Oh my, this is escalating quickly.
It has just been announced that the Dutch government has bought a 12.68% stake in Air France-KLM for 680 million EUR, and they hope to increase that even further. For comparison, France has a 14.3% stake in the company. The Dutch government says that they are doing this to “better safeguard the Dutch public interest.”
So, what exactly is going on?
Ben Smith was appointed CEO of Air France-KLM late last year, and he has been working on getting the different business units to work more closely together. This has included Air France and KLM cooperating more closely, which has been met with resistance from KLM.
The reality is that while Air France-KLM (the parent company) is looking out for the interests of both airlines, historically a lot more focus has been on Air France. The company has always been headquartered in Paris, and up until their most recent CEO, has always had a French CEO.
Smith has been trying to get Air France and KLM to cooperate more closely. On the surface this makes sense to me, since surely there are a lot of synergies they’re missing out on. At the same time, KLM is performing well, while Air France historically hasn’t done as well (largely due to labor issues). KLM and the Dutch are worried about what closer cooperation would mean for the airline.
There had been rumors that KLM’s CEO, Pieter Elbers, wasn’t onboard with Smith’s vision for the company. This became a big issues in the Netherlands, and the government even wrote a letter of support saying it was important he stay on. It was recently announced that Elbers will be staying on, but it seems like there’s still some bad blood.
For example, this photo op between Smith and Elbers is causing many to wonder just how much bad blood there is. They’re asked three times to shake hands, but don’t do so (it’s also possible they didn’t hear it, but…).
#Auw. Een ‘handshake’ tussen Benjamin Smith en Pieter Elbers zit er niet in voor de vaderlandse pers. #telegraaf #AirFranceKLM pic.twitter.com/FAA7q0CSKK
— Remke Polder (@remkepolder) February 20, 2019
Now the Dutch government has taken this “war” to the next level, by taking a bigger stake in the company, and they’re viewing this as protecting the interests of the country.
Bottom line
This is going to be a very interesting situation to watch unfold over the coming weeks.
Smith is a bright guy, and I think he’s on the right track with wanting closer cooperation between the two airlines. However, he probably wasn’t quite anticipating the extent to which this would become a national issue.
At this point we have the Dutch government stepping in and trying to change the course of the airline at the cost of hundreds of millions of Euros. They’re more than welcome to do that, of course, but this will make things even more challenging.
Wow…
(Tip of the hat to @thomas199023)
While I don't disagree with the arguments, the evidence you're all using is suspect.
Continually stating that KLM currently make more profit isn't really relevant to their goal. Air France has a bigger potential profit, and companies look to the future - not always the past.
The Dutch governments responsibility is to the Dutch people and not to make Ben Smith's life easy. It's clear that Ben sees KLM and the Dutch market as a lower prioriry and clearly seems to have a poor understanding of the situation.
Totally agree with majik above. Also Chandan Bhat makes some great points too. In my view KLM would be better off without AF - AF is a basket case and it is laughable he is trying to make it a "premium carrier". Neither are industry leaders, but KLM at least has fantastic staff, a great hub and a good consistent product particularly in short-haul.
I also understand Ben/Lucky admires Ben Smith, but do think this...
Totally agree with majik above. Also Chandan Bhat makes some great points too. In my view KLM would be better off without AF - AF is a basket case and it is laughable he is trying to make it a "premium carrier". Neither are industry leaders, but KLM at least has fantastic staff, a great hub and a good consistent product particularly in short-haul.
I also understand Ben/Lucky admires Ben Smith, but do think this isn't nearly critical enough at the same time he is human and AF is frankly a nightmare - but I do think he is completely failed from the get go of uniting these two carriers and has actually alienated the only part of his business that makes money and is successful.
Frankly I think AF/KLM as an entity is not rescuable - I don't think you could find a more ill matched pair of airlines culturally. Demerger would be the best outcome. I actually miss the days when KLM tried to be a global carrier like we see with Turkish, Emirates or Qatar and I do think they out of all the Western European carriers are the one that have the best shot at this if they ever do return to this goal...
I have to join the other commenters here and question just why this article is still talking about what a “smart guy” Ben Smith is and what wonderful things he is doing/trying to do for AF-KLM.... we don’t have enough information to evaluate that at all yet, and we certainly don’t know what his intentions are eg saying he is just “wanting closer cooperation between the airlines”.
From the limited evidence so far since he...
I have to join the other commenters here and question just why this article is still talking about what a “smart guy” Ben Smith is and what wonderful things he is doing/trying to do for AF-KLM.... we don’t have enough information to evaluate that at all yet, and we certainly don’t know what his intentions are eg saying he is just “wanting closer cooperation between the airlines”.
