More than 15 years ago, Air France and KLM merged to become Europe’s largest carrier. But the combined airline, no longer the continent’s biggest, still operates with two fiefdoms, one in Paris, and the other in Amsterdam, keeping it from leveraging the efficiencies shareholders covet.
You might blame national pride. KLM, the Dutch airline, has been around for 100 years, making it the world’s oldest major carrier still flying under its original name. Air France is no slouch, having taken its name in 1933.
When the companies joined, neither governments nor travelers wanted the historic brands to go, so both kept their identities. That structure can boost profits, as customers stick with the brand they prefer, while the group reduces duplication and decreases costs.
But by letting the two airlines operate so independently, Air France-KLM lost out on some cost savings. Now Ben Smith, the company’s new CEO, wants to bring the two parts closer. Smith, the first non-French national to run it, wants to centralize more power in Paris, while keeping KLM as an independent brand with a robust presence in Amsterdam.
Reports indicate Smith may want to push out Pieter Elbers, KLM’s respected CEO, who turned the Dutch carrier into a profit powerhouse, even as the French arm floundered. KLM’s unions have been so upset some threatened to strike, and Dutch politicians have urged Smith to reconsider. (A KLM spokeswoman declined to comment on the saga.)
“There is massive frustration at all they’ve done while Air France has lagged way behind and has been beset by labor problems,” said John Strickland, a UK-based aviation consultant, who has worked for KLM.
It is understandable. KLM consistently generates higher operating profit than Air France, including in the first half of last year, when KLM reported operating profit of 388 million euros ($439 million U.S.), and Air France lost 164 million. On fleet, hub management, labor relations and industry reputation, KLM is in often is in better shape than its French cousin.
But let’s remember: Smith is the boss, brought in from Air Canada, where he was chief operating officer, to fix the entire company. His mandate includes better melding operations — and cultures — at the two airlines, and if he believes he must install his own choice as KLM CEO, he deserves to do it.
Yes, sometimes governments are run by a team of rivals, ministers or legislators with different opinions and outsized egos. But corporations generally are not, and usually all top executives must join the CEO’s team. Under that paradigm, Smith should make his own choices about how the company is run.
“The optimized outcome for the combined airline is to pick a person and let him pick his own people and let him run the airline like it’s one airline,” Jay Shabat, publisher of Skift Airline Weekly, said in an interview.
Air France-KLM’s top two competitors are further along integrating their airlines after mergers. Lufthansa Group owns national airlines of four countries — Germany, Switzerland, Belgium and Austria — and all kept their names, branding and identities. It’s similar at International Airlines Group, owner of British Airways, Iberia, and Aer Lingus.
Both companies have learned how to capitalize on most of the benefits of a merger without alienating customer bases or too many politicians. At Lufthansa Group and IAG, member airlines have their own management teams, who generally are responsible for their own profit-and-loss statements and are accountable for their actions, Strickland said.
But make no mistake. On the biggest issues, Lufthansa Group CEO Carsten Spohr and his team make decisions in Frankfurt, just as Willie Walsh, IAG’s CEO, is the ultimate decider about what happens at his airlines.
They guide what aircraft the carriers will buy, where the jets will fly, and how the group will combat competition from low-cost carriers. They balance the needs of each airline against the needs of the group.
Smith needs the same power. He must be able to make major decisions even if Dutch unions or politicians disagree. If he does his job right, he’ll probably also irritate French politicians, who also are fanatically protective of the national airline. (Smith replaced Air France’s independent CEO, promoting the airline’s head of customer service.)
“The big thing is that going forward Air France-KLM has some big decisions to make about how they are going to respond to long-haul, low cost competition in Paris, and where they are going to allocate future widebodies,” Shabat said. “The question is, how much autonomy is KLM going to get versus Ben Smith?”
Group CEOs need the ability to respond quickly. As one example, almost two years ago, IAG rapidly launched a low-cost low-cost airline as it sought to thwart Norwegian Air. At first, Walsh assigned Iberia, the Spanish airline, to handle the task.
If Smith wanted to do something similar, he would not want Elbers or anyone else in the way.
“That’s an example of a big decision Ben Smith might have to take and he doesn’t want Elbers to say ‘screw that, we can’t going to throw you any resources,'” Shabat said. “There are other things they might want to do going forward that become more completed if you have two people in the CEO chair.”
One problem is that Elbers is supremely competent. Analysts credit him with turning KLM into a profitable airline with strong labor relations and a robust route network. Many insiders expected he would be named Air France-KLM CEO, wondering if he wasn’t only because of his nationality. The French government still owns about 14 percent of the company, giving politicians leverage.
Elbers’ reputation is so robust, some analysts say they strongly believe the two executives should work together.
“You only fire a CEO at an operating subsidiary when there is a problem and there are no problems at KLM, arguably,” said Henry Harteveldt, an analyst the Atmosphere Research Group. “If anything, Ben Smith needs to be work with Pieter Elbers. When you have The Netherlands’ government and 18,000 workers say, ‘We need this guy,’ you cannot ignore that point of view. Ben Smith needs to put his big boy pants on and just make sure that Pieter Elbers is empowered to continue to being successful.”
Despite the drama, Strickland said he expected the two executives would be “natural allies” who worked together to fix Air France-KLM. He said he still doesn’t consider the situation hopeless, saying Elbers and Smith can work together. “The group cannot afford to sacrifice proven leadership on the back of organizational structure,” he said.
Perhaps in an ideal world, they would both stay. But Smith is the CEO and he deserves freedom to name his own team.
Harteveldt said he doesn’t agree with the argument, but acknowledged it may not matter.
“This is the classic with office politics,” he said. “It is very possible Pieter Elbers will say, ‘Fine I’ll leave. Let’s discuss the terms.’ To me, Pieter Elbers is one of the best, if not one of the better global airline CEOs in the business right now. He has a few bright future.”