The Challenge Of Closer Cooperation Between Air France & KLM

Last year Ben Smith was appointed CEO of Air France-KLM. This was a huge move for a variety of reasons, not the least of which is that he’s the first non-French CEO of the company.

Smith has accomplished a lot in a short time

Air France and KLM still have their individual CEOs, and Ben is leading the overall vision for the parent company. He’s one of the most competent people in the airline industry, and I also know he’s someone who likes to get things done fast.

Some executives take years and years to execute their vision, while Ben has made huge changes in the few months he’s been at Air France-KLM:

  • He has done a great job negotiating with Air France unions, which is something he has always been good at, as he did a similarly good job with that at Air Canada
  • Air France is ending Joon, their failed low cost carrier expansion; this is also a big gesture of goodwill towards Air France employees
  • Ben has made it clear that he wants Air France to become a more premium airline and to have better brand recognition, and has taken several initiatives towards making that happen

As you can see, even though he’s the CEO of Air France-KLM, a lot of his efforts so far have been focused on Air France rather than KLM. As I’ll discuss below, that’s largely because there’s so much more to be fixed at Air France.

I’d say things have gone extremely well so far, though I think Ben is about to face one of his most challenging tasks yet, as he tries to get KLM onboard with his vision.

The dynamic between Air France & KLM

Before we talk about the news as such, I want to briefly talk about the dynamic between Air France and KLM.

Air France-KLM is one of the “big three” European airline conglomerates, along with IAG (parent company of British Airways, Iberia, Aer Lingus, etc.) and Lufthansa Group (parent company of Lufthansa, Swiss, Austrian, etc.).

One of the biggest problems that Air France-KLM has is that the two airlines don’t work closely together. So while the other major airline groups cooperate in so many other ways, Air France and KLM have surprisingly little cooperation.

At least on the KLM side this is probably intentional. Historically KLM has been really well run, they’re profitable, and they have a well liked CEO. Historically none of those things have been true of Air France.

It’s understandable that up until now KLM has refused at all costs to work more closely with Air France, since they feel like Air France will only drag them down. For that matter, they feel like they’ve largely been neglected by the overall parent company. It’s pretty telling that up until now, all Air France-KLM CEOs have been French, and the company is based in Paris.

That brings us to the current issue.

Ben Smith wants Air France & KLM to work more closely together

Ben has made no secret of the fact that he wants Air France and KLM to work more closely together. In a logical world, they 100% should, as there are so many synergies to be had. The problem is convincing KLM that they’d benefit from this.

On that note, Bloomberg is reporting unnamed sources as saying that discussions are happening at Air France-KLM over replacing KLM CEO Pieter Elbers. Why? He’s apparently not fully supportive of Ben Smith’s vision to strengthen ties between the two airlines.

Pieter’s current contract ends in April 2019, and apparently there are discussions about whether it should be renewed.

While Air France-KLM has refused to comment, a KLM spokesperson has said that nearly 13,000 people have already signed an online petition calling for Pieter to remain on as CEO. This has even become such a national issue that the Dutch government sent a letter to KLM’s supervisory board praising his record.

My take on this situation

Ben is one of the most brilliant guys in the airline industry, and he has accomplished a lot in a very short period of time at Air France-KLM. I’m thrilled to see the company finally having a direction, and I think the two airlines have so much potential.

Meanwhile Pieter has done a phenomenal job as CEO of KLM. I have so much respect for him personally as well, as he has been at the airline for over 25 years, and worked his way up.

It’s rare for an airline CEO to be popular among employees, but he really has been, and the company’s record under his leadership speaks for itself.

I think there’s simply no denying that closer cooperation between the two airlines is in the best interest of the combined company, Air France-KLM. But actually getting both parties onboard with that is challenging.

I can’t blame KLM’s CEO for resisting closer cooperation with Air France.

Now, hopefully Air France is reaching a turning point where they’re improving, but it will take years until they’re on KLM’s level.

What I think needs to happen is that Ben needs to make sure that Pieter stays on. He’s popular with employees, and Ben will lose a lot of goodwill with KLM’s frontline staff if he’s perceived to be kicking out Pieter.

So, what should happen? Air France-KLM should take a slow and steady approach to create closer cooperation between the two airlines. It’s possible to make changes without making KLM feel bulldozed.