From the limited evidence so far since he has been in charge, he has managed to increase the labour costs at AF quite substantially, while utterly alienating the management and employees of the Dutch side of the corporation, which has been carrying the group financially for years. This does not scream “success” to me, although as I have said it’s too early to make final judgements.
In addition, this statement that Smith “probably wasn’t quite anticipating the extent to which this would become a national issue” is frankly a bit absurd; the man was brought in to take over the holding corporation of two national carriers. If he was unaware that “robbing Peter to pay Paul” in this situation would create a problematic political issue with one side then he was not fit to take the job.
I enjoy your coverage of this interesting topic Lucky but please try and make it a bit more balanced.
It’s time for Delta to pony up some serious cash to take a major stake in KLM. Northwest/KLM were seriously joined at the hip before the NW/DL merger and that partnership reaped huge benefits for both carriers. AF will never be as important to Skyteam as KLM. AF doesn’t have the hub, the management, or frankly the will of the employees to pull it off. They are too focused on being “French” at the expense...
It’s time for Delta to pony up some serious cash to take a major stake in KLM. Northwest/KLM were seriously joined at the hip before the NW/DL merger and that partnership reaped huge benefits for both carriers. AF will never be as important to Skyteam as KLM. AF doesn’t have the hub, the management, or frankly the will of the employees to pull it off. They are too focused on being “French” at the expense of running the business. Yes, KL is very “Dutch” but unlike AF they are also pragmatists. Something the French are not. There are many former NW upper management people now at DL who remember well the synergies created by the NW/KL partnership. It’s time for DL to take another look at that and protect what they have.
@Danko
Amen to that, you hit the nail on the head.
This is less about 'KLM funding AF' (which of course isn't great, but wouldn't be enough for a government intervention) - but more about protection of the Dutch economy, which is so heavily dependent on being an international distribution hub (Rotterdam, Schiphol). International connectivity is essential.
While I don't necessarily love government intervention, I think this is a move that needed to...
@Danko
Amen to that, you hit the nail on the head.
This is less about 'KLM funding AF' (which of course isn't great, but wouldn't be enough for a government intervention) - but more about protection of the Dutch economy, which is so heavily dependent on being an international distribution hub (Rotterdam, Schiphol). International connectivity is essential.
While I don't necessarily love government intervention, I think this is a move that needed to be done to be taken seriously. The government of France holds a similar stake in the company, hence to me it makes sense that the Dutch state would also like a seat at the table.
I just checked mentioned financial results for 2018:
- KLM Group operating result 1,073 bil EUR (operating margin 9.8%),
- Air France Group operating result 266 mil EUR (operating margin 1.7%)
KLM has 2.5x less employees and a smaller fleet. Indeed, the situation in their respective home markets is completely different but regardless - wow... I did expect to see the difference but not a huge one like this.
@ Rafi
“Publicly traded companies exist to earn a return for their shareholders. ... But that doesn’t give me or the city the authority to tell a business how to operate.”
That is a very “purist” position which seems to be based on the idea that corporations are somehow independent from society. They are not: they are creations of society, and exist to serve it.
While for the most part it’s usually better for governments...
@ Rafi
“Publicly traded companies exist to earn a return for their shareholders. ... But that doesn’t give me or the city the authority to tell a business how to operate.”
That is a very “purist” position which seems to be based on the idea that corporations are somehow independent from society. They are not: they are creations of society, and exist to serve it.
While for the most part it’s usually better for governments to set a framework of rules and then let the corner shop or the baker, etc, get on with it, the fact is that some corporations are strategically important. This is most often publicly recognised with defence industries (governments often retaining ultimate control or veto powers for themselves), but aviation has also been one of those industries: why does even the US place strict limits on the maximum % of its airlines that can be owned by foreign investors?
Corporations were invented to pool investment risk and to encourage extreme entrepreneurialism. They were a tiny niche part of society. Granting them “legal personality” was a huge advance in the development of industrial economies (it’s unlikely the railways could have been built without corporations, and the finance structures that go with them).
But if a corporation was human it would be recognised as a dangerous sociopath, utterly self-interested and exploitative of all around it, usually minimising its taxation / returns to the society in which it is embedded, and from which it derives its wealth.
If the relationship becomes too one-sided, it seems likely at some point that there will be a fundamental shift. That dangerous commie lefty Eisenhower was warning more than half a century ago about the improper power of the military-industrial complex. Since then it’s only got stronger.
