Société Air France

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Société Air France

45, rue de Paris
95747
Roissy CDG Cedex
France
33-1-41-56-78-00
Fax: 33-1-41-56-70-29
Web site: http://www.airfrance.fr

State-Owned Company (94.3%)
Incorporated: 1 933 as Société Air France
Employees: 50,000
Sales: FFr 60.72 billion ($9.81 billion) (1998)
SICs: 4516 Air Transportation, Scheduled; 4522 Air Transportation, Nonscheduled

One of the world’s largest airlines, Société Air France is trying to shake a somewhat troubled reputation and a socialist work ethic to become known as Europe’s finest carrier. Its fleet of approximately 205 aircraft includes several of the unique, supersonic Concordes and numerous Airbus and Boeing planes. More than 33 million passengers a year fly Air France which is also a key deliverer of air freight.

In the Beginning

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.

Postwar Nationalization

The end of World War II 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.

1980s: Deregulation Era

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 Genérale Maritime et Financiera, 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 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 1989 Air France paid FFr 240 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 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.

The Perilous 1990s

Air France made another crucial strategic move in January 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 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.

Company Perspectives:

Being the best European airline … involves improving our customer’s satisfaction on a daily basis and providing the most attractive products and services at the best value. Air France must be a global brand meeting the needs of customers from all over the world. We will increase the range of our destinations both directly and through an alliance network. We will be a customer-driven organization. We will be reliable. We will improve our commercial efficiency by developing closer relationships with our distributors and customers. This is our commitment.

Air France continued to look for international alliances, and in September 1990 signed a commercial agreement with US Air, 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 FFr 668 million for 1990. The group estimated that the crisis in the Persian Gulf had cost it FFr 1.7 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 1991 the French government announced that it would inject FFr 2 billion in fresh capital into Air France and in August gave the company approval to raise up to FFr 5 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 FFr 1.25 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 FFr 1.16 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 1991 that it would merge its routes with those of UTA, cutting 3,000 jobs, or nearly eight 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 FFr 1.6 billion and move its offices to Charles de Gaulle airport by 1995. The company reported another loss of FFr 685 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.

In January 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 1992, this time with the state-owned Belgian airline Sabena. Air France agreed to acquire as much as BFr 6 billion of a BFr 15 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 during this time 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 1992, however, the only firm result was a marketing agreement between the two, and no timetable for a merger had been set.

Edouard Balladur became prime minister of France in March 1993. He proposed privatizing 21 large companies, including Air France. In the face of a paralyzing but popular strike in the fall of 1993, the government canceled plans to cut wages and eliminate 4,000 jobs. It feared similar strikes in other troubled industries. France floundered in a recession characterized by severe unemployment, afflicting nearly 12 percent of the work force. Meanwhile Air France hemorrhaged money, losing $650 million in the first six months of 1993.

In April, Chairman Christian Blanc finally announced that the previously-rejected restructuring had been approved by Air France unions. However, it was contingent upon the European Commission’s approval of yet another government bail-out, this time in the amount of FFr 20 billion ($3.4 billion). The Economist noted this spurred resentment among unsubsidized European carriers such as British Airways, which owned a fifty percent share of French domestic carrier TAT.

French resources were severely taxed when Flight 8969 was hijacked in Algeria by Muslim terrorists. Although three passengers were executed before the plane was allowed to leave the country, a French commando unit rescued the remainder after it refueled in Marseilles.

In 1995 Air France announced plans to enter the commercial data communications business, in direct competition with France Telecom. The company’s extensive computerized reservations system provided the rationale behind the venture. It already had 50 air transportation clients, and expected revenues of $40 million per year from the venture.

After losing $3.5 billion in seven years, Air France posted a profit in 1996, when earnings were FFr 394 million. Blanc cut 5,000 jobs through attrition and trimmed costs by one-fifth. Blanc also resisted Jacques Chirac’s urging to buy only Airbus aircraft. Thanks to these practical, but politically unpopular efforts, Air France posted even larger profits in 1997.

Chairman and CEO Christian Blanc, frustrated at government intervention of the airline’s majority privatization scheme, resigned in September 1997. He had guided the airline to profitability, but the concessions he gained from workers rested on the promise of eventual compensation in company stock. If only a minority stake were sold, too few shares (less than ten percent) would land on the market to make the employees’ share of thirty percent very valuable. Jean-Cyril Spinetta became the company’s next chairman.

French tourism was booming in 1997, again making it the most popular tourist destination in the world. During this time Air France merged with domestic carrier Air Inter. An ouster of conservatives in June 1997, however, threatened Air France’s plans to go public. In February 1998 a partial privatization plan was announced that would reduce the government’s share from 95 percent to 53 percent. In March this plan was postponed until autumn.

Air France pilots went on strike in June 1998. They objected to plans to cut their salaries in exchange for equity. The Economist reported the strike cost FFr 100 million ($17 million) per day.

In the summer of 1998, the planned privatization was rescheduled for early 1999. This plan called for the sale of only 20 percent of the company, expected to raise between FFr 15 billion and FFr 20 billion.

By November 1998, the main pilots’ union had agreed to a three-year contract that would reduce costs by $90 million per year. With an initial public offering planned for 1999, most of the union’s pilots opted to reduce their wages in exchange for company stock.