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THE FUTURE OF KLM AND AIR FRANCE

“If Air France does not make efforts to become more competitive, allowing this flagship to be at the same level as Lufthansa and other airline companies, Air France will disappear,” French finance minister Bruno Le Maire said on May 6. This statement followed planned industrial action and the walk-out of chief executive Jean-Marc Janaillac. Business Traveller Forum users were quick to respond.

MARCUSGB

It seems that Air France staff are in a selfdestructive, systemically selfish mode, which may lead to the company not surviving. This was emphasised by the French finance minister. Shares fell 14 per cent today (May 7), to less than half their value in December.

Is it time that KLM divides itself completely from failing Air France? KLM is making profit, the brand is strong, and it has, as a company, endeavoured to adjust and do its best. The attitude is so different within Air France, and you see it at its hubs and on-board. There appears to be a distinct attitude and behaviour at each airline that simply does not meet.

I have flown KLM for 25 years. It has been an excellent airline. I find everyone sees it as reliable, hardworking, constantly striving to be better, teamoriented (a family, as staff regard it), and one of Europe’s best airlines. It has great respect in many of the countries it serves.

KLM retains many destinations within Europe (more with its feeder network), and its long-haul network spans most of the world (though not Oceania). KLM refrains from going lower cost with Buy On Board, and KLM Cityhoppers are expanding through smaller airports in Europe. There is an almost completely renewed fleet, with more Dreamliners in the pipeline. KLM is set for the future.

I know several senior staff working at KLM. Patience and tolerance (which the Dutch seem to have more of than most European nationalities) has run out.

Is it financially possible for KLM to break free as its own company?

Financial reports are often mixing the two, and hiding the sheer waste and destruction Air France is making to the KLM brand. Hop! and Joon [sub-brands] are not working. I do not know why it is even contemplating taking on Alitalia.

Surely the Dutch government must now have some strategy, should this continue, to separate KLM and allow it to thrive and stand on its own?

I cannot see the Dutch wanting to lose KLM, nor the excellent Schiphol hub – always voted the best in Europe, and looking 20 years ahead with expansion.

How secure is the [Air France-KLM] Flying Blue programme, and your Miles? These can be worth a lot for redeemed tickets worldwide in business class. All of us at the BT Forum regard our collections of miles as very valuable!

I would like to see these airlines divided and separated. Let each fall or thrive on its own results, and reputation, and not let Air France hide behind the success of KLM.

EDSKI777

It is about time the French appoint a professional rather than a political chairman: someone capable of dealing with the unions and restructuring Air France. Results over 2017 prove that Air France-KLM is heading for the cliff, and going along with the unions’ demands, [it is taking] “a big leap forward” – normally not the best strategy while at a cliff’s edge.

The cost of Air France’s personnel [wages] is around 30 per cent of its revenue, while at British Airways and Lufthansa it is estimated at around 23 per cent; at low-cost carriers such as Easyjet and Ryanair that proportion is around 15 per cent.

If Air France were to increase salaries by five per cent [the wage bill] would rise to a level that is uncompetitive.

KLM has a result of 8.8 per cent [profit margin], where Air France didn’t get any further than 3.7 per cent – both in a bullish market. We all know that won’t last forever; strong economic headwind is always just around the corner. Fuel prices are rocketing, competition is fierce from low-cost carriers such as Norwegian, Ryanair or the ME3 [Emirates, Qatar Airways, Etihad Airways], which are cutting into some of the most profitable routes.

Politicians are getting involved now. The transport ministers of France and the Netherlands had a conversation about the situation and they have reiterated that this is an Air France-KLM problem for them to resolve. The French prime minister has expressed that when the airline group gets into financial difficulties the government will not bail them out.

Dutch members of parliament are now openly discussing the option of withdrawing KLM and Transavia [its low-cost subsidiary] from the Air FranceKLM group. Something done in the same way as the Dutch government did with ABN/AMRO, the Dutch banking group. KLM and Schiphol airport are too big a financial and economical interest to the Dutch to let them be ruined by totally clueless French management and unions.

Another option discussed in the Dutch media is to appoint Pieter Elbers, chairman of KLM, as chairman of Air France-KLM group. He is the chairman of the only successful part of the Air FranceKLM group, has turned KLM around, and has excellent relations with the Dutch unions and the personnel.

Dutch management and unions have much more economic sense and willingness to compromise in the interest of the organisation than the French. Let’s call it common sense and realism.

It is time for action to save this airline group, or risk it falling apart and disappear. The profitable parts to be sold off and the rest to go bankrupt or continue as a third-rate small airline.