So I’d think the Dutch government is right to be worried about the strategic direction of one of its critical industries. The money they’ve spent is an investment - so they’ll likely get it all back. And in the meantime they’re buying balance to the influence of the share-owning French government.
Seems sensible to me.
Two things:
1) If the only thing Smith wants is for two parts to be closer, why doesn't he give a statement in the media or internal statement about his plans? There is a reason why this charade lasted more than two months. Note that Delta and China Eastern have a seat on the board and they were supporting Elbers from the start. I know for a fact that working together were/are not his...
Two things:
1) If the only thing Smith wants is for two parts to be closer, why doesn't he give a statement in the media or internal statement about his plans? There is a reason why this charade lasted more than two months. Note that Delta and China Eastern have a seat on the board and they were supporting Elbers from the start. I know for a fact that working together were/are not his plans.
2) Dutch finance minister said that they bought stake cause they as a government feel that agreements and contracts made in 2004 will not be honored, and they need a saying in the board as well. I think that tells a lot about what was happening behind the curtains.
Seriously Ben, people have every right to make fun of you regarding Smith. And the conclussion you made is quite... let's say interesting.
I haven’t really noticed the synergies since these two national airlines merged. I can usually spot it easily when companies merge, but the combined airline doesn’t seem to be any more efficient or effective than its two components. Can someone describe these business benefits? Perhaps these two should split up?
Is Northwest/KLM still in business with DC-10’s and World Business Class?
Better move Air France-KLM to AMS to focus on KL.
CDG is a shithole.
I really like flying KLM and I like AMS more than the vast majority of other airports. I`d hate KLM to change just one bit.
This bold act of the Dutch government, reminds us of exactly why and how The Dutch once became a huge colonial power, a trading powerhouse, one of the most wealthy nations in the world and a force to be reckoned with on the world stage, only centuries ago, mentioned in one breath with the other three, equally illustrious, sea faring powers of old; the Spanish, The Portuguese and The British. As a people, nowadays, they...
This bold act of the Dutch government, reminds us of exactly why and how The Dutch once became a huge colonial power, a trading powerhouse, one of the most wealthy nations in the world and a force to be reckoned with on the world stage, only centuries ago, mentioned in one breath with the other three, equally illustrious, sea faring powers of old; the Spanish, The Portuguese and The British. As a people, nowadays, they may not look that nationalistic or patriotic perhaps, but make no mistake, cheese, wooden clogs and tulips can also beat the shit out of you. I salute them.
Jordan
I don’t have an issue with posts about AF-KLM but many of us do have issues with Luckys belief that Ben (Smith) can do no wrong and calling him just ‘Ben’ in many previous articles rather than just ‘Smith’ like he had in this one grated with many.
So far his decisions when he was temporary CE of AF (rather than the group as a whole) has and will cost AF billions in the...
Jordan
I don’t have an issue with posts about AF-KLM but many of us do have issues with Luckys belief that Ben (Smith) can do no wrong and calling him just ‘Ben’ in many previous articles rather than just ‘Smith’ like he had in this one grated with many.
So far his decisions when he was temporary CE of AF (rather than the group as a whole) has and will cost AF billions in the future in salary payments to pilots and cabin crew etc so no wonder he wants more cooperation (read cash from KL to AF) between the two. His basic capitulation to the AF unions is not a success by any measure of the word. What did he get in return? Certainly no huge changes in working practices and efficiency.
Perhaps we are looking at a potential split of the group and the two airlines will go back to being totally separate companies.
Publicly traded companies exist to earn a return for their shareholders. The 60+ percent of Air France KLM shareholders that aren’t a government are the majority owners of the airlines. I live in a city that would be devestated if it lost its airline hub. But that doesn’t give me or the city the authority to tell a business how to operate.
You can argue that the airlines shouldn’t have been privatized. You can...
Publicly traded companies exist to earn a return for their shareholders. The 60+ percent of Air France KLM shareholders that aren’t a government are the majority owners of the airlines. I live in a city that would be devestated if it lost its airline hub. But that doesn’t give me or the city the authority to tell a business how to operate.
You can argue that the airlines shouldn’t have been privatized. You can argue that the merger should have been blocked by anti-competition regulators. You could have a national government try to become the owner of the airline again. But, for now, it needs to earn the best return for all of its shareholders—even if that means that winners and losers are created in the process.
@Mauricio Matos - Exactly!
@Ben - Wow is AF/Ben sponsoring OMAAT or are you being "forced" to report every movement of KL in 2019?... this is starting to ruin things. Perhaps its some sort of weird obsession (stuck on loop in your head)?. You must realize (or jeeez someone on your team) that you've posted waaaaaay to many KL stories.