I’ll be very curious to see how this all plays out. This is going to be a huge challenge over the coming months, and will certainly set the tone for how KLM employees feel about the new direction of Air France-KLM.

What do you make of this situation?

Comments

  1. I’m not sure about the accomplishments of Smith in his first months. His quick success in labor negotiations is mentioned all the time, but what actually happened is that he simply signed for the wishes of the unions that have been on the table for over a year.

    This means that the costs of labour at AF are now over 30% higher at AF than at either KLM, IAG or the Lufthansa group. How can that be an accomplishment? And how is he going to explain KLM staff that their colleagues at AF earn so much more, especially with his “close collaboration” wishes?

    Besides that, he managed to become extremely unpopular with KLM staff within only a few months, by wanting to dismiss Elbers, by not having any communication with the KLM side of the company at all and by proposing to fill AF budget holes with KLM profits and cost-cutting at the KLM side instead of AF.

    I very much wonder where this positive attitude regarding Smith in online media is coming from.

  2. At this stage and for the foreseeable future closer cooperation between KLM and Air France will only drag down KLM. AF has made significant progress but a lot remains to be done. In comparison KLM operates as a fairly well oiled machine and it would be foolish to tinker with it at this time.

  3. KLM employee here and one of those 13 000 people from the article. My take on this is simple – all the respect and admiration I had for Smith in the last couple of months disappeared after his answer on the question from one of our FAs – ‘what is KLM’s future in the group’, the situation with Elbers just puts more people into that direction – KLM has been keeping this group afloat for years and the guy who turned the company around and made that possible must stay.

  4. Good analysis. The work culture between the two countries could not be bigger. Not only the difference of work ethics (many strikes by Air France pilots), also a lot of difference in efficiency. I think KLM and Lufthansa would be a much better match.

  5. Ben Smith needs to pick his battles wisely. Why change an organization like KLM when it’s already doing well and profitable?
    It’s a given that AF and KLM should work more closely together but I’m sure there must have been reasons why they have not in the past several years. Ben Smith needs to understand those reasons and then see how he can make the two work together one task at a time. Having these rumours of getting Elbers replaced though is not helping Ben Smith win any praise from the KLM folks at all. Good luck to Ben Smith in accomplishing this task!
    The only reason I can think of as to why Ben Smith wants Elbers replaced is that Elbers is a threat to Smith’s job (given Elbers’s record with KLM, perhaps the board should have made him the CEO of AF/KLM?)

  6. The massive strategic error was made decades ago, when KLM was in a dance with BA that was expected to lead to merger. But KLM valued their stake in the combined entity higher than BA was prepared to concede: to everyone’s astonishment KLM then walked away, straight into the waiting arms of AF.

    BA sought solace with Iberia, and hence IAG was born.

    It is difficult to imagine two less-well matched companies than AF and KLM. I have eeen no evidence of their corporate cultures moving closer together over the years.

  7. KLM was in 2004 in a very very bad situation whereas AF was in a really good one, that’s why Air France buy KLM and make KLM what they are today
    So no KLM wasn’t always well run

  8. BA regrets deeply what happened with KL, but makes IB work and it works pretty well. KL regrets being forced to join AF. KL should have a much bigger say in the AF-KL structure since it knows how to run an airline alot better than AF.

  9. @ Jordan

    Yes, I was sceptical about a BA+IB consolation merger, but it has seemed to work well. As has, so far, taking over Aer Lingus.

    I do wonder how much stronger a BA+KLM merger would have been though.

  10. Stop with the love-in with Mr Smith.

    You start every article about AF-KLM by (a) calling him Ben which you don’t do when you write about other airline Chief Execs and (b) singing his praises yet he’s hardly been in the job 5 minutes.

    You also ignore the contribution of the AF CE Anne Rigail made in getting a deal with the AF unions which comes across as crass and sexist.

    Do you have a personal friendship with him? If so you should clearly state that as it seems to cloud your judgement.

  11. What Mr. Smith has ‘accomplished’ at Air France recently costs soooo much financially in short term. Until these measures prove to be beneficial in longer term, KLM has absolutely no interest of getting more involved.

  12. AF and KL have always been a strange couple. I doubt this liaison will work long term. I doubt AF can be “fixed” from an economic standpoint. The airline business is cut-throat and the one with the lowest cost wins. In response to an unsustainable and uncompetitive cost structure, AF is trying to get further upmarket (this decision by Smith is defensive, not a sign of strength), where they’ll likely find out that the market size is simply too small to support them. Meanwhile, placating the unions by yielding to them will just encourage them to ask for even more in the next round.

