Air France CEO Anne Rigail on recovery and how aviation can grow back sustainably

Transcript

Jonathan Wober:

Good morning, good afternoon, good evening, depending on where you're tuning in from around the world. And a very warm welcome to this session of CAPA Live, where I'm delighted to welcome the Chief Executive Officer of Air France Anne Rigail. Anne has been with Air France and the predecessor company, Air Inter for 30 years now. Anne, so congratulations on such a milestone. I just wanted to start by asking you what has changed most in the aviation industry in your 30 years?

Anne Rigail:

Well, a lot. 30 years is a lot. Thank you to remind me, it was my birthday at the beginning of this week. What I remember is-

Jonathan Wober:

Congratulations on that too.

Anne Rigail:

Thank you. What I remember is, well the transport hub, the fact that we began the hub of transport in 1996, and of course it changed all our business model and way of operating with all the luggage issues and the connecting issues with the hub. Also the growth of the high-speed train in France. That has taken more and more market share in the domestic travel. Of course, the democratization of the air travel industry, with local carriers being more and more present in Europe. And especially with the 2008 crisis, we saw the growth of the local carrier inside Europe. And because I spend a lot of time in operations, I strongly remember 9/11 crisis and all the changes in the safety and in the operations after this crisis, of course.

Jonathan Wober:

Okay. We'll certainly touch on at least a couple of those issues again. I think the domestic train and the role of the hub. But we're going to just divide this discussion into two broad sections. One is general update on where Air France is with the recovery and the strategy, and then we'll focus a bit more on sustainability issues. And we will try to take questions from the audience through the online chat system, if people have questions towards the end. So, first of all, just to give us an update on where things are now, what's your current level of capacity at Air France and how do you see this progressing over the course of the year?

Anne Rigail:

Yeah, so at the moment we are close to 40% of our usual activity, capacity. Medium haul and domestic were a lot impacted by the recent travel restriction that we had in Europe since the end of January. So we are 30% compared to 2019. Long haul is a bit more dynamic, thanks to the cargo demand that is really present at the time. So if we look at Air France, KLM group, the capacity that we expect for the first quarter is around 40% in terms of ASK. We adapt, in fact, the network on a weekly basis with a lot of agility, we make sure that every flight covers it's variable costs. And we noticed that the bookings are more and more short term oriented. So it's really an ongoing process to adapt the network. Well, maybe you were asking... Yes.

Jonathan Wober:

Just to come back on that first of all, I did also ask about development through the year. But before we get to the rest of the year. I think if we look at the difference between Air France and KLM, I think Air France has had slightly less capacity than KLM, relative to pre-crisis levels. But at the same time, Air France and the group has had slightly more capacity compared with many of the major competitors. So can you just explain why the group has more than competitors and why Air France has less than KLM?

Anne Rigail:

Yes. It's a never ending question. Well, I think we have more as a group of capacity because of our very balanced network. We address all kinds of offer, leisure, business. But also we have a network that is present on all geographical areas. If you look at Air France, we have a strong network towards Caribbean and Indian ocean. We have a strong network towards Africa. And those two zones were the most resilient during the crisis. And I think it's about the same for KLM.

Then regarding the difference of capacity between Air France and KLM. First, if you look at December and January, I think that if you look at Euro control statistics, Air France was just below Turkish Airlines in terms of capacity. So we were able to maintain a lot of capacity during December and January. A bit less now due to the travel bans and restrictions that were decided end of January. What we can say is that the Government subsidies are very different between France, and Holland. In Holland, KLM will receive some subsidies, given the decrease of the turnover. In France, we will have some subsidies when we put our workforce in partial activity. So it means that we have to adjust the profitability of our flights, given the current Government measures that are different in the two countries.

Jonathan Wober:

Okay. We will also touch on the subsidy issue a bit later on as well. So development of capacity over the year, I know there's a lot of uncertainties, but what's your range of possibilities in terms of percentage of 2019 levels that you might get to in the second and third and fourth quarters?

Anne Rigail:

Oh, well of course we expect some recovery in Q2 and Q3 thanks to the vaccination deployment that is taking place on the large scale. But we don't give any precise guidance for the rest of the year, as it remains very difficult to forecast the lift of the existing travel restrictions, even inside Europe by the way. So we still expect 2019 activity to be back in 2024. But we don't give guidance for the full year.

