Could COVID-19 Lead To An Air France-KLM Breakup?

Filed Under: Air France, KLM

Air France-KLM has become the first European mega-airline to receive government support, though this might only complicate the relationship between the French and Dutch even more.

The complicated Air France-KLM relationship

Among the major European airline groups, Air France-KLM is probably the most complicated politically. To provide a brief summary of the problem:

  • There has long been bad blood between the Dutch and French regarding the airline group
  • The Dutch feel like they’ve been supporting the French while being treated as the second class airline in the group, as KLM views themselves as more profitable and stable than Air France, while the parent company is headquartered in Paris
  • Air France has historically been a basket case in terms of efficiency and labor relations, though that has improved with Ben Smith as the new CEO of Air France-KLM
  • This recently become more political, as we saw the Dutch increase their stake in Air France-KLM to match France’s stake, meaning that each airline owns about a 14% stake in the airline group

The relationship between Air France & KLM is complicated

Air France-KLM secures government relief package

Air France-KLM has been in talks with French and Dutch governments regarding aid measures that would enable the company to maintain solvency.

The French government has now finalized a relief package for the company for a total of up to €7 billion, which would include:

  • A French state-backed loan of €4 billion granted by six banks; this loan is guaranteed up to 90% by the government, and has a maturity of 12 months, with two consecutive one-year extension options
  • A shareholder’s loan of €3 billion from the French state, which has a maturity of four years, with two consecutive one-year extension options

The Dutch government also plans to provide €2-4 billion worth of support, though it’s expected that this will come with some conditions.

France has provided up to a €7 billion relief package

Could we see Air France & KLM break up?

Dutch website Luchtvaart Nieuws suggests that the current situation could lead to a breakup between Air France & KLM. They suggest that executives at KLM are considering this in light of the crisis.

The argument essentially boils down to this:

  • When it comes to the aid packages, the Dutch government doesn’t want to be funding Air France, and the French government doesn’t want to be funding KLM
  • KLM and the Dutch have long been concerned about Air France reducing costs, and they believe that the €7 billion in aid from the French government will have the opposite impact, and strengthens the position of the French government
  • KLM increasingly feels that the two companies would be better off independent, and instead just cooperating as necessary (for example, with their transatlantic joint venture, etc.)
  • KLM doesn’t need as much aid as Air France, and they don’t want the French government taking further equity in the airline, creating more of an imbalance between the two countries

There’s no doubt that this is going to be complicated. I have a ton of respect for Air France-KLM CEO Ben Smith, and I’ve been impressed by his efforts since he took over the airline group.

He has been trying to undo years of mismanagement, and a lot of progress was being made before this all started. Understandably he wants more efficiency and closer cooperation between the two airlines. Because if the two airlines are going to be part of the same airline group, they need to work more closely together.

At the same time, I understand where KLM’s skepticism comes from, when you consider the history here. There’s no doubt that the current pandemic only complicates the situation further, as Air France will potentially need more aid than KLM.

The Dutch may not want Air France-KLM anymore

Bottom line

This is a complicated situation. I understand why the Dutch have been so skeptical of the airline group historically, though I also think in the past 18 months a lot of things have moved in the right direction.

With the current pandemic essentially creating a reset in the industry, much of that progress will likely be wiped out. I’m hoping for the best for the airline group here, and have the utmost respect for all three CEOs (of Air France, KLM, and of Air France-KLM).

What do you make of the situation between Air France and KLM?

Comments
  1. “given that KLM has historically been more profitable and stable than Air France”

    This is something which indeed is burned deep into the Dutch psyche but which is simply not true interestingly enough. Before the merger with Air France, KLM’s losses were 133 million a year. Sure, nowadays KLM is doing much better than Air France (a 910 million EUR profit – with passenger numbers up 40pct and turnover by 60 since teaming up with the French).

    Yet the Dutch people always conveniently forget about the status of the airline before they teamed up with Air France, as well as the reasons they felt forced to do so in the first place, taking for granted how much of the growth and success of KLM is actually thanks to cooperation!

    Somehow the Dutch always think they know better and can rule the world, but in reality KLM would be little more than a Brussels Airlines in world status without Air France or any other close cooperation.

    Knowing the Netherlands very well having been born and raised there, I can therefore only say that these sounds to break-up the partnership with Air France are the usual big-mouthed words of Dutch people, the press as well as the lower echelons of KLM, with little to no enthusiasm for it among the people who actually matter and have decision power. This all not being helped by the Eurozone’s north-south divide and frugal Dutch nature!

