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.
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”.
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.
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.
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-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?