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Transavia: too little, too late? Air France-KLM’s LCC enjoys a growth spurt

10-Aug-2013

At the time of Air France-KLM’s 2Q2013 results on 26-Jul-2013, Group chairman and CEO Alexandre de Juniac said that the turnaround of the medium-haul business was taking longer than expected. “Further measures” are to be adopted, including “industrial and commercial decisions” and more job losses.

Although he did not give details of these measures, it seems likely that they will include an acceleration of the growth of Transavia, the group’s LCC, to become its principal short/medium-haul point-to-point operator. In this report, we analyse Transavia’s network and market position and compare its unit costs both with its parent and with the other European LCCs that have been so damaging to Air France-KLM.

The Dutch arm of Transavia has been part of KLM for more than 20 years and the French operation started up in 2007, but the group has not fully exploited its potential. After a number of years of following a ‘stop-start’ approach to growth, Transavia has resumed double digit capacity growth in 2013. Is it a case of ‘too little, too late’?

Air France-KLM’s LCC based in Amsterdam and Paris

Transavia is a business unit of Air France-KLM, whose results are reported within its ‘Other business’ segment (and, peculiarly, not part of the group’s Passenger segment). It consists of the Amsterdam-based transavia.com and the Paris Orly-based transavia.com France. Collectively, the two are known as Transavia.

Transavia network summary (number of destinations): at 11-Aug-2013

Region

transavia.com

 transavia.com France

Total

Domestic

5

5

10

Africa

4

10

14

Europe

68

25

93

Middle East

2

0

2

Total non-stop passenger destinations

79

40

119

Although they are two separate airlines, they have the same leisure-focused LCC business model and are run as a single business, with a common website. The carrier’s Dutch origins go back to 1966 and it became a KLM subsidiary in 1991. The French arm of Transavia began operations in 2007.

Transavia is an entirely short/medium-haul operation and is a key element in Air France-KLM’s efforts to turn around its losses in short/medium-haul. Transavia operates mainly to Europe, but also has destinations in North Africa (particularly from Paris) and the Middle East.

Number two airline at Amsterdam, number four at Orly

The principal base for the Dutch transavia.com is Amsterdam Schiphol, where it has almost two and a half times the seat capacity that it operates from its second hub at Rotterdam.

At Schiphol, it is the number two ranked airline by seats, with just under 7%, behind its fellow group company KLM, which has 53% of seats (source: Innovata, week of 5-Aug-2013). It faces competition at Amsterdam from other LCCs in the shape of easyJet and Vueling. It is the largest carrier at Rotterdam, with 76% of seats and, at Eindhoven, its 31% share puts it number two behind Ryanair’s 50%.

Amsterdam Schiphol seats by carrier: 5-Aug-2013 to 11-Aug-2013

At Paris Orly, transavia.com France is the fourth largest carrier by seats, with a share of just under 7%. Although group carrier Air France is number one at Orly, with 32%, transavia.com France ranks behind both Vueling and easyJet.

Paris Orly seats by carrier: 5-Aug-2013 to 11-Aug-2013

Focus on leisure destinations in Europe

Transavia destination map: summer 2013

According to data from Innovata for the week of 5-Aug-2013, the largest region for Transavia’s seat capacity is in Western Europe (62% of combined seat capacity of the two Transavia airlines), followed by Eastern/Central Europe (21%) and North Africa (12%). Only 4% of its capacity is domestic. Its network emphasises leisure destinations.

Transavia seat capacity by region, split between transavia.com and transavia.com France: 5-Aug-2013 to 11-Aug-2013

By some distance, the biggest destination country for Transavia’s Dutch carrier is Spain, followed by Greece and a number of other southern European and Mediterranean countries. The nearer countries of Austria, Germany and Denmark also feature on its list of top destinations.

transavia.com international seat capacity by country: 5-Aug-2013 to 11-Aug-2013

For transavia.com France, a group of five countries (Portugal, Tunisia, Italy, Morocco and Greece) head the list, but its combined seat capacity to these countries is less than the capacity that its Dutch arm has in Spain alone. North African countries feature more prominently, reflecting historical and cultural links with France. France’s neighbour, Spain, is only sixth on the list of top country destinations for transavia.com France.

transavia.com France international seat capacity by country: 5-Aug-2013 to 11-Aug-2013

Strong market positions on top 10 routes from the Netherlands

The two arms of Transavia also differ in their top international routes. Only Irakleion in Greece features in the top 10 list for both airlines. Amsterdam is the origin for nine out of transavia.com’s top 10 and the Dutch Transavia is number one by seats on seven routes (having a monopoly on three), number two on two and number three on one.