  2. KLM’s been treated as the lesser partner in the group because that’s what their resources, existing hardware and the general work attitude/service level of Dutch crew, have been conducive towards. As a former customer I’d say AF made a very good judgment call on that…cough cough, “market positioning.” It in fact is a bit of a LCC disguised as legacy.

    KLM is where business class crew would just conveniently “forget” you asked for decaf coffee because it’s not convenient to their work flow. I’ve seen them forget to make the pre-takeoff-roll announcement. Always busy gabbing amongst themselves, don’t even bother hiding behind curtains. Not an airline I’d fly again…good for them though, that’s probably their low-stress Dutch quality of life right there. 😉

    As much of a basket case AF may be, I believe it’s KLM who needs the group resources more. Is the weaker partner complaining they’ve got to prop up the stronger one? Hrmm. So why did they want to merge in the first place? Don’t answer that, you might hurt their pride 🙂

  3. This is why governments should *almost* never be involved in private enterprises.

    People seem to easily forget AF is quite literally double the size of KLM and that AF had to put up with a slumping KLM for years whilst it was one of the most profitable airlines in the world.

  4. While I do not see KLM and Air France splitting up any time soon, I do believe there is a problem which is not going to go away soon. A big part of KLM’s staff feels they are suffering from Air France’s bad management. Which partly makes sense but has more to do with the power of France’s unions.

    However, just thinking outside the box I could see some creative ways for KLM to secure a future without Air France. Being part of AIG or Lufthansa would probably come with similar issues as they are dealing with now and would definitely give them less freedom. On the other hand there are airlines in Europe dealing with the exact same issues as KLM (Bad relationships with their partner/owner). So why not merge with Brussels Airlines? Talks to nationalize them are already ongoing, they have similar products (not too premium), different strengths (KLM in the U.S. and Brussels in Afrika) and a more similar culture than Air France/KLM has. Maybe even include Austrian or SAS in this?
    Just thinking very hypothetically outside the box here. Curious about your opinions.

  5. Yes please!
    The arrogant, inefficient, money-burning legacy-carrier Air France should no longer drag down the modern, profitable KLM.
    I’d be very happy to see a general shakeup within Europe:
    Finnair or SAS and TAP Portugal would be a complementary Team with individual strengths in South America + Asia.

  6. @Charles
    Yes, the lime should be at the bottom of the glass when you have finished your drink. The end.

  7. I could see this happening along with the Luftansa Group breaking up (or at least getting much smaller). As the government begin to bail out these airlines, they aren’t going to want to fix a bad egg that is not in there own backyard. Could the EU finally collapse from this? Could we see “country” airlines again (like Italy is doing). Be interesting to watch.

    IAG looks like the only one that figured it out. BA/IB will be a much stronger group in the end.

  8. “This recently become more political, as we saw the Dutch increase their stake in Air France-KLM to match France’s stake, meaning that each airline owns about a 14% stake in the airline group”

    Should that say that each Government owns 14% stake? Or am I missing something here?

  9. @John your arguments are incredibly robust and thorough. On a serious note, it’s kinda sad to see so many braindead people on the Internet. If what you’re trying to do is troll, that’s a very lame attempt tbh

  10. I honestly did not know how bad the relationship is between the two companies (yes they are both airlines however from a business POV (business Point Of View) they are both two operationally two independent companies with the same parent company) until COVID-19 (just about) shut down everything.

    I have never flew on either airline however from what I read KLM is better and the ATC in the Netherlands is not striking every few years (or however often it actually is) unlike France. (To be fair ATC issue(s) are not in anyway related.) I felt it should be mentioned.

    From what I read, around 2004 KLM was struggling and needed help so Air France came in. Hens why “Air Fance-KLM” exists.

    From a business POV Air France and KLM (listed in alphabetical order) have different fleet types (as one could expect from two airlines operating under the same parent company)

    Air France: mostly Airbus (with the exception of 777 and 787 (I am only looking at the current fleet. (As of April 27, 2020.))
    KLM: mostly Boeing (with the exception of A330 (I am only looking at the current fleet. (As of April 27, 2020.))

    By how the last paragraph reads I am saying I have a problem with the fleet of the two respected companies however I have no opinion and want to state that.

    Maybe there should be a change/changes should be made with options ranging from the parent company and the struggling company switch roles; two companies are/were getting in each others way; or they should split (Air France-KLM”) and fully operate under each company.

