Skift Take

The Air France-KLM merger has been a textbook example of how hard it is to meld corporate cultures. But CEO Ben Smith isn't letting that deter him from taking a look at new acquisitions. Too soon?

Air France-KLM would consider participating in European consolidation and could buy or invest in another carrier, CEO Ben Smith told Skift at the IATA Annual General Meeting in Seoul.

“There are neat opportunities, that are priced right, that are strategically right, and you have to at least consider them,” Smith said at the conference for aviation executives. “There are some airlines that are interesting out there.”

European airline executives in Seoul repeatedly complained about overcapacity, particularly in Western Europe, saying there are too many airlines competing for the same passengers. The short-haul European market remains more fragmented than in the United States, where four big airlines control the bulk of domestic share.

“In Europe, we have huge overcapacity,” Lufthansa Group CEO Carsten Spohr said in a panel discussion in Seoul, bemoaning “very irrational” behavior by his competitors.

Spohr and his predecessors at Lufthansa Group have tried over the past 11 years to streamline European capacity, buying out as many competitors as they could. Lufthansa Group not only has acquired Austrian, Swiss, and Brussels Airlines, but has also added assets from defunct airlines, including Air Berlin. Its spree continues, with the company expressing interest in Condor and Alitalia.

It has been similar at International Airlines Group. The company now owns British Airlines, Iberia, Aer Lingus and Vueling, a Spanish low-cost airline. Last year, CEO Willie Walsh said the company was interested in acquiring Norwegian Air, though the deal never happened.

But Air France-KLM has been quiet. Plagued by internal strife, the company has not been so active in consolidation.

State of The Industry

Air France and KLM started this wave of consolidation in 2004, when they merged to become what was at the time Europe’s biggest airline company.

But a series of group CEOs have had trouble melding the two cultures, with the Dutch arm often reporting far better results than the French one. In recent years, the company has underperforming its competitors on many financial metrics.

It has also been forced to wade into politics more often than other carriers, with politicians in The Netherlands and France both making demands on it. (Both governments now own considerable stakes in Air France-KLM.)

While Air France-KLM has been in turmoil, there’s been little appetite to participate in consolidation. But Smith, who took over last year with a mandate to improve relations between the two segments of the company, as well as profits, said it can grow while it fixes it problems.

“It’s a competitive industry with lots of consolidation, and we have no choice,” Smith said.

Smith acknowledged the company trails its two competitors on many metrics, including stock price. And he said an acquisition might create even more complexity for the group. But Smith said Air France-KLM at least must consider joining its rivals in pushing for more European consolidation.

“Should we be distracted by looking or investing into another carrier even though it may be the right decision?” Smith asked. “Long term, it is hard to say.”

Smith did not say which airlines he might target. But many of Europe’s independent carriers might be for sale for the right price. It’s a group that includes Norwegian Air, LOT Polish Airlines and Scandinavian Airlines.

No Sure Thing

Under normal circumstances, it would make sense for Air France-KLM to be a player in consolidation.

But Madhu Unnikrishnan, editor of Skift Airline Weekly, said Smith might want to work on fixing the mess he inherited before he goes into acquisition mode. Smith has been working to streamline the company’s operations, and recently killed its long-haul, lower cost carrier called Joon. But he still has a lot ahead.

“The European airline industry is fragmented, with too many airlines competing for the same pool of passengers,” Unnikrishnan said. “However, buying another airline is not the answer for Air France-KLM yet. The company needs to get its own house in order before it considers acquiring another airline.”

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Tags: air france, air france-klm, ben smith, International Airlines Group, klm, lufthansa

Photo credit: Air France-KLM CEO Ben Smith. Smith said the company might participate in future European consolidation. Air France-KLM

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