  13. Where dan I find the link to sign the petition to keep Pieters on board?
    I have traveled both airlines and now choose KL any day. You can not compare the crew and the service. I would be very sorry if KL went more like AF.
    Agree that KL would work better with LH than AF.

  14. Lots of nonsense here. AF has been profitable for many many years during 1960s/70s/80s and at the end of the 90s and until ca. 2007. Except for its mid 90s crisis (because of the adquisition of UTA and Air Inter) and the last years, AF has been historically a profitable and performing airline, unlike KLM and its recurring losses until the 2004 merger. KL greatly benefited from AF commercial strength. Even if AF has to improve, it is far from being a historically fucked-up airline (like Alitalia) as a lot of people seem to believe

  15. Managing any French company is a huge challenge because they have a culture of bloated pay and benefits, and of course strikes all the time

    Now, this can mean good service. Nobody thinks that AF service is bad. Of course it is good, because they are over-staffed. Ever taken French trains? They are fantastic, because there are employees everywhere. But of course it is run by the government who can just raise taxes to pay for it all.

  16. Mr. Ben Smith is in favor of a role where he ‘leads’ both companies. He is now realizing this is not that easy. Off course KLM is hesitant to flush all their effort and profit down the drain in Paris. Furthermore, and unlike the LH or IAG structures KLM is not just a part of the group, it’s an independent part that has its majority shares placed in the Netherlands. KLM has by law to be 51% Dutch to remain its landing privileges at Schiphol. KLM has an tremendously positive cash balance and for years several AF-KLM CEO’s wanted access to that. To fill gaps at the AF end. Because of the never ending losses and strikes, and inability to reform KLM has never given in to that demand. In the merger agreement between KL and AF this is also formalized. Independence is guaranteed to the Dutch government because of the enormous importance of KLM to the Dutch economy and to as hip hop. Smith wants to break these rules and wants a seat on the KLM’s supervisory board, which is not allowed under Dutch corporate government rulings. Elders stands for for KLM and pointed this out to Smith. Elders became a stand in the way, and a threat, to Smith. But Smith is very naive if he think this will end well. If he persists in replacing Elbers it will unleash a full on war between KL and AF. This will only result in bad news for the group as a whole. KL and Elbers want to integrate, but want to see efforts made at the AF side first, which is a fair stand. In the end I think Smith is making a mistake of a lifetime if he persists in this strategy.

  17. Not so sure about what Ben Smith has accomplished other than giving in to the unions which are way too powerful in France to be healthy.
    KLM is a well run airline, and the only reason why Ben Smith is trying to get rid of Pieter is that he feels threatened by him. He does not even communicate with Pieter.
    So my take is that Ben Smith has his own interests at play here, maybe less so the interests of AF/KLM and certainly not the interests of KLM.
    Given the fact that Ben Smith is being hyped up and the french are staunchly nationalistic, the only solution here is for the KLM employees to hold tight to Pieter, the Dutch government to play whatever cards of national interest they have left and dor the KLM M&A team to start working with PE firms to get out of this mess and then possibly get themselves into an alliance (but not acquired by) Lufthansa.
    Dutch culture is not all that different from German culture and discipline and should work well.
    Another option that would culturally work is an association with SAS.

  18. @ Danko

    I was not aware of the 51% requirement, but that is a solid one.
    And yes, for years AF has been trying to get its fingers into the KLM cash.

    You are right that under Dutch Law and corporate governance a shareholder cannot be on the supervisory board.
    This is the eternal confusion for people who have grown up under English Law, as Ben Smith has, and the single tier Board system is which the Chairman of the Board and CEO is allowed to be the same person – eventhough this is bad practice.
    Under the two tier board system this is not allowed, not possible. Even more so, the Board of Directors (management board) is NOT accountable to the Board of Commissioners (supervisory board), but both boards have distinct roles and both boards are indepently accountable to the Annual Meeting of Shareholders.

    In simple words, Ben Smith has the illusion he is the boss of Pieter Elbers which in reality he is absolutely not.

    I have been in situations like this and it annoys the hell out of shareholders who do not comprehend the two tier board system, particularly for publicly listed companies, but this is how it works.

