Air France-KLM Wants To Regain Its Position As A European Leader

Air France-KLM CEO, Benjamin Smith, gave his first strategic presentation to investors today, outlining his vision for the Group’s priorities over the next five years. The presentation, held in Paris, focussed on reducing operating costs, increasing efficiency and simplifying the Group around the three main brands: Air France, KLM, and Transavia.

Air France Aircraft on Runway
The Air France-KLM Group presented their five-year strategy today. Photo: Air France

The presentation

Smith was joined by KLM president and Chief Executive Pieter Elbers, Air France CEO Anne Rigail and Air France-KLM Chief Financial Officer Frederic Gagey, as they outlined the Group’s targets for the coming years. In his presentation, Smith said that he believes “the Air France-KLM Group has all the assets to regain its leadership position”.

He continued; “This is the starting point of a strategy that will allow Air France-KLM to reinvent itself, creating value for all key stakeholders. We will optimize our operational model and increase revenues to significantly improve our operating margin. Everything we do will support our goal of remaining an industry pioneer”.

Five-year plan

The five-year plan is Smith’s attempt to turn the Group’s fortunes around after a wave of strikes in 2018 cost the business an estimated 335 million euros.

Strikes aren’t the only problem Smith has come up against. The Group was formed in 2004 by Air France’s merger with Dutch airline KLM. But there has always been tension between the two sides. This year, the Dutch government bought 12% of the group to match the French government’s 14.3% claim, thereby strengthening the distrust between the two sides.

Smith, formerly of Air Canada, is the first non-Frenchman to hold to the position of CEO. He may be hoping his nationality will help to reduce Group tensions.

Air France-KLM CEO Benjamin Smith
Air France-KLM CEO Benjamin Smith is Canadian and the first non-Frenchman to hold the position. Photo: Air France

The strikes, combined with tensions between the Dutch and French sides, have left the group unable to pay dividends since 2008. This is something which Smith emphasized was going to change when the group reaches an operating income of 1.9 billion euros. In 2018, it came in at 1.3 billion euros.

Dutch airline KLM Aircraft on runway
There have been tensions between the French and Dutch sides of the Group since the merger in 2004. Photo: KLM

Smith also announced that he wants to lift profit margins to between 7-8% over the medium term. Air France KLM’s operating margin for the year so far is at 4.8%. This is a 1.7-point decline from the same period last year.

In a press release, the Group said it “must simplify and optimize its mode of operation and reposition itself to pursue the most profitable traffic.” Smith plans to ensure that Air France, KLM and Transavia were “well-aligned” so that the Group can “consider acquisition opportunities”.

He outlined the key areas for each of the Group’s main sectors: Air France will focus on the premium travel market with Transavia remaining at the low-cost end of the market. KLM is positioned as an operator of connecting flights through Amsterdam.

A new fleet

The statement continues that the Group is “committed to global environmental sustainability.” Last year Air France-KLM took a 100 million euro charge so they could retire their Airbus A380s early and replace them with more fuel-efficient planes.

Smith added that, by renewing the airline’s fleet, he would be able to add 300 million euros to its operating profit over the next five years. He also said that a further shake-up of the fleet would depend on whether Airbus builds the new A220.

Air France AIrbus A380 on runway
Air France is looking to retire its Airbus A380’s by 2022. Photo: Air France

Risky business

Air France-KLM shares were up by 11.5% this year in anticipation of Smith’s presentation and thanks to union deals that have pushed up wage costs but increased operating flexibility.

However, despite Smith’s optimistic presentation this morning, Air France-KLM shares dropped 4.8 percent following the announcement and analysts stated the medium-term goals were a “considerable risk”.

Do you think Smith can turn it around for Air France-KLM?

6
Leave a Reply

5 Comment threads
1 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
6 Comment authors
newest oldest most voted
AndrewS

KLM yes AF no. Can’t remember who was who when this was put together but wasn’t the right thing even then

Peter

Agreed! This marriage between KLM and AF has been a non-runner from day one.
Dissolve the agreement, and let KLM team up with Lufthansa, if it’s felt that it has to be part of a larger group. Or just stay a standalone airline, like SAS, for example: KLM has a very lucrative joint venture with Delta, and is more than capable of operating as an independent hub airline at Amsterdam Schiphol.

Roman Radomyslsky

Hey, great topic but very little detail. What else did Smith say? What are the fleet plans?

ROGER DENNY

No

Fred

Air France-KLM are in trouble. They must divorce to keep business going. I am a frequent flyer of with Air France – KLM there is uncertainty in their relationship. Take for instance, I am flying to Lagos Nigeria from Brussel, I don’t like to use the train. I have to fly to Amsterdam for half an hour, then another half an hour to Paris before heading to Lagos. Due to such unwarranted and unthoughtful Planning for their passengers is deterring passengers and Pushes the price of flights. Just booked a flight to Lagos Nigeria with a European airline I paid… Read more »

Erik

Pity the article does not mention the fleet simplification within the group. KLM will move towards an all-Boeing fleet, they have announced to retire their A330’s in 2025 and attract more 787’s and 777’s. The E2 will also join the KLM fleet. AF will retire their ATR’s and Embraers 145 and replace the A318 and A319 with the new A220. Overall I think that Mr Smith has a good vision of what the group can become. I love the fact AFKLM let both carriers keep their identity and I feel that KLM-fan boys should not forget how AF helped KLM… Read more »