Chances are that the French unions will demand that, in order to prop up the figures of Air France, activities and routes will be transferred from KLM to Air France. But that would result in frustrating fights between these two major groups.

From an investor and passenger point of view, it would be wise to abandon the fixed distribution of aircraft/seats and expand the KLM brand. This would also send a strong signal to the unions that they have to cooperate with the management in the interests of the total group in today’s economic environment.

As someone based in the Netherlands and a regular passenger on KLM flights, I would hate to see the demise of the great airline that KLM is, together with its highly skilled and motivated personnel, who provide an excellent service. I sympathise with the KLM personnel, who are worried about their future.

MARCUSGB

Thanks EDSKI777 for that insight, especially to hear what is being discussed from the Dutch perspective.

We are clearly talking about the Dutch and French culture within each airline being different.

Both my Dutch and French friends have said it reflects each country as a whole; I have felt the difference the second you go into a terminal or step onto an aircraft. I simply enjoy the whole KLM experience, its reliability and running of services, yet I dread Air France and have always had awful, poor experiences.

When hard times came to KLM, we must remember that ALL staff came in to work in any way they could, voluntarily, or moved roles – flight operations, ground services, engineering, HR, accounting, admin, to keep “the family” going. Pilots, cabin crew, engineers, ground staff. I have great respect for that, much my own style of management – effective teamwork, community.

Air France has none of that. “Not my job or concern, I don’t care,” one purser said from Air France to a Dutch colleague!

It is a very complicated issue – individuals, and investor companies, governments holding shares, the Dutch government and city of Amsterdam holding stakes in Schiphol. The success of each interlinked. If “The Group” own KLM, I agree the best they can do is to part them in all ways possible, hold them to account for their profits, efforts and brand.

RFERGUSON

The irony is that in France, paid-up trade union membership is lower than in the UK, yet the statutory powers they hold are immense.

MARCUSGB

Many other carriers can take Air France’s place at Charles de Gaulle airport, but the same would not be welcome nor successful if KLM were to cease at Schiphol.

TRANSTRAXMAN

Does one really think that Air France will be allowed to go bankrupt? That is a possibility that neither the French unions nor their government will permit. The European Union has proved incapable of controlling the French and Italian governments. They do precisely what they want “in their national interest”.

Thus the French might have to accept KLM separating from Air France, but would that mean Air France going bankrupt? I doubt it. There could well be two companies going separate ways.

What the European Union decides about Alitalia might be more significant. If the EU said that Italian government aid was enough after more than €900 million was spent, then Air France might also have to follow suit. However, France holds a stronger position in the EU, so might well obtain the benefits of maintaining Air France flying without having to go into bankruptcy. Who knows?

EDSKI777

No matter what KLM personnel, passengers or shareholders may prefer, the chances that Air France will let KLM go are minimal. KLM and other Dutch parts of the group are what keeps the group afloat, despite all the strikes by what is increasingly regarded as unwilling and unrealistic personnel and unions, and highly incompetent French management.

Financial newspapers report that each day Air France strikes will cost the group €25 to €30 million. The Air France-KLM group is expected to operate at a loss this financial year.

Futhermore, Air France-KLM reports that, in April 2018, the group had fewer passengers than in the same month the previous year. Air France transported nine per cent fewer passengers, while KLM reported a growth of five per cent. The total number of passengers dropped from 7 million in April 2017 to 6.9 million in April this year.

To lose passengers in this current market compared to last year is quite a performance (not!).

LUGANOPIRATE

An article in The Economist shows Air France-KLM staff are paid more than others, but the reality is it’s even worse, as Air France staff are paid more than KLM staff for the same job. A friend of my son’s, also in a senior position at KLM, spent six months in Paris with a view to integrating their various systems. He said the staff were unbelievably lazy, arriving later, long lunches, breaks and leaving early. He doubted they did more than four hours work a day, and even that was interrupted with personal phone calls. No wonder Air France staff

outnumber KLM staff three times on a comparable basis.

KLM paid Alitalia €500 million, I believe, as a “deposit” towards the merger. As the Italians could not agree staff cuts, etc, KLM walked away and should have had it money back. It never did.

However, the grim reality is that KLM cannot devolve itself from Air France. The systems are linked, finance and leasing is cross-guaranteed by Air France and KLM and so on. The truth is if Air France goes bust, it will take KLM with it. That would be a sad and unfitting end to the world’s oldest airline!

