Air France-KLM Group: bad marriage or rough patch?

Edition 30 October 2018. by Benjamin B. Roberts

In today’s aviation industry, it’s a doggy-dog world. With the budget airline Ryanair, a one-way ticket from Amsterdam to Malaga costs just € 16.98, which makes it cheaper to travel to Spain than by train from Amsterdam to Groningen (€ 25.30). Budget airlines are swamping the aviation market, while traditional national airlines like British Airways, Lufthansa, Air France and KLM are struggling. They are still used to the heyday of airline travel, when national airlines were the pride of the nation. In the 1960s and 1970s, when most national airlines started to grow substantially, air travel was a luxury and a costly affair. When travelers fl ew with Air France in the 1970s, it was a true experience. Airline stewardesses paraded down the aisles in Dior-designed outfi ts and passengers were served meals on porcelain plates, beverages were served in real glasses, and utensils were not plastic. Now, 40 years later, most passengers do not experience air travel as a luxury, or something special at all. Modern passengers will gladly forfeit the spiffy outfi ts of airline personnel and the luxury of infl ight meals, as long as they can get to their destination for the cheapest price and as soon as possible. For today’s traveling public, an airline is little more than a giant Greyhound bus, but with wings, and some occasional turbulence.

Aviation marriage

For many national airlines, the opening up of the aviation sector at the beginning of the century must have felt like a Monopoly game. A mad scramble ensued to conclude as many alliances and mergers as possible. One of the largest mergers between the royalty of national aviation families occurred in 2004 between Air France and Royal Dutch Airlines (KLM). In France and the Netherlands it was not a well-received wedding, although on paper the union looked good. Air France would dominate Charles de Gaulle airport in Paris and KLM Schiphol Airport in Amsterdam. The two airports are among the four largest air hubs in Europe. However, the prenuptial agreements, specifi ed by Brussels, stated that the French state would have to reduce its 60% stake in the company and the Dutch state its 14%. With both airlines being the pride of their nations, for the French and Dutch state this must have felt like letting their children go off into the wide world. Now, after almost 15 years in the highly competitive market of airline travel, the union is struggling. There are many fi nancial and cultural differences that still cause friction. One of the main causes of friction is that Air France and KLM were both allowed to maintain their own brands, which were both strong and symbolized their respective national identities. Both airlines kept their names and tooted their national fl ags on their fl eets. In the last years KLM has fared well, while Air France has been plagued by losses, pilot and personnel strikes and increased airport taxes, which have made transfer fees more expensive for travelers. KLM has generated profi t and has encouraged move more passengers to use Amsterdam’s Schiphol, because the airport has lower transfer fees. In the past, Schiphol had the same problem. Before 2009, when the Dutch government imposed an eco-tax on all tickets, the price of tickets increased anywhere from €11 to €50, and generated a total of €380 million for the Dutch government. However, the eco-tax cost the Dutch economy a whopping €1.3 billion in lost revenue. In the middle of the fi nancial crisis, the Dutch government quickly ditched the tax.

Lack of equality

One of the main reasons for the tension between the two airlines is Air France’s lower profi t, which has been mainly caused by pilot’s strikes. Earlier this year, Air France’s management failed to allow a 5.1% wage increase for the coming year, and pilots, cabin crew. Air France management was only willing to offer a 2% increase, and an additional 5% increase spread out over 2019 to 2021. However, that was not enough for its personnel, and ground personnel went on a fi fteen-day strike, which caused a € 335 million ($ 386 million) loss for the company. The damage, not only in lost profi t, but also loss of reputation, was lethal for the company. It already does not have the best reputation for quality of service in the airline industry. The main reason for the strike was that Air France pilots were not given a pay increase like their KLM colleagues, who were said to have received 4% more. This only emphasizes that Air France and KLM do not treat their employees the same. However, Air France is trying to modernize and in the last fi ve years has gradually generated more profi t. In 2007, the airline founded its own budget airline Transavia France, which last year boasted six million passengers, and continues to grow.

In December 2017, Air France launched another budget airline, Joon, geared towards a new generation of travelers. Joon, which means young, already fl ies to Barcelona, Berlin, Lisbon, and Porto, which are popular travel destinations especially for young people. In general, the union between Air France and KLM has not been an easy one, primarily because each company has maintained its autonomy and still has a different business culture. The French state still has a 14% stake in Air France and the company is occasionally subject to state intervention, whereas KLM tends to operate more like a private business, is more competitive and aims to appease its shareholders with profits. KLM, with its daughter budget airline Transavia, has fl ourished in the global aviation boom, which has directed more fl ight traffi c to Amsterdam. One of the reasons the aviation market is booming is that the urban middle class in Brazil, Russia, China, and India (the BRIC countries) is growing at a staggering rate. And one of the most popular destinations for passengers from these countries is Europe, and the intracontinental fl ights it offers. In the next 20 years, aviation travel will grow steadily further. Forty percent of the world’s population resides in the BRIC countries, and they account for one-fi fth of the world’s GDP, which will ultimately have a large impact on Air France and KLM in the future.

New man

On August 15th, 2018, Air France-KLM’s executive board elected a new CEO, Benjamin Smith, to replace tFrenchman Jean- Marc Janaillac, who stepped down after the pilots’ strikes in May. As new executive of the twelve-member board of Air France- KLM group, Smith is an outsider (the board consists of an equal number of Frenchmen and Dutchmen). Smith is Canadian and has more than 20 years of experience, starting with Air Ontario; in 2002, he joined Air Canada, which he transformed. The board of directors of the Air France-KLM group, which elected Smith, hopes the Canadian will bring some fresh air into the the airline and make it more competitive. Smith has on-the-ground experience and hopefully will make the two national airlines more team-oriented, as well as increase customer satisfaction and add brand value.

The executive board has high expectations of Smith and has agreed to pay him four times more than Janaillac earned. Smith will earn € 900.000 million ($1 million) a year. And as show of good faith, the Canadian has pledged to invest half of his fi xed earnings in the company’s stock. It’s a gesture that Smith is committed to the union. And in that regard, it looks like Air France- KLM is only going through a rough patch, which happens in the best of marriages.