We're confident that the travel restriction will be lifted. And as it will be lifted, our passenger will come back. We have experienced it at the end of each lockdown. In the summer, after the lockdown in November in France for Christmas period, we saw that the appetite for travel did not change during the crisis. We saw that visit friends and relative demand, VFR demand is still very present, on the Caribbean and Indian Ocean, inside Europe. So we saw the growth with very late bookings, but we had a very good Christmas period, for example. So tourism can also pick up, mainly inside Europe, than long haul at the first time. But we are quite confident on this leisure oriented business. Regarding business demand, it's more complicated to predict. We don't anticipate it to come back before mid or even end of 2021 due to budget cuts and the new working habits.

Jonathan Wober:

Right. And for many legacy airlines, that's the prime source of profitability, isn't it? The business traveler. So that's a big challenge. So, you said you're not giving any guidance about the rest of the year and that's understandable given the uncertainties. But what are the factors that may drive the recovery more quickly, or conversely may slow it down? And I guess, some people are talking about maybe in Q3, something like 70% of pre COVID levels of capacity-

PART 1 OF 4 ENDS [00:09:04]

Jonathan Wober:

... see something like 70% of pre-COVID levels of capacity might be a good scenario? I mean, would that be a very good outcome, or do you think it could go higher? I mean, have you got some rough idea of that?

Anne Rigail:

I would say 70% capacity for Q3 would be a very good thing. A very good thing, because we've seen from the beginning of the crisis that the focus that we've made have been beaten up by the reality in that the COVID variants were very bad surprise and that we had to delay every time our forecast for the restart. So the good thing, to come back to your question, is that the demand is not impacted by the fear of being contaminated in an aircraft. We've all launched, and Air France in particular, a very strict sanitary measures, and we monitor the perception of the customer. That is very good regarding the sanitary measures. We also have good total commercial flexibility so that our customers don't fear to book and not to be reimbursed. They can book with a full assurance.

What can slow down the recovery is, of course, the various variants, which led the governments, especially in Europe, to put new restriction in place like multiple testings, but also a lot of quarantines, travel bans, and border closure. What can slow down the recovery is also the lack of harmonization inside Europe especially, and we strongly call for harmonized policy for the restart in the spring and the summer. And what can accelerate the recovery is, of course, the vaccination wisdom and strategy. We had I think 500,000 people vaccinated this week, just the weekend in France, Saturday and Sunday. It's accelerating, and I think it is very important because it will give confidence to the customers and also to the governments to reopens our borders. And also what's very important-

Jonathan Wober:

Did-

Anne Rigail:

Sorry, yes.

Jonathan Wober:

No, no, continue please. Continue.

Anne Rigail:

No, and the other things we are really pushing for is some sanitary passes. Because at the restart, if we have to check at the boarding each test, also to check on from countries, probably that the passenger has been vaccinated, it will be quite difficult in terms of operations.

Jonathan Wober:

Okay. I mean, there's obviously a lot of challenges there and in particular, the coordination of all of this between different countries. But if we look very roughly, we've got testing and we've got vaccination. Which do you think is actually more important? It seems to me, the vaccination are so variable in different countries that entirely relying on vaccination may take a very long time. But if we have a comprehensive and affordable and reliable testing system in place, then that should allow more travelers to get on a plane and go somewhere.

Anne Rigail:

Well, that was the bet that we were doing at the beginning of the crisis. But in Europe, I think testing is available quite everywhere. You now have PCR tests that are available during the day, and we see that it's not enough to bring confidence for the government to lift their travel restrictions. So I think that testing will still be present, but only the vaccination rate of the population will allow us to reopen the borders.

Jonathan Wober:

Okay. Just moving on then. And in a sense, my next question sort of in a way combines strategy with sustainability in some ways, and I'm wanting to ask you about the role of the hub as a concept, really, with the impact of the COVID crisis and at the same time the impact of sustainability requirements could be working in different directions on the role of the hub. I wonder if you could comment on that?

Anne Rigail:

Well, I must say that I think that the health system was quite resilient during this crisis. The flow is very narrow and the hub helps us to focus on one flight and to be able to have a positive economic contribution of the flight thanks to the hub. So I think, and the level of our activity in Air France and in KLM is showing this, that the hub model has proved to be quite resilient during the crisis, since many routes have been caught by other operators.

