Air France and KLM represent years of French and Dutch airline tradition, but Air France-KLM represents a first: a holding company made up of two national airlines. Together, Air France-KLM is the second-largest airline in Europe after Deutsche Lufthansa and one of the largest in the world. Through its operating units, the company serves more than 250 destinations in about 125 countries with a fleet of some 590 aircraft. Air France and KLM operate independently from hubs in Paris and Amsterdam, but have coordinated their operations, both as sister companies and as members of the SkyTeam alliance, which also includes Alitalia, Delta Air Lines, and Korean Air Lines.
Anticipating further uncertainty in the world economy, Air France-KLM announced a three-year plan in January 2012 to strengthen profitability that comprises decreased capacity growth, debt reduction to €4.5 billion ($5.9 billion), and cost cutting measures that include a freeze on pay increases at Air France and wage moderation at KLM, as well as the continuation of a hiring freeze begun in September 2011. To boost demand for seats, the company will decrease its fleet by cutting more than €1 billion ($1.3 billion) from its budget for expansion.
With the goal of increasing productivity by 20%, Air France is consolidating its European operations into three units. One of them, tasked with serving smaller cities, will include Brit Air, Regional, and Airlinair. The second will be focused on leisure operations and will include discount line Transavia, which annually carries more than 5 million passengers on low-cost, medium-haul flights to several vacation spots. As a third division Air France's short-haul brand will add no-frills service.
Though the company is prepared for a challenging economic climate, year-over-year revenue grew 13% in fiscal 2011. The company's cargo segment, 12% of revenue, was profitable that year while the more significant passenger segment, 77% of revenue, broke even. Maintenance, representing 5% of revenue, was reported to have contributed to operating income.
The company's fuel bill increased 21% between 2010 and 2011, a setback that was further exacerbated by the appreciation of the dollar relative to the euro. However the company has been hopeful that its hedging strategy will have a positive effect on its fuel expenses. Fuel hedging is when airlines lock in a pre-determined price for future jet fuel purchases.
In addition to rising fuel prices, the company has been challenged by competition from low-cost carriers, particularly from airlines based in the Middle East. To meet those challenges, Air France-KLM has been working to expand its SkyTeam alliance to Brazil and Asia, especially India. It has also been working to create joint ventures, similar to one already in place with Delta Air Lines and Alitalia, with Chinese airlines.
In addition to its SkyTeam alliance, Air France-KLM operates a trans-Atlantic joint venture with Delta and Alitalia that offers more than 260 flights on about 145 aircraft. The company plans to use this partnership to develop more service for Asia, Latin America, and Africa. Another area of focus for the joint venture is Florida, which since 2011 has been served by more than a dozen new flights.
And supplementing its low-cost Transavia operations, Air France-KLM formed a partnership with British economy carrier Flybe to provide about 45 flights between France and the UK.
The company's Paris and Amsterdam hubs are connected by what Air France-KLM calls the Paris-Amsterdam Hubway, which is served by more than 10 daily flights between the two nodes. Each of the two hubs has its own geographical emphasis and they complement each other to create a broader service area. For instance, KLM is focused more on East Africa while Air France provides more service for West Africa. A third hub, Lyon-Saint Exupéry, connects regional centers in France with the rest of Europe.
The French government owns about 16% of the combined company; employees own about 10%. Air France-KLM's board includes six directors representing employees.