Air France is concerned that new generation aircraft like the Airbus A350-1000 will undermine the competitiveness of its de facto in-house low-cost, long-haul airline: a sub-fleet of 12 Boeing 777-300ERs with 472 seats, more than any other international 777.

The first retrofitted 777 with 472 seats rolled out this week as the successor to the previous 468-seat configuration, which was already record-setting globally. More locally, it has been an important competitive asset for Air France. Even at 468 seats, the aircraft achieved a CASK of approximately five cent euro. Air France estimates that is the same CASK as Level’s 314-seat Airbus A330-200, which Air France identifies as its current low-cost, long-haul benchmark.

But that goalpost is changing.

“The Airbus A350-900 and -1000 are starting to enter the fleets of some of our leisure competitors,” Air France-KLM CEO Ben Smith recently told investors. “That will bring down the unit cost for those airlines by approximately one cent.”

Air France projects a four cent CASK for French Bee’s A350-900 with 411 seats, partially achieved due to 10-abreast seating in economy. Another competitor, Air Caraïbes, has 389 seats on the A350-900. Its -1000 has 429 seats while French Bee’s -1000 will go higher with 480 seats, which Air France expects will give an even superior CASK advantage. Yet the alarm bells are not going off for Smith.

“We’re still not convinced that this is a model that has a strong future,” he said. Low-cost, long-haul in France is in transition. While new aircraft offer improved economics, two local leisure airlines ceased flying last year. “Based on what we’ve seen – XL go out of business here in France, Aigle Azur [too] – we believe the strength of the long-haul, low cost carriers in France is not that strong. And we do have a product that can keep us in that market for now.”

What exactly is this market? The largest leisure destination out of Paris is arguably an easy guess: New York City. “But you’d surprised at what number two, three and four are,” Smith said. Those are Pointe-à-Pitre in Guadeloupe, Réunion, and Martinique. These Caribbean and Indian Ocean destinations form the CIO acronym used to describe Air France’s high-density 777 sub-fleet.

Big data and IT business intelligence company ForwardKeys estimates Guadeloupe and Martinique have similar marketshare at 4-5% each, but Canada and Thailand – not mentioned by Smith – are larger. “This ranking has not changed over the past five years, showing a remarkable stability in terms of travel preferences,¨ VP insights Olivier Ponti said.

XL Airways used to serve New York while French Bee plans to serve New York this June. Air France uses its regular fleet to reach New York and its sub-fleet for the other markets. “A decision was made a few years [ago] to densify 12 of the 43 777-300ERs into an extremely dense configuration to compete with the carriers on those routes,” Smith said.

Since then, Barcelona-based Level expanded to Paris with flights to three of Air France’s four largest leisure markets: New York, Pointe-à-Pitre and Martinique. Low-cost airlines have flights between Paris and other markets like Montreal and San Francisco. Across its bases, Level has seven A330s, less than the 12 in Air France’s CIO sub-fleet, but perhaps there is an argument to then include British Airways’ low-business class 777 sub-fleet.

Air France’s current CIO retrofit slightly increases seat count while debuting lie-flat, direct aisle access business class seats whereas the plusher seats on Air France’s leisure competitors are more akin to premium economy.

Smith wants to put Air France’s turbulent history and inconsistent product behind as he moves the airline up-market. Although Air France may be at a growing cost disadvantage compared to low-cost, long-haul airlines, it has an edge on what fares it can charge. “The RASK opportunity for Air France is higher,” Smith said. Air France could command a yield premium on this sub-fleet by appealing to passengers who already fly Air France for work. “They have more of a tendency to fly Air France for a leisure trip,” Smith explained.

Yet competitors are pressing ahead with low-cost, long-haul brands: IAG with Level, and Lufthansa planning a second attempt. Smith wants to champion Air France, which should appease unions upset previous management was neglectful by fragmenting Air France with subsidiaries. Smith cleaned up the complicated brand matrix that included Joon, intended for leisure markets but not strictly low-cost. While many observers dismissed Joon for its name and middle-of-the-market position, Smith’s explanation is different.

“Consistency is necessary,” he said. “This is why you’ve seen the removal of the brand Hop!, and the removal of the brand Joon and…the introduction of business class in domestic France.”

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