Air France international strategy is driven by two external threats: the pressure of low-cost competitors on short and medium haul, and the competition from emerging countries' airline on long haul. Air France response includes : (1) external growth, (2) partnerships and (3) segmentation. Made with love by a team of students from EMLYON Business School.

1. AIR FRANCE STUDY
PG28 – Global Strategies
Group 10
December 2014

2. |
Executive summary
2
Low-cost
competitors
Emerging countries
competitors
On short and medium haul On long haul
Environmental pressure
Liberalization, economy and taxation
Recommendations
Negative impact on Air France
Low growth and low operating margin
#2 Partnerships#1 External growth
International acquisitions Alliances and code sharing
#3 Segmentation
Marketing and organizational
Carry on the current strategy with reinforced risk
mitigation

3. |
The macroeconomic pressure on the airline industry in France
resulted in a scissor effect between value and volume of sales.
Liberalization Economy Taxation
UE policy on Open
Skies in 1997
Economic crisis in
2008-2010
Chirac tax
UE tax on pollution
Scissor effect : decrease in value VS increase in volume
3
Industry drivers
Air France faces two threats : competition from foreign companies and a
decrease in the revenue per seat.
Conclusions
 The airline industry in France has
been driven by three main
macroeconomic drivers.
 The liberalisation of the skies in
Europe since 1997 has put an end
to the monopoly of national airlines
(« legacy companies ») and let new
entrants in.
 Following the economic crisis, the
airline industry has lost 3,1% of
passengers between 2008 and
2010.
 On top of a new UE tax, Air France
suffers from a specific French tax.
 Between 2012 and 2014 the
number of passengers carried in
French airport remained stable
while the revenue of French airline
decreased.
 This means a drop in ARPU
and/or a loss of market shares to
non-French companies.
6%
0
4%
-2%
2%
-4%
8%
3,0%
20142013
3,7%
2,7%
201220112010
6,0%
0,9%
Passengers carried in French airports
Revenue of airlines in France
Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700.
Companies annual reports

4. |
Over the last 10 years, Air France has lost 6,8% of market shares
while EasyJet and Ryanair have gained 14,6%.together.
4
Market shares of the first ten airlines in France (2001-2012)
Air France is losing market shares to the low-cost companies on the short
and medium-haul segment.
Conclusions
 78,8% of the revenue of Air France
comes from the passenger activity
in 2012 : Air France is a dominant-
business firm. So we will focus our
analysis on the passenger activity.
 The cumulated market shares of
Ryanair and EasyJet, the two
leading low-cost companies went
from 2% in 2001 to 16,6% in 2012.
 In the meantime, Air France lost
6,8% of market shares.
 Low-cost competitors stock to 3
factors: small distance flights, cost
reduction and PLF optimization.
 Consequently, low-cost airlines
challenge Air France on short
and medium-haul flights.
Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700.
Companies annual reports
100,0%
40,0%
0,0%
10,0%
30,0%
60,0%
70,0%
80,0%
90,0%
20,0%
50,0%
2001 2012
Air France
Ryanair
EasyJet
Other

5. |
The traffic carried by major Middle-East airlines is expected to grow
by 14,7% each year until 2020.
5
Passenger carried by airline (million)
Air France is stricken by the emerging countries companies on the long-
haul segment.
Conclusions
 Middle East companies won market
shares in Europe. For instance,
30% of Emirates revenue were
made in Europe in 2012.
 Turkish Airlines has multiplied its
number of passengers by 4
between 2003 and 2012.
 They benefit from their geographical
position between Europe and Asia
but also from the low growth of
European legacy airlines.
 Their strategy is based on high
quality services, acquisition of new
aircrafts and they are linked to the
development of airport hubs.
 Emerging countries company use
their geographic location, at the
crossroads of the globalization, as a
competitive advantage via hubs.
 Consequently, emerging
countries airlines challenge Air
France on long-haul flights.
Source AirClaims, Press releases
Air Transport Intelligence
http://transit-city.blogspot.fr/2010/06/gulf-new-hub-of-world.html
34
20
8
1
68
48
16
6
78
59
28
16
2005 2020*2009 2015*
+14,7%
Emirates
Etihad Airways
Qatar Airways
0
50
100
150
B777-300
A340-500
A340-600
A330-200
20072002 2012
B777-300ER
1997
A380-800
A340-300
Fleet plan, Emirates Airlines (in units of planes)

