Spotlight: Air France - KLM

What does the future hold for Air France - KLM (EPA:AF)? Stock price was sky high in 2007 (€38.30), but when the crisis hit Air France it all came crashing down with no real sign of recovery to date as the stock is currently trading at €8.42. Why does the stock not recover? First of all there is the high competition in the passenger aviation branch, because pricefighters are gaining more and more ground. Where Ryanair and EasyJet are able to have lower wage costs, Air France is not able to reduce these costs. Moreover, pilots of Air France are on strike because they demand even higher wages. In the end Air France will have to give in to their demands, simply because pilots can easily switch employers as there are a lot of other companies who are willing to take these pilots in. The recent strike has already cost Air France €500 million, putting pressure on Air France to come to a quick solution. If we then look at how Air France performed over the last years, we note that they last reported a profit in 2010. Hence, Air France is in desperate need of the money and all the employee malaise is not helping them reporting a profit for 2014. Air France is also losing market share, because it simply can't compete with the prices of these pricefighters, meaning that Air France does not only have a problem on its cost side, but also on his revenue side. So what can they do to turn the tide? Air France has played with the thought of taking over companies to regain market share. The big drawback is the huge initial costs that comes with such a plan. Besides, this does not eliminate the threat of the pricefighters. Costs of Air France may however drop in the future due to the plunging oil price, but since other companies also gain from this trend, it does not give Air France a competitive advantage. In conclusion, we strongly do not recommend the Air France stock, because this company simply can't keep up with the changing business environment in the aviation industry. Instead, look for competitors that are able to comply with these changes.