  19. I do not understand why many people propose that KLM should be part/ or work together with Lufthansa. KLM should never ever be part of the Lufthansa group. The only goal of the LH group is to strengthen the position of Lufthansa. If Swiss and Austrian kept their independence, they could be major players in Europe. But since they are part of Lufthansa, they will always remain in the shadow of LH.

    KLM would have never gotten their 787’s or their new business class if they were part of the LH group, because that makes them too competitive for LH. Even the ‘smile’ of KLM flight attendants are too expensive for Lufthansa.

    German work culture is very different than Dutch working culture. Dutch people are decision makers, straightforward and easy to work with. Germans are too strict and tight, and getting things done are much more difficult.

  20. What does ‘work more closely with AF’ mean here? From a passenger perspective they seem to work pretty closely as it is already. What exactly is it that BA/IB or LH/LX/etc are doing that KL/AF isn’t? Very curious.

  21. @ rfrn

    You are right. With working more together AF means access to KLM cash and no independence. Also Smith leaked documents he wants to make KLM a leisure airline and AF a premium airline. Breaking down a really profitable, respected and successful airline in favor of your under performing part. No wonder KLM staff – Elbers and everybody who is behind him – and even the Dutch government will do everything in their power to prevent this.

  22. Couple of weeks ago, Smith attended yearly cocktail of Dutch pilots’ union without anyone from KLM attending or even knowing that he will be there. My guess is that he was trying to get that union on his side, but last week all unions gave support to Elbers.
    I also think that his ‘success’ at AF is overrated since he just agreed to all requests and that will cost a lot of money – let’s see annual financial results in 2 weeks.
    On top of this, rumours are that his idea for AF-KL is to function as Air Canada – Air Canada Rouge which is ludacrious if true.
    He is definitely loosing support on Dutch side and I am with KLM employees, CEO and Dutch government on this.

  23. Yeah the cash balance of KLM is bothering the guys in Paris a lot. I remember a while ago there was also some action to try and get 1 bln of that cash out. Good thing it didn’t happen.

  24. The only form of cooperation between these airlines can be AF becoming like KLM already is. I´m using SkyTeam all the time to fly between US and Europe and I love KLM while I hate AF.

  25. I agree with many statements above that the hyping of Mr. Smith has no fundament at all.

    I am not working for KLM but see that Mr. Elbers is somebody you would like to work for.

    From several sources i read only i can only conclude that Mr. Smith is playing sneaky games behind one’s back. If this continues, this might end up very nasty. I hope for him and not for the whole group.

  26. Let’s face it, France is the EU’s Argentina, a nation in steep decline with nostalgia of past grandeur. In the case of France, this means acting out as if they are still a superpower and trying to harness Northern European financial power while protecting French agriculture, state-owned companies and the white elephant in Strassbourg while breaking all the rules. The silly Euro is a result of all that, and so are the shenanigans around AF. Privatize it and clear out the excessive, unionized overhead. Don’t let them bleed others so they can carry on ignoring their problems.

  27. Tweettweettweet – Utter rubbish based on lazy stereotypes. Did you know French people work longer hours than the Dutch?

  28. @ peter. Like many here you are ignorant of the fact amongst other things , AF (AF/KL) is a private company My last flights have been a delight having flown in both business and economy . Nice lounges , organised boarding , polite and helpful staff , great food at the front ,comfortable and on time Charles de Gaulle airport is far better than it used to be and is quite easy to navigate. Although it needs more cheaper food options

  29. @Lucky:
    You miss the main point completely. As a CEO, you need a management team that is loyal to you and your strategy. If you have a person in charge of half of your operation who disagrees and/or sabotages this, that person needs to go. A company is not a democracy.

    This doesn’t mean Elbers is doing a bad job, or that Smith is doing a good one.

  30. As others have said KLM and AF couldn’t be a worse match for each other – they should demerge. Closer alignment with AF will be a disaster for KLM, it will also ruin the vastly better service they provide compared to their French counterpart. I am very happy flying KLM, but I refuse to fly AF. Its not the tangible that makes them great, it’s the overall culture and impression you get from their employees – AF staffs attitude stinks generally…

  31. Anne Rigail the CEO of AF who everyone appears to forget above in their testosterone fuelled posts, confirms 7 A380 will be refurbished and 3 returned to lessors. More 777s will be refurbished. The first a350 will be delivered in September 3 more 787-9s … and they will place an order for new aircraft at the Paris air show

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