CAPETONIANM

I did some work on integrating the systems in about 2007, with both airlines, and the attitude of the Air France staff was exactly as described above by LuganoPirate. Whereas the Dutch spoke excellent English and were happy to do so, the French couldn’t or wouldn’t, even though it was made clear from the outset that the project language was English. The French were a waste of office space, utterly negative, always looking for problems and ways of avoiding work, and contributing nothing, while the Dutch worked hard and looked for solutions and a better outcome.

EDSKI777

Following the adage “Never waste a good crisis”, according to a major Dutch newspaper the KLM management will try to restore the old structure of Air France-KLM back in the days the group was created. Have a French chairman to “run” the group, and have a Dutch right-hand man. The coming weeks will show whether the Dutch will succeed, or whether Air France will drag all other parts of the group with it to their demise.

Workers at Air France are finally starting to realise that the current situation is catastrophic. With oil prices rapidly increasing, fierce competition, diminishing customer loyalty and both the French and the Dutch governments clearly unwilling to interfere and/or finance the ensuing situation, they are finally waking up.

BA789

What was the rationale for KLM to link up with Air France? Air France has a history of strikes and tense labour relations, so why would any airline want to join forces with such a company?

EDSKI777

In 2001/2002 KLM was having financial and organisational problems. As the consolidation in Europe started and IAG and Lufthansa became the dominant players, KLM was deemed to be too small an airline to survive. Around that time we saw the demise of Swiss and Sabena (a Belgian airline) as well. KLM was looking for partners, but both British Airways and Lufthansa were seen as not attracted nor interested for different reasons. Then, partner Northwest Airlines was also not the healthiest of organisations, and had a fairly old fleet. So it was more of a target than an investor in the industry. Air France was the only airline available.

The old structure, something KLM seems to want to revert to, was a holding with two or more brands under this Air France-KLM umbrella. With the French making up two-thirds and the Dutch (KLM, Martinair and Transavia) one-third of the organisation. In order to keep labour relations under control, it was agreed that investments in the fleet would follow this line as well. Management would be formed on the basis of a French chairman, Mr Spinetta, and a Dutch second in command, Mr van Wijk. In later years, due to the economic situation, Air France-KLM was forced to adapt both organisations to the new reality. KLM was very successful in reorganising its operation by cutting staff and costs and improving on their performance, hard and soft product, and subsequently on load factors, revenue and profit. Air France lagged behind, hindered by strikes, political influencing, bad management and increasingly bad relations between management and personnel, including the unions.

Where KLM kept its finances tightly under control, helped by a steady course and decent relations between management and unions, Air France didn’t meet the requirements. Air France still has a huge workforce in comparison to KLM for the amount of planes. Somehow the French will have to come to their senses and start realising that it is 2018 with global competition. Like it or not, in the airline industry the market dictates. No longer are unions in charge and are governments able and willing to support ailing “national” carriers.

The current investment structure makes no sense anymore. Any normal commercial company would invest in the most profitable and well-run side of the business, while the other part sorts out its problems. Surely KLM personnel feel like that. Frustration and animosity between the two sides of the company are increasing. It remains a question how long this situation can continue and if relations can be re-established.

Did KLM make the right decision in 2001-2002? With hindsight: maybe not. But who else was able and available at that time to support KLM?

For now the French will have to sort out their own mess, kept afloat by a moneymaker like KLM, but KLM is not generating enough profit to sustain the losses caused by the French strikes. Air France is rapidly losing customer loyalty, obviously not helped by having CDG as

an airport. Trying to win it back will take a lot of effort and probably money as well – money it has lost already because of these strikes.

MARCUSGB

First Quarter 2018 results: Air France lost average for “The Group” of €25 million per day of the strikes. A €211 million loss by Air France. KLM profits doubled to €60 million. The Group’s profits were up 42 per cent for 2017, and 1.41 billion Euros. Share prices were around €14.50 in January – now halved. What a complete failure when prospects were so good.

It is very complicated to try to divide the two [companies] so they can operate as two separate airlines again, but a way must be found. The stakeholders in Schiphol including the Dutch government and city of Amsterdam, KLM teams of staff, and senior execs of KLM, are looking at the scenarios and possibilities.

CAPETONIAMM

I am not holding my breath that there will be anyone who can improve the situation. In fairness, I doubt if that’s possible until the unions are neutralised and someone with a spine and an international background runs both the country and the airline.

So it will be, as the French say : “Plus ça change.” As Business Traveller went to press, it was announced that while Air France-KLM searched for a new chief executive, it would be run by a three-person executive committee comprising of group finance director Frederic Gagey and the chief executives of Air France and KLM, Franck Terner and Pieter Elbers.