Wednesday, September 08, 2010

Air France Launches Its Low Cost Subdivision For Local Flights

Air France is experiencing difficulties to keep a leading position in the local flight market in France. Due to its high pricing policy, low cost companies have thrive on this business segment which was hence neglegted by Air France, as it was not representing a profitable activity for them.

Nevertheless, the overal airlines competition has become tougher, and with high gas prices, it is difficult to remain profitable and earn money in the industry. As we have seen, United and Continental have merged this month. And this trend has gone on for quite a while.

Hence, Air France decided to launch its low cost company, dedicated to local travels.

Now some experts are questioning this decision, doubting about how Air France could deal with such a heavy administration to cut cost and hence have a profitable low cost business.

Nevertheless, launching such a service can’t hurt: Local travels are a non profitable business for Air France, and switching for low cost could just help them to improve their market shares and to adapt to the competition landscape.

If I were Air France, I’ll try to monitor what happen with other brands which decided to launch a low cost branch. I have always found interesting to go further than your basic market to find ideas in other industries which you could adapt to your own.

Thus, some great examples of premium brands that launched their low cost subdivision :

  • Carrefour owns DIA stores, and they have been able to leverage the purchasing power of the group to get great pricing.

  • Esso which launched Esso Express.

  • Renault created Dacia

  • Levi’s created Levi Strauss Signature for hypermarket distribution channel.

  • Dannon with its pack of 6 yogourhts for 1 € (which actually was a failure).

  • Accor hotels with Formule 1 (which is the leader on the low cost chain segment)

It is difficult for large companies like Air France to get into the low cost business. Most of the time low cost companies have started as start ups, which gave them the ability to innovate. Bigger firms tend to be more prudent than younger ones. As strange as it might seem, large corporation, which owns great innovation budget and large R&D departments are less likely to leverage it into actual new concepts.

Also, as a company developed a strong business model, acquired a certain size, and have to meet expectations of shareholders, it is difficult for it to adapt to brutal shift in market trends. I have heard on the radio this very great phrase: “It is not stagecoach firms that invented the car”. But I believe that low cost has changed so much the airlines market that it is mandatory for Air France to find a viable way to take advantage out of it.

It is funny because this post comes after having discussed about how Esso went low cost. As I have said for Esso, as you have developped a wide range of service and customer relationship management tool, you may know which ones you may take away, and which ones are the most important.

And you, what do you think about it?