    My apologies for the long length I honestly don’t know what (obvious) solution(s) is the best for “Air France-KLM” moving forward. I look forward to reading your responses to my lengthy reply.

    (PS: all listed above is my thoughts.)

  11. Those of us who worked at Northwest at the time knew that this was going to be one major cluster-f-ck. These two carriers simply do not like each other and that is not going to change. Totally different cultures at play here.

    The best thing would be for these two carriers to go their own separate ways. That way KLM can do what they do best (fly reliably and make a profit doing it), and Air France can do what they do best (shut down the operation when the weather is nice and everyone in France goes on strike, and appeal to the French “community chest” when they invariably lose a fortune.

  12. As a flyer, I think breaking up, as with any competition, will lead to a better product. (Yes the 2-2-2)
    As a company, breaking up is just like losing monopoly powers, nothing good will come out of it.

  13. KLM should go into partnership with British Airways/ IAG and be done with Air France. Air France does drag KLM down whereas that wouldn’t happen in IAG because those airlines are actually well run.

  14. Dom – there is no way on earth KLM would be allowed to join IAG, even some sort of alliance would foul because of the regulatory issues.

    @Ben / Lucky – Ben Smith can hardly be described as ‘new’ he’s been in post for 18 months

    A question AF-KL needs to ask is why is KLM now so profitable and AF not when previously it was the reverse. I bet Ben Smith is regetting handing the AF staff unions large pay rises for basically nothing in return (other then ending a strike). Not such the golden saviour now is he?

  15. @sunviking82, I agree that we will see similar tensions in the Lufthansa group. Certainly the Swiss government will be reluctant to bail out LX without equity or major concessions.

  16. This was said before me and it bears repeating: KLM was near insolvency when it paired up with Air France. Effectively, Air France rescued the Dutch carrier. But memories are short-lived.

    Since the tie-up, yes, the AF business has suffered more so than KLM but it’s highly questionable whether KLM would even today were it not for AF’s bail out.

  17. The European Union is currently deciding how to shoulder the debt that all member states will end up with because of this crisis. One group lead by Italy, Spain and France is arguing for sharing debt amongst member states. Whereas the other group lead by the Netherlands and Germany is fiercely opposed to it. This attitude also applies to Air France-KLM. It seems most of KLM’s concerns come from the French government increasing their stake in Air France. In order to ensure the group’s survival both sides need to work together to come to a compromise.

    The size of the bailout for Air France shows just how inefficient the airline is. I love them but they have not been run well for decades.

  18. Anybody remember in 2000 when KLM teamed up with Alitalia? It ended 6 months later with KLM paying $100 hundred million USD to get out of the deal. It seems no one has learned in 20 years about Alitalia. KLM doesn’t learn either. Their biz class seating is hardly any better than in 2005. KLM was also sceptical of Ben Smith when he was appointed. You’d think they’d be pleased that they didn’t get another useless Frenchmen. You must be stupid to believe they thought a Dutch person might be appointed. MON DIEU!!!!!

  19. While I am based in NL (non native) and thus using and liking both AF and KL, I have always wondered how two parts of one company could have nothing in common. There seems to little to no synergies in fleet, soft product or services.
    I don’t have a strong preference for either one of them when it comes to onboard product (both longhaul biz products have their weaknesses, and intra Europe it depends on the route). I’m quite sure that KLM without AF wouldnt do worse, while AF might struggle some more.
    Disagree on the partnership with IAG…but think about the purported sale of Virgin Atlantic. Delta is already in the boat 🙂
    Also we will see some more stuff happening in Europe – see Austrian/Brussels and their mother…

  20. @Ben Holz – ignore John. He is an illiterate troll and he only knows 4 English words. I can’t understand why the moderators don’t block his replies.

  21. Air France must get separated from KLM as now is the right time to do so. Then, I will see how KLM survives! KLM has been trying to control Air France in all areas, and have caused Air France to become offline in most of its routes. KLM management needs help from Air France, but they don’t want to see their presence anywhere in the world. Currently, KLM has no stations in the Middle East other than DUBAI, and very soon they will try to finish this as well, and put another KLM flight instead. This is a wake up call for Air France to let KLM be on their own feet, and then they will see how far they go. Within one year, you will see them down with no business in the world!

    How can this be justified, that Dutch government is bailing out KLM with 2 billion Euros, and French government is bailing out Air France with 7 billion Euros???? And an airline group with three CEO??? LOL

  22. It would be a positive. While I do like AF and fly them regularly, financially and strategically AF has been a drag on KLM. KLM would do better without the interference from AF and Ben Smith. Schiphol is a major hub and I do not see why KLM would be worse off w/h AF.