On two of the three routes where it is not number one, its fellow group company KLM is the leading operator. Its most frequent competitor on this list of routes is Vueling.

transavia.com top 10 international routes by seats: 5-Aug-2013 to 11-Aug-2013

transavia.com market position on its top 10 international routes by seats: 5-Aug-2013 to 11-Aug-2013

Route

transavia.com
rank on
city pair 

Competitors

Amsterdam-Barcelona

3

1 KLM, 2, Vueling, 3 transavia.com

Amsterdam-Malaga

1

1 transavia.com, 2 Vueling

Amsterdam-Alicante

1

1 transavia.com, 2 Vueling

Amsterdam-Girona

1

Monopoly

Amsterdam-Nice

2

1 KLM, 2 transavia.com

Amsterdam-Palma de Mallorca

1

1 transavia.com, 2 Vueling

Amsterdam-Ibiza

1

1 transavia.com, 2 Vueling

Rotterdam-Malaga

1

Monopoly

Amsterdam-Irakleion

1

Monopoly

Amsterdam-Antalya

2

1 Pegasus, 2 transavia.com

Competition on routes from Paris is stronger

The competitive landscape for transavia.com France on its top 10 international routes is not so benign. Defining these routes on a city pair basis including all Paris airports, rather than just from its Orly base, the French Transavia is number one on only one of these city pair routes, although it is number two on four and number three on four.

Its fellow group carrier Air France competes on four of the 10 routes, and has more capacity than transavia.com France in each case, but these tend to be routes where transavia.com France is a recent entrant. As its network grows, presumably Air France will reduce and withdraw capacity if its LCC sister company can operate them successfully. Competition from other LCCs is quite high, with easyJet appearing on six of the city pairs, Ryanair on four and Vueling on three.

transavia.com France top 10 international routes by seats: 5-Aug-2013 to 11-Aug-2013

transavia.com France market position on its top 11 international routes* by seats: 5-Aug-2013 to 11-Aug-2013

Route

transavia.com
France
rank on
city pair

Competitors

Paris Orly-Porto

3

1 TAP, 2 Ryanair (BVA), 3 transavia.com France, 4 easyJet (CDG),
5 Aigle Azur, 6 Vueling

Paris Orly-Djerba

2

1 Tunisair (CDG), 2 transavia.com France, 3 Syphax Airlines (CDG),
4 Aigle Azur

Porto-Madeira*

2

1 TAP, 2 transavia.com France

Paris Orly-Irakleion

1

1 transavia.com France, 2 Aegean Airlines, 3 easyJet (to 1-Sep-2013)

Paris Orly-Marrakech

2=

1 Royal Air Maroc, 2= transavia.com France & Ryanair (BVA & XCA),
4 Jetairfly, 5 easyJet (CDG)

Paris Orly-Monastir

2

1 Tunisair, 2 transavia.com France

Paris Orly-Lisbon

6

1 TAP, 2 Air France (CDG), 3 easyJet (CDG), 4 Vueling, 5 Aigle Azur,
6 transavia.com France (started summer 2013)

Paris Orly-Venice Marco Polo

3=

1 Air France (CGD), 2 easyJet (CDG), 3= transavia.com France
(started summer 2013) & Ryanair (BVA-TSF), 5 XL Airways France (CDG)

Paris Orly-Naples

3

1 easyJet, 2 Air France, 3 transavia.com France (started summer 2013)

Paris Orly-Tunis

4

1 Tunisair, 2 Air France (CDG), 3 Syphax (CDG), 4 transavia.com France

Paris Orly-Sevilla

3

1 Vueling, 2 Ryanair, 3 transavia.com France

Growth has been stop-start

The chart below shows data from OAG on quarterly scheduled seat capacity for Transavia since 2003.

