Editor’s Note: Following our previous CEO interview series in online travel, hospitality, and destinations, as well as our CMO series across verticals, we’ve launched another series, this time focused on the CEOs of leading airlines outside of the United States.
To better understand the challenges facing airlines in an age of fluctuating oil prices, rapid growth, and changing passenger expectations, our Future of Passenger Experience series will allow leaders in the industry to explain their best practices and insights. Read the rest of the series here.
This is the latest interview in the series.
KLM CEO Pieter Elbers reached the top the hard way, climbing the corporate ladder for more than two decades, starting in 1992 supervising aircraft loading at the carrier’s Amsterdam hub.
Since 2014, he has led one of Europe’s quirkiest — and most profitable— airlines, managing 33,000 employees. In part because of its robust long-haul network and its trans-Atlantic partnership with Delta Air Lines, KLM made 681 million Euros (about $764.1 million) in operating profit last year, 300 million ($336.6 million) more than in the previous year.
But not all is perfect at KLM because the Dutch carrier is not an independent company. In 2004, it merged with Air France, and the combined company is called Air France-KLM. The full company is profitable, but KLM far outperformed its French cousin last year, with France’s flag carrier earning about 372 million Euros ($417.4 million). This happened even though Air France has about twice as many aircraft as KLM.
KLM has fewer labor troubles than its French partner, and it has a robust Dutch low cost carrier called Transavia that helps it fend off challenges in Amsterdam from discount airlines. KLM is also a spunkier brand than its French counterpart, and it’s more willing to take chances than Air France on technology and innovation. (Air France-KLM CEO Jean-Marc Janaillac recently told Reuters that millennials view Air France as “too stiff.”)
We spoke with KLM’s Elbers last week at the IATA Annual General Meeting in Cancun, a two-day global conference for airline executives. We asked him how his airline retains its independence, despite being part of a much larger company. We also asked about KLM’s long-term focus on innovation.
Note: This interview has been edited for clarity.
Skift: For years, KLM has been more focused on innovation than other legacy airlines. Why is this a major part of the airline’s ethos?
Pieter Elbers: I think it’s deeply rooted in our company. Our company was founded in 1919. It’s 98 years old. And we’re coming from a country with an airport below sea level, with a population in relative terms which is very small. And we’re probably one of the few, if not the only airline, which right from the start didn’t have any domestic flights. Because [The Netherlands] is just so small. And in order to sort of overcome this disadvantage, we had to be more innovative.
I think we have cherished innovation through the company all these years. We were the first [airline] really making use of the sixth freedom traffic. And we were the first ones, with our partnership with Northwest [Airlines], to do a transatlantic joint venture [in 1997]. Then, we were the first [airline] in the [current wave of] European consolidation with Air France back in 2004. And then the use of social media. From 2009, we took it up.
It’s deeply rooted in the company, and my view is also that this really differentiates us from the competition.
Skift: Sometimes innovation is expensive. And your parent company has prioritized cost-cutting. How do you weigh being innovative and cutting costs?
Elbers: It’s a very good point. I started as a CEO at the end of ’14, and … we had been sort of belt-tightening for the past years. A company cannot have a strategy just based on belt-tightening. Belt-tightening could be good for a short time, but there should be a vision towards what we want to be and what’s our place in the industry and in the landscape.
So [I said,] ‘We’re going to do two things.’ We’re going to do cost-cutting on the one hand, and we’re going to do investments on the other. And the investments are in our product, in digital, in equipment, in stuff on board. And I found it ridiculous that our cabin crew staff did not have iPads. So we ordered 9,000 iPads for all of them. And, of course there was discussion, ‘Yeah, what about the money?’ and ‘Is it good?’
We should invest. And by coming into a sort of positive cycle of cost reductions, investments, good results, more investments etc, we have been able as KLM to make a very good contribution to our parent group in 2016. So the margin of KLM was [roughly] 690 million [Euros]. Total group was about a billion [Euros, or $1.12 billion]. I think, by this innovation, and by this strategy, we can make a good and meaningful contribution.
Skift: You’re well-known in Europe, but not as much in the United States. Last year, your team told The New York Times market research showed Americans thought you were a radio station or a milk brand. You used an ad campaign to poke fun at this. Why try this approach?
Elbers: I think this is partly what is strong about KLM. And I credit our team in New York. It was not a central, head office thing where some guys in the head office thought about it and said, ‘This is how we’re going to approach the U.S. market.’ It was done by our team in the U.S. And this is also something I would really underline — operate globally but act locally. And this ‘act locally’ was done by the team with this ad.
The first time I saw it, I said, ‘What is this? What are we going to do?’ We should say, ‘We are big and we are good.’ And not make fun of ourselves. But the effect I think has been enormous, and very, very positive.
We did it in combination with some popup stores in New York, in San Francisco and some other places, and it worked out pretty well. We want to be … an airline that stands out.
Skift: Why is the U.S. market so important for KLM?