Time for a "news" section.
Ben Smith had achieved a lot indeed. His nativity and misunderstanding of the situation between AF and KL has made the Dutch government do what non of his French predecessors achieved; Investing nearly a billion and stepping in to protect the position of KLM. Unprecedented.
Who thinks this is just a company, think twice. The Dutch economy is one of most open in the world, and with 326 direct destinations Schiphol is the 2nd best...
Ben Smith had achieved a lot indeed. His nativity and misunderstanding of the situation between AF and KL has made the Dutch government do what non of his French predecessors achieved; Investing nearly a billion and stepping in to protect the position of KLM. Unprecedented.
Who thinks this is just a company, think twice. The Dutch economy is one of most open in the world, and with 326 direct destinations Schiphol is the 2nd best connected Airport in the world. Which boast the economic trade climate of the Netherlands, one of the richest countries in the world. Schiphol and the Port of Rotterdam are main gateways for international trade.
KLM is the crown jewel in this all, and KLM’s results and management deserve to be taken serious in Paris. Smith achieved that the distrust in him and AF became that big that the Dutch stepped in to protect KLM, but mainly, the strategic position of Schiphol and KLM.
Indeed the Dutch are not willing picking up the French non reform premium bills, and Smith’s actions backfired big time now with this unprecedented move of the Dutch.
KLM wants to cooperate with, not sponsor French airlines. Bold and bright move of the Dutch and this will keep Smith awake this night.
I think people in the US don't have a sense of what an airline means to most countries. Since the US is such a big country and have multiple airlines, it doesn't apply. But most countries, even in Europe, have that one airline that, even if it's a private company, is still the "national airline". So people (and governments) tend to protect it.
Here in Portugal, the privatisation of TAP Air Portugal was definitely...
I think people in the US don't have a sense of what an airline means to most countries. Since the US is such a big country and have multiple airlines, it doesn't apply. But most countries, even in Europe, have that one airline that, even if it's a private company, is still the "national airline". So people (and governments) tend to protect it.
Here in Portugal, the privatisation of TAP Air Portugal was definitely a national thing...so much so that it was privatised 80% and then a new government came and reverted it so the government kept 50% of it.
So no, this is not just like any other business, even if it's private.
People should remember that this is a private company that is publicly traded on Euronext. National governments own a minority of the investment. Their first duty is to shareholders—not to national interests or feelings. Businesses make differing decisions about how to spend money and resources, which don’t just take into account recent profitability of a single business unit. Lots of businesses will use profits from one product line to build out another. We can speculate...
People should remember that this is a private company that is publicly traded on Euronext. National governments own a minority of the investment. Their first duty is to shareholders—not to national interests or feelings. Businesses make differing decisions about how to spend money and resources, which don’t just take into account recent profitability of a single business unit. Lots of businesses will use profits from one product line to build out another. We can speculate and disagree as to what’s a good business strategy, but this isn’t a joint venture between two national governments. It’s a private company. If you read the FT article on this whole spat, you’d see that Ben is largely on point with how the business world has regarded this whole issue. People really need to chill...
@ magice
You completely got it. Because AF was screwing KLM and ‘Ben’ intended to screw some more by taking the cash out of KLM to subsidize AF, some protection had to be put in place.
i like it when he goes quiet when commenters question his questionable prose
I think all commenters must chill out.
Look, no one says the Dutch government must never ever increase their stake. They can. However, it's one thing to do it for them to, says, bail out the airlines or sock away some extra cash (I mean, must be nice to tax enough to have cash to do that). Or maybe a longer term planning for the investment. For example, no one would say anything if the...
I think all commenters must chill out.
Look, no one says the Dutch government must never ever increase their stake. They can. However, it's one thing to do it for them to, says, bail out the airlines or sock away some extra cash (I mean, must be nice to tax enough to have cash to do that). Or maybe a longer term planning for the investment. For example, no one would say anything if the Nederlands wants to push for more recognition of how great of a destination they are and to get in more passengers from some far away continent. Whatever. That's business. No hard feeling.
The problem with this announcement, according to lucky, is the in-your-face corporate-nationalist-politicking. It's like "yo, the Frenchies are bullying us! must retaliate! Make KLM great again!" It looks more like people screwing each other than partnering, which is just sad.
Maybe, once he resolves the issues with AF, then he can demand a closer cooperation between AF and KLM. Right now he is asking KLM to subsidize AF, even when AF employees has higher pay and runs a horrible product and service.