It saw little significant overall growth until the 2007 start of transavia.com France, which grew quite rapidly initially, before pausing in 2009 and then resuming growth in 2010. It then levelled off once more, but has seen a resumption of strong growth in the first two quarters of 2013. The growth of transavia.com (previously branded as Transavia Airlines) was more or less flat until early 2011, since when its seat capacity has grown by more than 50%.

It is worth noting that these OAG data do not reflect the full capacity of Transavia as charter flights are not included. Moreover, there can be discrepancies between capacity entered into the schedules, and gathered by OAG, and capacity actually flown. Nevertheless, these data reveal a less than whole-hearted approach to growing the LCC business of Air France-KLM.

Transavia rolling four quarter scheduled seat capacity split between transavia.com* and transavia.com France: 3Q2003 to 4Q2013

Fleet growth has been cautious compared with other LCCs

At the end of 2Q2013, the total Transavia fleet consisted of 43 aircraft, 32 for transavia.com and 11 for transavia.com France. The Dutch fleet comprised 22 737-800s and 10 737-700s; while the French fleet was 11 737-800s.

The 43 aircraft accounted for 19% of the combined Air France-KLM Group’s medium-haul fleet at the end of Jun-2013. This total represents an increase of 16 aircraft from the 27 aircraft in 1Q2007, before the launch of the French operation. However, most of the increase took place between 1Q2007 and 2Q2010, by which time the fleet had already grown by 13 to reach 40 aircraft. Over the next three years, transavia.com added only one aircraft and transavia.com France just two.

Air France-KLM Group medium-haul fleet aircraft numbers: 1Q2007 to 2Q2013

From 1Q2007 to 2Q2013, the combined medium-haul fleet of Air France and KLM (excluding Transavia) fell by 11 aircraft from 196 to 185, while Transavia added 16. Over this period, Ryanair added more than 160 aircraft, easyJet added around 80 aircraft, Norwegian around 50 and Vueling more than 30. Again, it seems that Air France-KLM’s LCC ambitions have been somewhat cautious.

Superior load factor

Transavia’s load factors are significantly higher than those of Air France-KLM’s on its European network, presumably reflecting its lower fares and relatively slow capacity growth (until recently). In 2012, Transavia’s passenger load factor of 87.1% (up 0.6 ppts from 2011) compares very favourably with the 74.4% of Air France-KLM in Europe. Moreover, it has achieved further improvements in recent quarters, in spite of faster capacity growth, reaching 91.5% in 2Q2013 (versus 78.4% for Air France-KLM in Europe).

Passenger load factor (%) for Transavia and Air France-KLM’s Europe routes (including domestic): 3Q2011 to 2Q2013

Resumption of growth in 2013

Transavia’s growth has picked up again recently, with ASKs up 15% year-on-year in 1H2013. Since the end of 2012, its Netherlands fleet has added one aircraft (from 31 to 32) and its Orly-based fleet has added three (from eight to 11).

Transavia total ASK (million): 3Q2011 to 2Q2013

In 2012, Transavia’s ASKs amounted to 23% of the combined capacity of Transavia and Air France-KLM’s Europe network and this rose to 24.3% for the 12 month period ended Jun-2013. Its capacity pattern is more seasonal, reflecting its leisure focus, and its share of this combined medium-haul capacity was almost 30% in 3Q2012.

Transavia ASKs as a percentage of combined ASKs for Transavia and Air France-KLM’s Europe routes (including domestic): 3Q2011 to 2Q2013

Transavia revenues up 14% in 1H2013

This capacity growth has also led to revenue growth for Transavia, which saw total passenger revenues grow by 14% in 1H2013. In 2012, its total passenger revenues were 12% of the combined passenger revenues of Transavia and Air France-KLM in Europe and North Africa. This share was 17% in the seasonally important 3Q2012. Its share of the group’s passenger revenues on medium-haul are lower than its ASK shares, reflecting its LCC model and lower pricing.