Jonathan Wober:

Okay. So you think that the hub ... I mean the hub system, people haven't been sort of worried about getting on two flights rather than one, and they haven't been worried about ... I suppose the airports haven't been crowded, so that's not an issue. But going forward, are people going to be concerned about going through big, crowded airports?

Anne Rigail:

That is an issue, and that's why we've put a lot of pressure on the sanitary measures and also in Charles de Gaulle, in Orly Airport, in the airports it's very important not to have still crowded at the boarding and the checking. So it was our main focus, and you're right. I think the vaccination will change totally the way our customer perceive it. What I forgot to say is that what was good in the crisis is that we were able to maintain ... I think it's 80% of our routes in our hub. So it's very good for our customers because we are still there for them. The cargo demand allowed us to maintain quite all our networks open.

And so for the restart, we are quite ready with this 80% network that is still operating since the beginning of the crisis. Of course, it doesn't mean that we don't have to work on our cost structures compared to low-cost airline, and the profound transformation that we've launched is totally essential for the restart, but the hub system is really proving that it has a future. And I must say that Air France hub is a bit different since Paris is also ... was leading tourist destination, and you know that we have 40% of our customers that are point to point flow from Paris. So it's a hub and it's also a local airport.

Jonathan Wober:

Right. And I guess you also have two Paris airports. One is more of a hub and one is more of a point to point.

Anne Rigail:

Exactly.

Jonathan Wober:

Do you still see a role for both those airports in the future?

Anne Rigail:

Yes, definitely. It's true. That Orly is quite dedicated to point to point. And Charles de Gaulle is a total hub. 50% of the flows are connecting. We still see a role of Orly, even if we are totally restructuring our domestic network due to economic situation.

Jonathan Wober:

Right. Okay. So just brings me on actually to my next question, and you mentioned the restructuring of the network, but also the issue that you've sort of touched on a bit, because you've talked about low cost carriers and you've talked about the need to get lower costs, but you have ... within the group, you have a low cost carrier, Transavia, but you also have a regional airline, which is Hop in the Air France group, as well as the main line Air France. So I suppose the kind of big, multi-part question, but how do you allocate capacity between the different brands within the Air France groupAir France, Hop, and Transavia? How will those vary going forward? And is that being changed by COVID? And is it changed by sustainability requirements?

Anne Rigail:

Well, before the crisis, and since Ben Smith's arrival in the group, we had worked on the position in all of our different brands. So Air France is reaffirmed into its flagship positioning. Then [June 00:17:44] brand was ended because it was too confusing. And then Hop is no longer a brand for regional carriers, but its original subsidy operating for Air France brand and in Europe and in domestic. And Transavia has been reaffirmed as a local subsidy-

PART 2 OF 4 ENDS [00:18:04]

Anne Rigail:

... has been reaffirmed as a low-cost subsidy and thanks to a good agreement with our pilots, we are able now to broach ones that we have with no limit in the growth. So I was talking to you about the restructuring of the French domestic market. It was totally necessary due to the big losses that we had even before the crisis, and of course with the crisis, it's all the more urgent to restructure this network. So the restructuration relies on the different pillars. We are stopping all the routes from Orly when there is a train option of less than two hours or 60 minutes of travel. So it means that we have cut Orly to Nantes, to Lyon, to Bordeaux, since the beginning of the crisis, and it was a strong commitment towards the government when we received the help from the government.

We are developing also intermodality with the railway company SNCF. We have stopped all loss-making routes that were departing from Orly, so point to point, domestic French routes. We have focused our regional carrier HOP on the two hubs, [inaudible 00:19:19] for Europe and the hub of Lyon for many domestic routes. And we developed now Transavia on some French domestic routes, because Transavia is the carrier of the group that is able to compete with the local carriers whose presence has been more and more important in France since the two paths used.

Jonathan Wober:

Yes. Now that the pilots have agreed to the further development of Transavia, particularly within the domestic market, is there some logic to all of that traffic being flown by Transavia, with Air France focusing on long-haul? I mean, why can't Transavia feed the hub?

