Air France-KLM Isn’t Sure What to Do About Low-Cost Rivals

The rise of Norwegian Air, and in particular its low-cost long-haul offering, left the big European legacy airlines scratching their heads as to how they should try and compete?

International Airlines Group, the parent of British Airways, decided to start-up its own low-cost carrier, Level, while Lufthansa beefed up its Eurowings unit. Air France-KLM, however, took a different route.

Last year, it launched a new airline called Joon, aimed, according to its marketing people, at millennial travelers. That positioning attracted plenty of derision. While Joon has a lower cost base than the group’s full-service carriers, it is not low cost when compared with Norwegian or short-haul specialists like Ryanair and EasyJet.

Despite all this, the company seems pleased with its results. So far it has carried 300,000 passengers at a load factor of around 85 percent.

“Joon will strengthen our long-haul network and feed our hub in Charles de Gaulle Airport,” CEO Jean-Marc Janaillac said on a call with analysts after the release of the company’s full-year results last week.

“The new airline is another of the group’s responses enabling us to win back customers from the competition with an innovative offer and an adapted cost structure.”

Another New Airline?

Air France might be happy to talk up the success of Joon but if reports in France are correct it is contemplating going further in its attempt to deal with Norwegian, Level and Eurowings.

La Tribune said last month that the company was looking at starting up an actual low-cost long-haul airline. Publicly, Air France-KLM has simply said it is studying the business environment but has made no definitive announcement as to what this might entail.

“Such a move would add labor complexity and would make the brand portfolio confusing, given the newly launched Joon, but should be viewed as a defensive tool,” said Andrew Lobbenberg a transport analyst at HSBC in a note to investors. Hardly a ringing endorsement.

If Air France-KLM is at least thinking of starting a new airline, what is the point of Joon? More importantly, Janaillac is still questioning the viability of low-cost long-haul.

On the same earnings call when asked by an analyst about Norwegian, Janaillac said he wasn’t sure of the “sustainability of this business model, I think some results show it’s not that easy.”

It’s true Norwegian messed up last year but it has already succeeded in changing the mindset of travelers and other airlines. Now that unbundled fares are becoming the norm, it’s hard to see them going back. Norwegian is also targeting Paris and adding capacity in Amsterdam, two of the company’s key bases.

Air France-KLM still harbors some hope that its legacy airlines can adapt to this new environment without needing to create new airlines. In December, alongside partners Delta Air Lines and Alitalia, it started selling a new range of economy fares between Europe and the United States and Canada. The very cheapest of which will only include hand luggage as part of the fare.

But basic economy isn’t going to save Air France-KLM and neither is Joon. The company is due to unveil a new strategic plan later this year. By then we should expect an update on how seriously it wants to take low-cost long-haul.