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PARIS-State-owned Air France is finishing a huge do-or-die restructuring of its business operations and marketing strategy, hoping to guarantee its existence in the next century.

Since recession hit the airline industry in 1992, Air France has been the bete noire of free-market champions and air travelers. France and various state-owned businesses have supplied cash repeatedly to the airline, which hasn't turned a profit since 1989. This funding-contested by its European private and nationalized competition-bankrolled acquisitions including controlling stakes in two other European carriers and ownership of French domestic carrier Air Inter.

But in its effort to build a formidable travel empire, Air France apparently forgot that size was no asset when the core business was losing millions of dollars per year-and about $3 billion since 1992. Passenger levels rose even as sales steadily dropped, and financing charges linked to acquisitions sent Air France into a tailspin.

Despite warnings, neither the company nor its governmental shareholder could slim the bloated carrier. When a restructuring plan was submitted in late 1993, furious employees seized Paris' two airports, snarling traffic for two days and costing billions of dollars. Then the government sacked Air France Chairman Bernard Attali, and workers returned to their jobs with promises that they would be consulted on future cutbacks.

The mishandled episode may have begun a long but encouraging turnaround at Air France, starting with Christian Blanc's being named to head the airline. Despite his Socialist affiliations, the ruling conservatives liked his reputation for fairness and incorruptibility, demonstrated by his quitting from head of the Paris transport system in 1992 when the ruling Socialists refused to back his tough business decisions.

After six months of careful negotiations and consultations with experts and union officials, Mr. Blanc submitted to employees a take-it-or-leave-it restructuring plan. His calls for a 30% productivity increase by 1998, a restructuring of fleet and management staff and 9,000 job cuts from the airline's staff of 42,000 were unavoidable and as humane as possible. He threatened to walk if the measure was voted down; it passed solidly.

But along with internal cuts, the plan called for the airline's record-setting, $4 billion recapitalization. After heavy debate, the European Commission approved the funding on condition that Air France sell many acquisitions, decline to seek new routes and prepare for privatization. Air France's European rivals howled, and the decision is under appeal before the European Court of Justice on the grounds that it distorts competition.

Mr. Blanc said the aid was the only way to avoid bankruptcy. "It was a miracle that the airline still existed at the end of 1993," he has said.

Quietly but diligently, the ailing Air France has been carrying out healing reforms. Internal restructuring attacking waste and inefficiency has already cut 1994 consolidated net losses to $472 million, from 1993's stunning $1.7 billion. Mr. Blanc hopes to return Air France to profitability by 1997, when total deregulation of Europe's skies is planned.

To meet that target, Air France is turning its attention to a long-forgotten part of its business: the passenger. With the reputation for giving the traveler short shrift and serving miserable meals-sin of sins for a French airline-Air France is trying to endear itself to passengers with a client-oriented ad campaign.

"This is a big change for Air France, and we are not ashamed to admit it," said spokeswoman Anne Leroy-Sanguinetti. "Before, our communications tended to focus on the service offered or on the name. But today Air France has different management, a different outlook and wants to establish a new relationship with its clients."

Air France in March unveiled a "Passengers' Bill of Rights"-guaranteeing the right to serenity, comfort, fair prices, and better food and service-in a humorous $6 million campaign by Euro RSCG, now running internationally.

"Given the financial situation, we're relying on a lot less money than our competition," Ms. Leroy-Sanguinetti said. "But we are very anxious to communicate this. Humor is important in doing that because it underlines the fact that we've lost the arrogance that had come to be viewed as family jewels at Air France."

The change is not limited to new attitude. Air France also replaced its first, club and economy classes with new Espace and Tempo categories without hiking prices. Espace travelers will enjoy unprecedented room, a quieter atmosphere and a new seat that folds into a bed on long flights. Tempo class will be sufficiently lively and animated that Ms. Leroy-Sanguinetti promises that passengers will experience "a lot of the Latin flair and atmosphere that they like about France." Ads for the new classes broke in April, and a third wave of international ads supporting the Espace advantages on long flights are planned for September, when installation of the bed-seats will be finished. Total ad spending exceeds $16 million.

The marketing effort could be expected to address the often hostile attitudes that foreigners have developed toward Air France, but Ms. Leroy-Sanguinetti said Air France also must humbly reach out to French clients.

"Winning passengers is increasingly difficult everywhere," she said. "We obviously have an advantage in France, but being a flag carrier today guarantees you nothing. Clients are looking at price, service and reliability, and if we don't prove ourselves, French travelers will do what the others do: fly with someone else.'


Corporate close-up

Headquarters: Paris, France.

Leadership: Christian Blanc, Air France and Groupe Air France president; Rodolphe Frantz, director general Air France; Jean-Claude Baumgarten, assistant director general in charge of marketing; Jaqueline Chabridon, director of communications, in charge of advertising.

Agency: Euro RSCG.

Ad spending: zero in 1994, $22.2 million alloted in 1995.

Recent successes: After painstaking negotiations with employees, management now appears capable of carrying off long-overdue restructuring capable of returning the airline to profit by 1998. An EU-approved $4 billion cash injection by the French government last year avoided certain bankruptcy.

Challenges for 1995 and beyond: End a half-decade of losses and shake a reputation for haughtiness and lack of attention to the client by winning back travelers with updated and improved service at competitive prices.

Source: AAI and company reports

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