Anne Rigail:

Well, it's a different model. As you know, low-cost efficiency is also linked to the optimization of the aircraft rotations, which is a lot more difficult to achieve when you have to meet the hub timings. So we're saying that Transavia is really dedicated on European network. So Transavia is growing on domestic for restructuring purposes, but also towards Europe on leisure destination. It's 25 aircraft that we are adding to the 40 current aircraft in the two to three years to come, and we really think that Transavia has a lot to do in Orly and it's not adapted to fit the hub. So for the feeding of the hub, we have our Air France medium-haul aircraft and HOP carrier.

Jonathan Wober:

Okay. Gosh, the clock is ticking now. We need to focus more on sustainability, which is the theme of our CAPALive today. How do you think that the COVID crisis is going to impact on aviation's commitments on de-carbonization in particular? There's hardly any flying. Carbon emissions have gone very much down as a result, and there's a lot of pressure now to maintain that reduction.

Anne Rigail:

Yes, it's a bit counter-intuitive, but the less we travel, the more the pressure is present. But it's a choice. I think that since 2019, really sustainability and the environmental impact of the transport industry has been a growing concern for our customers, for our staff, but also for the society as a whole in Europe. It began in Sweden, as you know, but it was very, very present in the French discussions even before COVID.

Of course, it has become all the more acute in the health crisis because this crisis questions us about our health, environment and ecological emergency. So it just increased the awareness and it will probably lead our customers to change the way they travel. We hear that they want to have a more fair use of air transport or more recent use of air transport. This is very true for business travelers. It was true before COVID. This is becoming more and more true also for leisure. We think that they are aiming to have maybe longer trips instead of several weekends during the year, and we think that there will be more and more combined travels between professional motives and leisure motives. And it's true that with video conferencing, you can work from quite every place in the world. So we have less and less division between our personal life and our professional life.

Jonathan Wober:

Okay. Recently, the European Aviation Industry, through various trade associations and under the umbrella of Destination 2050, published a target to reach net zero by 2050 for European aviation. I mean, does that align with your own targets?

Anne Rigail:

Oh yes. Before the crisis, we had committed to a 50% reduction of our net emissions per passenger kilometer in 2030 versus 2005. Now we are totally committed to work with all stakeholders and the policy-makers in Europe to achieve the climate objective with net zero CO2 emissions by 2050 for all flights departing and arriving in Europe. So we were working, and Destination 2050 is a good reference to work on this. What is true is that we have to be very transparent on our environmental impact, but we are not making the aircraft. We are not producing the fuel. We will not invent the green proportion. So our duty is really to ensure our customers that we are doing our utmost with all the stakeholders, the engine manufacturers, Airbus, Boeing, the government, so that we can propose them the most sustainable travel.

Jonathan Wober:

Okay. And initially, of course, you can replace your fleet with more efficient aircraft. So what plans do you have at the moment for your fleet?

Anne Rigail:

Well, [inaudible 00:25:09], when we look at the different way to lower our CO2 impact, there is clearly the fleet renewal for one of the efforts. Then there is sustainable fuel, and then there is all the other action plans. The plan we have, we protected our investment on the fleet. You know that with the crisis, we had to decrease a lot, by 1 billion per year of our investment, but we really focused everything on the replacement or renewal of the fleet. So we protected the former order of 38 Airbus 350, and also 60 Airbus 220 that will replace our medium-haul and long-haul fleet progressively. We are currently receiving our 350s. The first ever 220 will come in September 2021. And of course they are decreasing the CO2 emissions by 20-25% compared to the aircraft they replace.

Jonathan Wober:

Okay. And given the great challenges of achieving profitability in the crisis, and Air France-KLM as a group was less profitable than some of its competitors, even before the crisis, how do you pay for all this investment?

Anne Rigail:

Well, that is the big issue, and that's why we have decreased everything else. That's why we are decreasing also our variable costs. I think we managed to decrease them by 70%. So it was not a given at the beginning of the crisis. And we have launched a total transformation plan. We had built this transformation plan before the COVID to fix our margin issues.

PART 3 OF 4 ENDS [00:27:04]

Anne Rigail:

... the COVID to fix our margin issues and to come to a 7% [inaudible 00:27:06] margin in 2023 or 2024. We have accelerated and added a lot of new initiatives after this on our transformation plan, in order to be able to face those investments. Of course, we also have a strong support from the government during the crisis. You know that we had a 7 billion loan that was allowed in the spring, and that helped us to go through the crisis, of course,

Jonathan Wober:

And there were some conditions attached to that, and some of them touched on sustainability.