6. |
Three clusters of players can be distinguished.
6
Air France is on the way to losing its position as a global leader in the
airline industry in the medium to long-run.
Conclusions
 The legacy companies, especially
the US ones, remain the global
leaders in the industry.
 However, the airlines of emerging
countries have reached a
threatening size. What is more, their
tremendous growth rate indicates
they should topple the current
leaders within a decade.
 The low-cost companies are not big
enough yet to represent a
significant threat, but they rack in
the most profitable activities, with
operating margin growing by over
12% a year.
 In this fast-moving environment, Air
France is one of the worse
positioned, with stagnant growth
and almost non-existing growth of
operational result.
 Air France needs to react to
become more competitive and
gain market shares again.
Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700.
Companies annual report
12% 16%
5%
10%
0 8%4%
0
Turkish Airlines
Southwest Airlines
China East. Airlines
EasyJet
IAG
Evolutionoftheoperatingmargin
Ryanair
China South. Airlines
Emirates
Delta Airlines
UCA
Lufthansa
Air France-KLM
Revenue growth 2012-2013
Low cost company
Emerging country company
Legacy company
Performance of the main airline companies in 2013
*The area of the bubble represents the consolidated revenue in 2013

7. |
From both CAGE distance and Hofstede model, Air France and KLM
are close, which makes the merger easier.
7
Air France has successfully used international merger to grow externally
by acquiring companies with a low cultural distance.
Conclusions
 In 2004, Air France and KLM
merged in a mutual agreement,
which made the company the #1
airline in the world by revenue then.
 In 2007, Air France acquired the
Belgian company VLM Airlines.
 In 2009, Air France-KLM acquired
25% of Compagnia Aera Italiana
 In 2010-2011, Air France examined
bids for JAL and Virgin Atlantic.
 Air France has acquired or tried
to acquire companies with a low
cultural distance. This is key in
the success of the integration of
the target to the Air France
operations.
Source Ghemawat, P. (2001). Distance Still Matters. Harvard Business Review (8).
http://geert-hofstede.com/france.html
France and the Netherlands have a low CAGE distance
41 48
63 68
86
7168 67
38
53
80
14
Power
distance
Indulgence IndividualismMasculinity Uncertainty
avoidance
Pragmatism
NetherlandsFrance
France and the Netherlands are culturally close (Hofstede)
Analysis
Cultural Different languages but same religion and ethnicity
Admin. Common market and currency, strong institutiins, political friendship
Geographic Low physical distance, same climate and time zone, strong networks
Economic Both rich with similar cost and quality of resource,, similar economies

8. |
Air France-KLM has co-founded and used the Skyteam alliance to
develop partnership.
8
Air France turns competitors into complements through strategic
partnerships.
Conclusions
 Alliances are formed to facilitate
the internationalization process.
Companies cooperate to go around
regulations which ban
transcontinental airline mergers,
and therefore overcome the entry
barriers in other continents.
 Code sharing allows Air France to
expand into other markets by selling
tickets to their routes, but having
those flights operated by other
companies. It also reduces costs
and increases brand awareness.
 Join ventures make it possible to
split costs and revenues for a
particular route. For example, Air
France formed a joint venture with
Delta and Alitalia for a common
exploration of Transatlantic routes
and they share costs and revenues.
 With this self-reinforcing
partnership strategy, Air France
turns competitors into
complements.
Source www.skyteam.com
Air France-KLM registration document 2013
Air France partnerships breakdown by origin
11
13 14
19 19 20
5
320
25
22
2014201320122011
1
11
13
2010
14
2009
Skyteam
Other