  23. Before jumping into bed with AF, KLM was in lengthy merger talks with BA. That seemed sensible, especially given a strong cultural fit. In the end, the two couldn’t agree on a price (KLM wanted more than BA was prepared to pay).

    So KLM ended up with AF, and BA then bought Iberia.

    It looked to me like both of those mergers were unlikely to succeed. In fact, the BA-Iberia tie-up seems to have worked very well, with both airlines operating separately but with financial synergies through, eg, combined fleet purchasing.

    Unfortunately AF-KLM has never seemed to work. There has recently been some juggling of new plane orders between the two, but the intense government interest in the airlines hasn’t helped.

    Whereas the Spanish and UK governments have left IAG alone, the French can’t help but interfere in AF, while the Dutch see KLM (and Schipol) as vital national strategic assets — the latter a key part of Dutch attempts to continue to position itself as a world economic player.

    The fact the two governments have equity stakes, and the Dutch recently increased theirs to ensure they have a bigger say (to balance the French government), is a clue to why this merger has always been problematic.

    If I were in the Dutch government I’d want KLM released from the merger. With heightened tensions within the EU (and France and the Netherlands being on opposing sides of the current debates), things are unlikely to get easier anytime soon.

  24. @stratifier

    Agreed. AF may be wonky on the management/profit side, but their business class hard product and inflight service leaves KLM’s tired equipment and lackadaisical attitude in the dust. And if you’re not Dutch, it’s always much worse.

  25. I agree with Ben that things have improved over the last 18 months or so. That’s why a break up is less likely, now. Also in the Netherlands, a country less fond of state interventions, such an intervention has become more realistic given the COVID crisis. What remains is the strong cultural mismatch between – well, to be clear – the French politicians and those from the rest of Europe. I don’t think the people or the employees are so different, but the politicians are. French politicians simply can’t tolerate any other opininion.

    We exprienced this also here in Switzerland, where French politicians ran a fully fledged campain against the Swiss government’s COVID19 measures (imagine!). They only went quiet, when the Swiss curve bent quicker and more than the French one … But initially their view was that Switzerland has no sovereignty and should adopt the French measures. And equally they think the Netherlands has no sovereignty and should adopt the French position in respect of aviation industry policy. But as I said, that’s the politicians, not the people, nor the AFKL employees.

  26. Profitability differences is mainly due to social charges in France. Air France needs more money because the airline is twice the size of KLM! KLM would struggle alone because they rely on Air France commercial network. KLM hub is saturated while CDG has still significant capacity. KLM network is extremely dépendant on North American market while AF is diversified and that’s the main reason KLM failed in 2004 after the 9/11 crisis. If US borders stay closed longer, KLM will be in a very difficult position while AF can rely on the African and Asian network. KLM will also struggle more than AF on transatlantic with the surge of long haul low fare airlines due to its positioning: AF planes are half business class on three routes while KLM is mostly economy and have an average business class. Paris market is the biggest in Europe while Amsterdam is much smaller. The group would perform much better if KLM was accepting more synergies in fleet and purchasing. KLM CEO acts like he is working in a stand-alone company and has no group spirit. Ben Smith would have fired him if the Dutch government did not intervene. He should have left after he refused the group CEO position in 2018! He is like Dutch politician who are not respecting EU rules and acting as a fiscal paradise, they try to get advantage of the EU but do not accept any rules and solidarity. KLM CEO does the same with Air France!

  27. Let’s face it: France, the EU’s 21st century Argentina, always treats Northern Europe like their personal ATM. This situation is no different.

    Don’t bail them out, let them crash, and send no more money to the south. Their form of solidarity is a one way street. End the EU now, it’s just a racket.

  28. It seems people dont know what this seperation entails. Even when they seperate, they are still both in SkyTeam, so they will continue code sharing anyways. KLM leaving Air France will not change anything for KLM ,their profit will remain the same or even increase. Air France is underperforming and leeching off KLM. KLM is the better airline too as they’ve strived to improve over the last 5 years especially since they’ve been refurbishing aircrafts while half of air France long haul fleet cabin is aging. I think KLM will be just fine. I’ll admit Air France increased their popularity but it’s time to seperate.

  29. Let it be noted that British Airways has around the same fleet size as Air France and makes quadruple the profit. (Not a great comparison but still.)

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