Transavia passenger revenues as a percentage of combined passenger revenues for Transavia and Air France-KLM’s medium-haul routes*: 3Q2011 to 2Q2013

Transavia losses widen in 1H2013; breakeven target for FY2013

Growth in capacity and revenues has not yet led to a significant trend of improved profits for Transavia. Although its 2012 operating loss of EUR1 million was a slight improvement against 2011’s loss of EUR5 million, its losses widened in each of the first two quarters of 2013. In 1Q2013, its operating loss grew from EUR45 million to EUR51 million and in 2Q2013 from EUR1 million to EUR3 million. It seems that the increased activity is currently adding more cost than revenues to Transavia.

Profitability is very seasonal, with a healthy profit in the summer quarter 3Q offset by heavy losses in the winter quarters 1Q and 4Q. The early summer 2Q is just below breakeven and this will need to improve, and winter losses cut, if full year profits are to be achieved. It aims to achieve breakeven in 2013.

Transavia operating result (EUR million): 3Q2011 to 2Q2013

Transavia’s capacity impact is more positive than its revenue impact on the Air France-KLM Group

Of course, Transavia does not exist merely for its own sake: it is intended to improve the situation for the Air France-KLM Group as a whole in its short/medium-haul operations.

While it is early to judge the impact on the group of Transavia’s return to more aggressive growth in 2013, the evidence so far suggests that it has led to an increase in the group’s capacity (ASK) on short/medium-haul. In the first half of 2013, the combined capacity of Air France-KLM’s Europe network and Transavia grew at a net rate of around 2% year-on-year, with Transavia adding more capacity than Air France-KLM cut.

The impact on revenues is less positive. In 1Q2013, Air France-KLM’s short/medium-haul network lost more revenue than Transavia gained, so that combined passenger revenues from the region were down by almost 1%. In 2Q2013, Transavia’s growth outweighed Air France-KLM’s revenue decline on short/medium-haul. The net effect in 2Q2013 was that combined revenues were up by just over 1%, but this was less than the 2% net capacity gain.

Transavia and Air France-KLM’s short/medium-haul network* year-on-year change in capacity (ASK) and passenger revenue as % of combined group total: 4Q2012 to 2Q2013

Loss-making Air France-KLM capacity converted to breakeven Transavia capacity

Air France-KLM does not break out the profitability of its Passenger segment by region. At the time of its 2Q2013 results, it said that its short/medium-haul network remains in loss, although results are improving. Within the group, KLM’s profitability in the region is better than that of Air France. So, how might Transavia be affecting the group’s short/medium-haul profits?

While Transavia is not yet profitable, its losses are almost certainly less than those of Air France-KLM on short/medium-haul. The effect of Transavia’s current growth appears to be to replace loss-making Air France-KLM capacity with a greater amount of lower-priced Transavia capacity, at a lesser loss or even at breakeven over the full year.

Even if Transavia remains only a breakeven business, replacing loss-making capacity with breakeven capacity should help to reduce the group’s losses. This process should logically lead to medium-haul aircraft currently operated by Air France, in particular, being transferred to Transavia.

A difficulty is that Air France operates Airbus narrowbodies, while Transavia is a Boeing operator. 66 of Air France’s A320 family aircraft are operating leased and so could progressively be handed back to lessors, while new Boeings could be ordered for Transavia.

Conversely, the group could replace Transavia France’s 11 leased Boeings with Airbus aircraft from the Air France fleet. Transavia operates Boeings in the Netherlands and, ideally, it would serve the interests of efficiency to keep a single aircraft family across both of its arms, but a dual fleet could be justified if there was sufficient scale in both. Either way, the group should look to grow Transavia’s fleet at the expense of the Air France-KLM medium-haul fleet.