9. |
Air France activities are segmented by distance, destinations and
customer segments.
9
Air France segments its passenger offer to deliver optimal value to each
customer segment.
Short and medium-haul flights
Air France Hop ! Transavia
Best and Beyond
For Business
Value cost
For VFR
Low cost
For leasure
Long-haul flights
Conclusions
• Air France fuels the long-haul activity
hub at Paris-CDG. It aims at business
customers travelling to France and
Europe. The service is being
upgraded with the « Best and Beyond
program »: WiFi on board, chef
catering, etc.
• Hop ! Is the grouping of three
regional airlines: Britair, Regional and
Aorlinair after Air France sold CityJet
and VLM in order to streamline its
offer.. It aims at VFR (Visiting Friends
and Relatives) for point-to-point
regional flights (no hubs) in France
and Europe. Air France tries to
develop an original « value cost »
positioning with Hop !.
• Transavia aims at leasure flights
towards european and mediterranean
destinations. It is a direct competitor
to EasyJet and Ryanair.
• As a result, Air France PLF rose to
83,8% and Transavia revenue
increased by 10,7% in 2013.
Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700.
Air France annual report 2013
Emerging country competitors
Low-cost competitors

10. |
Air France should carry on the current strategy and reinforce mitigation
against 4 main risks.
Significance
Possibility of appearance
LowMediumHigh
Low Medium High
Risk Evaluation Matrix Risks
1
2
4
3
10
Source Porter M. (1996), What is strategy ?, Harvard Business Review
Cook Jr V. J. (2008), Why Airlines Mergers Don’t Work, Tulane University - A.B. Freeman School of Business
Air France annual report 2013
Recommendations
1
2
3
4
Straddling Trade-offs
Cannibalization Exclusivity
Failure of
partnership
Engagement in
alliances
Adverse regulation
or taxation
(Lobbying)

11. |
Conclusion
11
Low-cost
competitors
Emerging countries
competitors
On short and medium haul On long haul
Environmental pressure
Liberalization, economy and taxation
Recommendations
Negative impact on Air France
Low growth and low operating margin
#2 Partnerships#1 External growth
International acquisitions Alliances and code sharing
#3 Segmentation
Marketing and organizational
Carry on the current strategy with reinforced risk
mitigation

12. |
A teamwork by
12
Anastasia Shornikova Juliette Marion Mathieu Santoni
Miguel Mello Stéphane Nasser

13. BACKUP SLIDES

14. | 14
Table 1. Deep-dive analysis of the first 10 airlines operating in France
Source Frent, W. F. (2013). Le transport aérien – Étude de secteur. Xerfi 700.
Companies annual reports
65
70
75
80
85
90
-7,0 -6,0 -5,0 -4,0 -3,0 -2,0 -1,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 10,0 11,0
Air France
EasyJet
PLFin2012(in%)
Market shares evolution 2001-2012 (volume, in %)
Royal Air Maroc
Aigle Azur
Transavia*
Regional CAE*
British Airways
Brit Air*
Lufthansa
Ryanair
Legacy company
Regional company
Low-cost company

15. | 15
Table 2. Details of the risk anaysis
1. The failure to integrate a new acquisition is medium in possibility of appearance, since most of merger and acquisition
fail, but Air France has experience in the field. It can be mitigated with a CAGE/Hofstede analysis priori to the acquisition.
2. Straddling is the main risk in the current Air France strategy. It is significant in impact and very likely, since it happened
to a great number of company which tried to straddle between two segments (see the Continental Lite case). Air France
can mitigate this risk by isolating the different activities and letting them run on their own, and develop their own value
architecture fitted to their specific value proposition.
3. Cannibalization is another striking risk. The low-cost offer by Hop ! and Transavia could cannibalize Air France main
operations. We consider this risk only moderate in significance, because in the end, it is still better to be cannibalized by
its own offer than by its competitors. The risk is likely to appear, but can be mitigated by dedicating specific airports and
destinations to each activity, e.g. opening secondary airports in province. Air France already enforces this policy.
4. Failure of a partnership is always a possibility. The significance depends on the nature of the partner – is it a strategic
one or not. However, this risk is low, because airlines tend to all become interdependent. This risk can furthermore be
mitigated by multiplying contacts with potential partners within structures such as alliances. Being a cofounder of the
Skyteam Alliance, Air France is fine from this perspective.
5. Adverse regulation or taxation is a current issue for Air France, with the enforcement of the UE tax on airplane
pollution. But such a risk strikes the industry as a whole, and will not target Air France specifically. The problem lies in
national regulation, like the Chirac tax. Given that Air France competitors are mostly headquartered in Ireland or the UK
they ill not have to pay this tax, which in the end, puts Air France at a competitive disadvantage. Lobbying has proven to
be inefficient, so there is no actual way to mitigate this risk.

16. | 16Design by Stéphane Nasser