The new CEO of Air France has demanded a more joined up merger between Air France and KLM, 14 whole years after the airlines ‘merged’. Just a month into his new post, Benjamin Smith is determined to do what other CEOs have failed so far to do; to eliminate the chasmic divide between the two carriers.
Although the Air France and KLM merger went ahead a really long time ago, the two airlines still operate as very distinct entities. Talking to analysts this week, Smith spoke about the current situation:
“Obviously, it’s a very unique set up… There’s no comparable around the world. But the more we can do to optimize and do what most major groups do when they consolidate… merging two cultures also with different types of competitive environments in the two major hubs, is challenging. But at the same time, offers future opportunities.”
The Canadian executive has had successes in working through labour disputes in his previous role at Air Canada. His hopes are that increased transparency in the partnership will improve relations with staff; something which is desperately needed following months of strike action at Air France.
What’s happening with the Air France KLM group?
For the first half of this year, the group’s profits were down 81.6%, largely due to strikes within the Air France arm of the business. Dutch employees were often critical of the pay demands and strikes from Air France staff, as they felt it was this side of the business which was letting things down.
However, with recent results from the third quarter published, things appear to be getting back on track.
Air France KLM posted a 4% rise in revenue over the summer months, with pre tax profits up 7.3%. Although they’re still a long way off previous performance, things are certainly moving in the right direction.
KLM are effectively the underdog in the partnership, being a far smaller carrier than Air France. This means that their contribution to revenue is smaller, standing in the last quarter at $3.5bn compared to the $5.2bn of Air France.
However, in terms of profitability, KLM posted profits of $650m, higher than that of Air France at $559m. This equates to an 18% profit on the KLM side, a figure which Smith dubbed ‘adequate’, but which blows Air France’s 11% profits out of the water.
A disparate partnership
Ever since the Air France and KLM merger, both airlines have retained a distinct identity. Although there are many similarities in terms of routes and pricing, there are still some pretty clear differences from a passenger’s point of view.
Investments seem to be less than entirely joined up too. We recently took a look at Air France’s new economy cabin which is being rolled out, along with a new livery, to the 15 A330s in their fleet. KLM, as far as we know, are not investing in rebranding.
What they are investing in, however, is new fleet acquisition, with the first of their eight ordered 787-10 Dreamliners due to take to the skies next year.
So, Air France and KLM don’t share livery. They don’t share menus or passenger facilities. They don’t share much at all actually, apart from their reward programme, Flying Blue.
Although this in not unusual (both IAG and Deutsch Lufthansa groups contain standalone carriers), the situation of the larger airline being the least profitable is. Other merged airline groups tend to be carried by their biggest players, which is not what we’ve seen in the Air France KLM partnership.
The future of Air France KLM
One thing is for sure; the new CEO of Air France KLM has got his work cut out in turning his airline around. One year agreements with employees has abated the strikes for now but will expire next October when it could all kick off again if he doesn’t formulate an attractive solution. Meetings with pilots are scheduled for November, which also need to go well if more disastrous action is to be avoided.
Added to this, the entire airline industry is bracing itself for more fuel price rises. Air France KLM have stated they are expecting their fuel bill to increase by 900m euros ($1.03bn) in 2019, and potentially by a similar amount the year after too.
This puts pressure on Smith to secure peace with employees as quickly and efficiently as possible. Strike action has cost Air France in the region of 335m euros ($381m) this year, and the pay deal with the unions add a further 50m euros ($57m) to their annual costs.
Smith does have some plans, according to the French press who have reviewed some of the issues under consideration at Air France right now. Depending on the outcome of discussions, we could see:
- A reduction in management employees at KLM Air France, to reduce duplication between the two arms
- A greater focus on the two main brands, instead of offshoots such as Joon and Hop!
- Improvements at Charles De Gaulle (CDG) Airport – hallelujah!
- Less complex fleets, with more A350s going to Air France and a focus on 787s for KLM
Whatever comes out of the ongoing discussions, it’s good to see a go-getting CEO who is ready to get the job done. Any improvement on the Air France side has to be good for passengers, so we’ll be watching this space with interest to see what the future holds for this partnership.