Transavia’s CASK is consistent with its LCC tag

The chart below shows unit cost (cost per available seat kilometre, CASK) against average sector length for a number of legacy and LCC airlines. We include an estimate of where Air France-KLM’s short/medium-haul network lies and our calculation of where Transavia lies on the chart. Our Transavia CASK calculation is based on reported ASK and costs derived from the difference between revenues and operating result, while our average sector length calculation is derived from OAG and Innovata data.

Based on our analysis, Transavia sits firmly in the LCC category from a CASK standpoint. Its average sector length is longer than those of the majority of Europe’s LCCs, but, on a stage length adjusted basis, its CASK is on a par with those of Norwegian, Vueling and easyJet.

Unit costs (cost per available seat kilometre, EUR cent) and average sector length for selected European legacy and low-cost carriers: 2012*

Our analysis also suggests that Transavia is higher-cost than the group of three ‘ultra-LCCs’ Ryanair, Wizz Air and Pegasus, but lower-cost than Lufthansa’s Germanwings. Transavia’s recent growth has added shorter routes and reduced its average sector length, particularly for the French operation, and a continuation of this trend will bring it into greater competition with Europe’s bigger, more profitable LCCs.

What is also clear is that Transavia is very substantially more cost efficient than Air France-KLM’s short/medium-haul operation. Transavia’s current lack of profitability, in spite of its relatively efficient cost structure, suggests that it may be pricing aggressively in support of newly operated routes and/or that cost efficiency has scope to improve further as the network grows. This will be necessary if it is to have a chance of reversing the strong inroads that other LCCs have made into the group’s markets.

Transavia has not followed its own example

The bigger part of Transavia remains its well-established Dutch operator, which accounts for 41% of KLM’s total medium-haul fleet and enjoys some strong market positions. KLM itself focuses on hub feed and business routes, while transavia.com focuses on point-to-point leisure markets. The significance of Transavia in the Netherlands helps to explain KLM’s superior short/medium-haul profitability compared with Air France.

In spite of this example and the launch of transavia.com France six years ago, Transavia still only accounts for 7% of Air France’s total medium-haul fleet and the competitive environment it faces in France is much fiercer. According to Innovata data for the week of 5-Aug-2013, LCCs (including Transavia) have penetrated both of Transavia’s home countries to a similar extent, accounting for 39% of seats between the Netherlands and Europe and 40% between France and Europe, including domestic seats in both cases.

However, while Transavia is the number two airline in the Netherlands, with 16% of seats, it is only number seven in France, with 2.5%. High airport charges and the slot coordination process at Amsterdam may have helped to keep foreign LCCs at bay, but similar factors exist at the Paris airports too.

Top 15 airlines by seats in Europe to France and Europe to the Netherlands: 5-Aug-2013 to 11-Aug-2013

Rank

 

Share of
total seats

Rank

 

Share of
total seats

 

France

 

 

Netherlands

 

1

Air France

30%

1

KLM

39%

2

easyJet

15%

2

 transavia.com

16%

3

Ryanair

12%

3

easyJet

8%

4

Vueling Airlines

5%

4

Ryanair

7%

5

Lufthansa

3%

5

British Airways

3%

6

British Airways

3%

6

Air France

3%

7

transavia.com France*

3%

7

Vueling Airlines

3%

8

Air Corsica

2%

8

Lufthansa

2%

9

Norwegian Air Shuttle

2%

9

Wizz Air

2%

10

Volotea

2%

10

Aer Lingus

2%

11

Turkish Airlines

1%

11

Alitalia

2%

12

Flybe

1%

12

Turkish Airlines

1%

13

Air Europa

1%

13

Pegasus Airlines

1%

14

KLM

1%

14

Flybe

1%

15

Alitalia

1%

15

SWISS

1%

 

 Others

18% 

 

Others 

9% 

More to the point, Transavia has long provided competition to other LCCs in the Dutch market, while Air France-KLM has effectively sat and watched foreign LCCs take a huge bite out of the French market. Of course, it has faced significant hurdles, not the least of which has been labour, but it now makes sense to try to transfer as much as possible of Air France’s point-to-point medium-haul network to Transavia. It may be difficult to recover the lost years.


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