Air France-KLM's "Transform 2015" Turnaround Program

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Case Details:

Case Code : BSTR424
Case Length : 16 Pages
Period : 2003-2012
Pub Date : 2013
Teaching Note :Not Available
Organization : Air France KLM
Industry : Aviation
Countries : Europe; Global

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"What is clear is that we don't have a choice: the measures we proposed are meant to ensure the survival of the company and its recovery in coming years. The majority of our colleagues have understood this." 1

-Philippe Calavia, Chief Financial Officer (CFO), Air France-KLM, in July 2012.

"They've understood where we are, that we cannot continue in the way we behaved in previous years, and that a change is necessary to ensure the future of the company. It won't be an easy task, but I think people are prepared to face this kind of issue. We have to change things rapidly." 2

-Jean Cyril Spinetta (Spinetta), Chief Executive Officer (CEO), Air France-KLM, in January 2012.


On December 14, 2012, French-Dutch airline, Air France KLM SA (Air France-KLM), announced an addition of €500 million (USD654 million) to its savings target for 2013-14, in an effort to match the margins of its competitors. Earlier in 2012, the airline had announced a plan for a €1.4 billion investment in 2013, followed by a further €1.6 billion investment in 2014 as part of its "Transform 2015" plan. However, with the new savings target, investment would be cut by €500 million, out of which Air France would contribute €300 million while the remaining €200 million would be cut from KLM's budget.

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After the changes, Air France-KLM's capital expenditure would be €1.1 billion in 2013 and €1.4 billion in 2014. "3This is a necessary reduction, but given the group's younger fleet age versus competitors they have the flexibility to do it. The Transform plan is gathering pace and should be well on track to deliver,"4 said analyst Donal O'Neill at Goodbody Stockbrokers.

Air France-KLM was formed through a merger of French and Dutch carriers in 2004. With sound financials in the initial years, the merged entity became an example of how a cross border merger could prove a success. However, from 2009, the company was struggling to remain competitive in the changing global aviation industry. In 2011, the company's net debt was at €6.5 billion, €2 billion more than it had been the previous year. The company also incurred a substantial operating loss for the fourth consecutive year in 2011. It attributed its deepening indebtedness to increasing fuel costs, competition from low-cost airlines, and the after-effects of the financial crisis. "We have been incapable of financing our investments for the past three years, as we don't generate enough cash flow,"5 said Alexandre de Juniac (Juniac), CEO of Air France.

The company had announced the "Transform 2015" plan in January 2012. This included reducing unit costs by 10 percent and slashing €2 billion from its net debt by the end of 2014. The company also planned to cut some 5,000 odd jobs to turn around its short- and medium-haul business.

Aviation experts welcomed the restructuring initiatives of Air France-KLM. However, they were worried about whether the company would be able to achieve the targets mentioned in "Transform 2015". According to a Bank of America report published in March 2012, "the core structural longer-term issue of value destruction in this business remains unresolved".6

Background Note - Next Page>>

1] Cyril Altmeyer, "Air France-KLM Halves Operating Loss on Cost Cutting,", July 30, 2012.
2] Gregory Viscusi and Andrea Rothman, "Pay Freeze, Labor Concessions,", January 16, 2012.
3] Victoria Moores, "Air France Adds €500 Million in Spending Cuts,", December 14, 2012.
4] Mathieu Rosemain, "Air France-KLM Not Involved with Delta-Virgin Sale Talks; Cutting debt by $645 million,", December 10, 2012.
5] David Pearson, "Air France-KLM Expects Deep Loss,", January 25, 2012.
6] Daniel Michaels, "Air France Faces Turbulent Turnaround,", March 7, 2012.

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