Anne Rigail:

Yes, there were two conditions. First, the competitivity. So these strong transformation plans, to give you an example, we currently have departure plans for about 16% of our workforce, and it's ongoing. And then the sustainability, so we reaffirmed our commitment to decrease by 50% our CO2 emissions by 2030, and we added a new one, that was to decrease by half in absolute value our emissions on the domestic networks. So with the arrival of the 220, that we will focus first on the domestic network with the stop of some loss-making routes, with the intermodality and the fact that the train will feed our hub, for example. And we are working on the customer experience when they buy a ticket with a connection from train to aircraft, but also the physical experience in the airport, from the station to the airports, so that for when we can, it will be the new travel. You can use the most sustainable way of traveling that we can find, and we know that the train to fit our network is very important.

Jonathan Wober:

Given that short-haul flights don't contribute very much carbon emissions compared with long-haul, do you worry that the pressure will increase to reduce long-haul flying?

Anne Rigail:

Yes, and we know in the different sustainable paths to achieve the net zero emissions, that the technology will be key because we know that the [Flint 00:29:36] renewal with the current aircraft can address part of the decrease. We know that sustainable fuel will be totally essential to achieve these goals, but we rely also on the new generation of aircraft with new propulsion modes. We know that electric aircraft could address the short range and that we rely also on hydrogen. Airbus has made some commitments to produce an aircraft fueled by hydrogen by 2035.

The relaunch plan of the French and EU government is also investing in those green aircraft. And it is a challenge, because as you know, the hydrogen project is not addressing the long-haul launch, only travel till 3,500 kilometers. So of course the long-haul will be the last limit to achieve, and that's why sustainable fuel is not only a transition action plan, but also when we look at 2050 goal, we will need the sustainable fuel to be produced at the best level. We know that the current aircraft can be used with 100% of sustainable fuel, so I think that we have to put all our investment and focus also on sustainable fuel.

Jonathan Wober:

Right. Which obviously needs support from policy-makers. I'm going to just quickly take some questions that we've got through from our audience, for which many thanks. We don't have much time, so maybe make the answers brief, please. So, first question here is, how is cargo represented in the total of your long-haul and regional revenue operations?

Anne Rigail:

Well, usually cargo was 10% of our total revenue, but what we see in the crisis is that it's up to 50% now.

Jonathan Wober:

Okay, and I guess hopefully it will go back, because it means the passengers coming back again. The second questionwhat will the future of EU regional services be for Air France? Will you experience a new position after the crisis? I mean, you've touched on that a little bit already.

Anne Rigail:

Well, yes, but it's not a new strategy. We are growing Transavia on the leisure destination from all the airports, so Transavia will be more and more present from France to other Europe for leisure markets.

Jonathan Wober:

Okay. And then the next question here is, will Air France, as a long-time Airbus partner, send a letter of intent to commit to its zero concepts?

Anne Rigail:

Well, I don't know what would be the content of this letter, but of course, I think we can't face the big issues. This sustainable past is a total challenge for airlines since they have to be competitive enough to pay for investments in the renewal of the seat and in the south, since you know that the stock price is very high, and we can't do this alone. We have to do this in partnership with the aircraft manufacturer and the engine manufacturer. So I think it's the whole value chain that has to face this new challenge. So yes, we are totally committed with Airbus, and if Boeing is also facing this challenge, we will be delighted to commit also.

Jonathan Wober:

Okay. Anne, thank you so much. We have run out of time. I did want to ask you what were the new opportunities presented by the crisis, but unless you can answer that question in one word, we don't have any time.

Anne Rigail:

Well, I think that the lesson of the crisis is that sustainability and competitiveness are really linked together. We need to be competitive to be sustainable, and if we're not sustainable, we won't have any customers any more and no aircraft. So both are totally linked. So more than one word, sorry.

Jonathan Wober:

Okay. No, that's great. Thank you so much for your time. Anne Rigail, chief executive of Air France, many thanks for joining us and thanks to our audience too.

Anne Rigail:

Thank you.

PART 4 OF 4 ENDS [00:34:40]

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