I guess a matter of no choice. Ben Smith would suck KLM empty to keep AF afloat and that is strategically not acceptable for the Netherlands. KLM directly and indirectly has quite an impact on the dutch economy.
Just look at the results and the facts tell the story.
I don't get your admiration for B. Smith. All he has done so far is giving in to AF demands. To me he seems...
I guess a matter of no choice. Ben Smith would suck KLM empty to keep AF afloat and that is strategically not acceptable for the Netherlands. KLM directly and indirectly has quite an impact on the dutch economy.
Just look at the results and the facts tell the story.
I don't get your admiration for B. Smith. All he has done so far is giving in to AF demands. To me he seems a weak leader with little heart for the group as a whole.
Generally I am strongly against any government intervention but this was a case of simply no choice.
Another stream of income in the future possibly for them.
I'm with the others here. KLM has been the profitable part of the business. Now Smith wants to relegate them to a second tier position so AF can be the golden child? Good luck convincing the Dutch on that one.
@Adam I like KL but AF do some things just so much better.
Along with the wine KL could learn a thing or two from AF catering. AF catering is fantastic compared to the mediocre offerings at KL. AF also has better seats in J on their refurbed planes. They also offer better amenities and bedding than KL.
Where KL wins is with the service. KL FAs are more attentive but I figured this...
@Adam I like KL but AF do some things just so much better.
Along with the wine KL could learn a thing or two from AF catering. AF catering is fantastic compared to the mediocre offerings at KL. AF also has better seats in J on their refurbed planes. They also offer better amenities and bedding than KL.
Where KL wins is with the service. KL FAs are more attentive but I figured this is purely because they are better English speakers. AF FAs aren't strong English speakers and the older ones at least need to be warmed up with your schoolboy French. However AF FAs are willing to bend the rules a bit whereas on KL service is by the book. On the ground KL wins hands down. AMS is way more organised than CDG. Don't get me wrong, you're still looked after at CDG but service is often delivered with a sigh and a Gallic shrug.
@Adam Auxier and their food too. In my experience KLM has always given me significantly better food and more choices across the board than AF has too, but that might just be a one time thing with my experience
Sorry Ben, but whole bottom line paragraph deserves a proper facepalm.
I'd fly KLM over Air France any day of the week. Hope KLM protects themselves well
Why is the second part in the quotes? Is airline ownership of any government worldwide the same thing? Or the reverse question - why don't you question French ownership, they are still the biggest shareholder?
Your one sided Smith-worshiping is really ridiculous. Double check your facts, Ben. Do you really think that Smith just wants two parts to cooperate and Dutch side doesn't? You really think that it's that simple?
By the way...
Why is the second part in the quotes? Is airline ownership of any government worldwide the same thing? Or the reverse question - why don't you question French ownership, they are still the biggest shareholder?
Your one sided Smith-worshiping is really ridiculous. Double check your facts, Ben. Do you really think that Smith just wants two parts to cooperate and Dutch side doesn't? You really think that it's that simple?
By the way - why don't you include financial performance of both KL and AF in 2018. Numbers are out.
Based on my last trip on KLM, the only thing they need from Air France is their wine selection.....
It's quite funny how you are sticking with this obsession with Smith. So Ben, did you check in the news the financial result of the group for 2018? When you do I think it will become clear to you why Dutch government wants to protect its strategic position from ideas Smith had before high politics intervened.
I'm sorry, but I don't see how it's logical of Smith to pay AF employees more than KLM while also expecting KLM to divert profits to AF and not anticipate backlash from the Dutch.
When you touch our airline, you touch our soul. Ben Smith learns it the hard way.
Let's get this out in the open. It is clear that Smith had no idea about the importance of KL to the workings of AFKL. It has also been clear from his appointment that his primary mission has been to reinvigorate the AF brand and return it to premium status. He has dispensed with Joon and clarified the HOP! sub-branding, what positive things has this 'bright' man done for KL? Nothing, zero, zilch, nada. He...
Let's get this out in the open. It is clear that Smith had no idea about the importance of KL to the workings of AFKL. It has also been clear from his appointment that his primary mission has been to reinvigorate the AF brand and return it to premium status. He has dispensed with Joon and clarified the HOP! sub-branding, what positive things has this 'bright' man done for KL? Nothing, zero, zilch, nada. He has however disparaged the KLM brand with an eye to turning it into the value carrier division of AF. This rightly drew the ire of Elbers, KL staff and the Dutch government. It seems that Smith may be well out of his depth here.