air transport.”

In May of 1991 the French government announced that it would inject FFr2 billion in fresh capital into Air France and in August gave the company approval to raise up to FFr5 billion more from other sources. In November, after the EC had approved the government grant, the airline announced that the state-owned Banque Nationale de Paris would pay FFrl.25 billion for an 8.8 percent stake in the company.

The worsening of the Persian Gulf crisis in early 1991 and the ensuing war was detrimental to airlines. Air France incurred a loss of FFrl.16 billion in the first six months of 1991. The company responded to the predicament by appointing a management consultancy firm, Andersen Consulting, to undertake a nine-month study of how the company could cut costs in the face of increased competition from American and Asian airlines.

As a result of the study, Air France announced in September of 1991 that it would merge its routes with those of UTA, cutting 3,000 jobs, or nearly 8 percent of its work force, by the end of 1993, saving £150 million a year, and phasing out the UTA brand name. Air France also announced that it would sell its headquarters in central Paris for FFrl.6 billion and move its offices to Charles de Gaulle airport by 1995.

In January of 1992 Air France became the first Western airline to acquire shares in an existing Eastern European carrier. The company led a consortium, along with the European Bank for Reconstruction and Development and Caisse des Depots et Consignations, that paid a total of $60 million for a 40 percent stake in the Czechoslovakian airline Ceskeslovenske Aerolinie. The two carriers began combining their activities, using Paris and Prague as shared bases.

Also in early 1992, the pressures of the tight market were displayed in a series of disputes between Air France and U.S. carriers over transatlantic routes. Each side slashed prices to undercut the other, and a dispute over the amount of extra capacity the American airlines could add to their European routes during summer months resulted in France renouncing a bilateral air traffic agreement it had signed with the United States in 1946.

Air France signed another partnership agreement in April of 1992, this time with the state-owned Belgian airline Sabena. Air France agreed to acquire as much as BFr6 billion of a BFrl5 billion issue of Sabena shares by 1994, giving it a 37 percent stake in the carrier. The companies consented to integrate their activities at Brussels, Charles de Gaulle, and Orly airports.

Also in April of 1992 Air France announced an in-principle accordance with Lufthansa to merge its Meridien hotel chain with Lufthansa’s Kempinski chain, creating an 80-hotel group with annual sales of nearly £565 million. By June, however, the only firm result was a marketing agreement between the two, and no timetable for a merger had been set.

The company reported another loss of FFr685 million for 1991. Despite a slight increase in turnover, a restructuring, and a slight upturn in traffic, it did not expect to make a profit until 1993 at the earliest.

Insuring its expansion though acquisitions, partnerships, and a steady development of its operations, Air France has become Europe’s largest airline and one of the key players in the world air transport market. As the industry was experiencing a global crisis brought on mainly by the Persian Gulf War and worldwide economic contraction in the early 1990s, the company suffered along with most of its competitors. Its new alliances and much expanded network, however, left Air France in a position to reap benefits when conditions finally improve.