Elbers: Well, our geographical position, and our pioneering experience with Northwest Airlines, makes it for us a very good market. We started the operation right after the war in 1946. Last year we celebrated 70 years of operations to New York. And, I think this sort of natural connection has helped us through the years to grow.
Then, obviously with the joint venture with Northwest we made the next step. Then it became the joint venture with Delta and Air France/KLM and Alitalia, which for industry standards is the most advanced and the most developed joint venture. And with that, a quarter of our long-haul seats go to the North Atlantic.
[Editors note: In joint ventures, airlines share profits on all flights, regardless of which airline operates them. On the transatlantic sector, KLM’s group competes with two other major ones— British Airways/Iberia/American/Finnair and United/Air Canada/Lufthansa Group. The three joint ventures control most transatlantic market share.]
[The U.S.] is still the single largest market in our network, and it has naturally grown. Delta flies 18 flights a day from their points in the U.S. to Amsterdam. We said, ‘These guys are not coming for the good weather in the Netherlands.’ They come to connect. They come to explore Europe right from that point.
Skift: Are you seeing any decreased demand from Europeans because of the new president of the United States? Could Europeans say, ‘I don’t want to come to the United States this summer, it’s not worth it’?
Elbers: No. We see pretty robust outlook. What we do see is a little bit of insecurity when it comes to security measures, when it comes to, ‘OK what are policies and, how will they be developed?’
Skift: And what about Americans? Are they fearful of terrorism in Europe?
Elbers: Well, we have seen that, especially after the Paris attacks at the end of ’15. We have seen the demand also from the U.S. has gone down. With the recent incidents in Manchester and London, it is probably a bit too early to judge.
Skift: What about a possible laptop ban? Does KLM expect the U.S. government eventually will implement one covering flights from Europe?
Elbers: Right now my understanding is there’s no laptop ban but there are still security concerns by the U.S. administration. I think it’s critically important that the U.S. administration goes into a dialog with bodies like IATA, [an ailrine-funded trade group] who are representing the airlines. [But] there’s no different viewpoint between the administration and the airlines on the relevance and the importance of security. We share that same commitment, and we share that same view that we should do whatever it takes to get the level of security better all the time.
But with that, we should only take measures which are having sort of positive effect, and which can be substantiated in terms of having a positive effect. [We need to strike a] balance between the impact for the customers and the security levels … in an adequate way.”
Skift: Let’s talk more about innovation. You have been testing facial recognition for boarding in Amsterdam. Is this the future of airline boarding?
Elbers: Well, it is starting to work. I think there is a real technology challenge. With your eyes close to it, it works.
I think the next step … is technology that will disrupt our industry much more than it did over the last decade. Once the technology is there, [you’ll be able to] walk 10 meters [away] and technology will scan your eyes. A gate will open automatically. It would really be applicable. Today, you still need to come with your eye to the camera, and the gain of time is still relatively limited.
Skift: So you’re not going to be putting it at every gate in Amsterdam?
Elbers: No. We did some experiments in Aruba. We did some experiments in Amsterdam. Again, technology is not ready for it yet on a massive scale. But it will be.
Skift: Here’s another fun question. Why did you decide to put a beer keg on some flights? You say you’re the first airline to do this.
Elbers: Well, part of our philosophy is actually two elements. One, we say we are Dutch at heart. And we stand out by being innovative, and by being Dutch. There’s so many similarities between airlines that we really feel we should stand out. And our national identity and our staff makes us different. Ice cold Heineken beer is a good Dutch treat.
Two, our philosophy is to surprise customers. To [have them] say, ‘Hey, I’m touched, I’m surprised.’ And we thought about how to bring together these two elements. [It required] a touch of innovation, because it’s not so easy to have the pressure of beer on the 30,000-feet level. We worked with Heineken on some of the technology.
We only had one problem. [On one flight] I think there was like three cans of beer of 30 liters each, and halfway between Amsterdam and Curacao it was finished already. So the amount of beer was really the challenging part.
Skift: So you have to put more beer on board?
Elbers: We would like to keep it orderly on board the aircraft, so it’s a balancing act there again. And, we are not having it standard. We do it on some special flights, or dedicated flights. But it is a good way to show to our customers, ‘Hey, we care about you and we want to surprise you.” And we do something Dutch.
Skift: You have free food and alcohol even on short flights within Europe. We never see that in the United States, and many European carriers have stopped it. Why do you continue?
Elbers: I think the U.S. is a bit of a different market. U.S. airports are also different in terms of layout, and food courts and all that stuff. So all the perceptions in terms of how do we deal with food onboard the aircraft is different. Again, for me, the philosophy is we should link it to who we want to be as an airline. And with that, we concluded that we want to offer a product for our customers where yes, they can have their beer and yes they can have their wine.
Skift: Will you keep the food, even as your competitors give it up?
Skift: That’s crazy. We haven’t had much free food in the United States for a long time.
Elbers: But it will come back in the United States. Watch my words.
Elbers: I think so. I think I saw some announcements already.