Skift Take

Air France-KLM got a good surprise when the U.S. announced it would reopen to vaccinated travelers last month. The airline is gearing up for a strong Summer 2022 as it emerges from the crisis.

Air France-KLM CEO Benjamin Smith and Airline Weekly Reporter Edward Russell at Skift Global Forum 2021. The two discussed the theme “Steering Through International Travel’s Volatile Recovery.” 

You can watch a full video of their discussion as well as read a transcript of it, below.

Edward Russell: Hey, Ben. Thank you for joining us at the Skift Global Forum today. How are you?

Benjamin Smith: I’m doing great, thanks. You?

Russell: Doing well. Thank you. We’re sorry that you couldn’t make it to New York for this. It does seem like in a few weeks, you could have made it with the news that the U.S. is easing travel restrictions.

Smith: Yeah, just a little bit off the timetable. And I see the empty chair there. It’s too bad. Anyway, at least, we’ve got some modern technology that is not as good, which is great because that means some of our clients hopefully will feel the same way.

Russell: For sure. Now, when you heard the news on Monday, did you celebrate? Did you pop some bubbly or something?

Smith: Well, it was a big surprise, so I think it was a little bit of a pleasant shock to receive that news. We were expecting, or we were hoping that this type of announcement would’ve come out earlier in the summer. We had strong indications that perhaps in early July or when the German chancellor went to visit the United States, that those could have been opportune times for this type of announcement. And then when it kept going, and going, and going without any announcement, we were getting a little worried this was going to go into next year, and perhaps the midterm elections would had an impact. So at the end of the day, it was a great surprise and we’re all extremely happy.

Russell: Oh, I bet you are. Air France-KLM, you make … is it 40 percent of your long-haul revenue comes from U.S. routes? It’s a big part of your business.

Smith: Yeah, it’s our largest market. We had up to 64 flights a day in 2019. And with that, dropped as low as … we had a very low point. We probably had about four flights, maybe six flights a day — all of them carrying cargo. Then it’s gradually ramped up, but we’re still far away from our peak. And we’re hoping to get back to 2019 level as quickly as possible.

Russell: Well, that’s the good news. Some airlines have already started reporting an uptick in bookings for this fall and the winter holidays. Since the news, are you seeing anything similar there at Air France?

Smith: Yeah. I think all carriers, when borders open and the restrictions for entry or for departing the country, they do ease, you do see an uptick very quickly. And we saw that in Europe this summer. When borders restrictions were lifted, we saw a huge surge in bookings. And it’s a bit early for the U.S. But already, we’re seeing, obviously, demand levels go up — particularly for Christmas holiday period. But I would wait a couple of days to for me to definitively be able to tell you what percentage of increase that we’ve seen, but for sure. There’s people who’ve been waiting 18 months to either see their clients, or their colleagues, or see family members, that type of thing. So yeah, we definitely expect that. And I guess I could ask you a question. Do you have European friends that are to come see you or colleagues that’ll come see you now that this has been lifted? I would guess that your answer would be yes. Can you tell me otherwise?

Russell: No, for sure. I definitely have a number of friends that have been putting off trips to come visit. It was quite a shame this summer. I was able to Europe myself. But no one could come this way to meet me back, so I think it’s welcome news to a lot of people. One of the interesting things as we look next year is a lot of people are thinking there’s going to be a surge in this pent-up demand that we’ve all heard of on the transatlantic. Cowen, their airline analyst, Helane Becker, called it a jail break next summer. Do you think we’re going to see something along those lines next summer? Just a surge of travel across the Atlantic?

Smith: I believe so. As an example, this past summer … so a few months ago, our offering, the number of flights and capacity that we had between France and Greece was actually higher than what we had in August of 2019. Destinations that were open … there is this huge pent-up demand for leisure travel and destinations where there was big business demand, and we did see a big surge. Now, is that temporary because there was pent-up demand for 18 months? Will that slot be sustainable over the short (and) medium term? (That’s) to be seen. But definitely in the beginning, this is excellent, very good news for us and a very positive signal.

Russell: For sure. Now with the U.S. opening, where else are you looking to ease travel restrictions? What’s the next market that, for the group, is important that reopens?

Smith: Well, Europe is a, I would say, is in reasonably good … in a good position. For us, there are a few markets that are still a little bit cumbersome, and there’s some specific rules in place, which don’t make it so easy for customers. For us, Africa’s been relatively resilient, even though there are heavy restrictions in place. Our clients seem to put up with those restrictions and find ways to make the trips work. One of the big, I’d say, worries of customers, (is) if rules change while they’re at the destination and it would cause them problems in getting back or getting back home. So with the U.S. now open, that’s great. We have Canada that opened a few weeks before. That was a big improvement for us, and something that I think gave us a great indication of how a long-haul market that’s been closed for so long, how customers would react.

And we’re hoping we get the same thing in the U.S. because Canada was very positive, but South America is a challenge. We have a lot of restrictions in place of South America. And Asia, of course, is the most difficult. So with Europe, good shape. Africa, resilient. Now North America is fully open. Our two big markets that we’re hoping to see some improvement in the future would be South America and Asia. I think (with) Asia our expectations are quite conservative, but we’ll see how things go over the next few months.

Russell: For sure. That’s generally what I’m hearing — Asia’s going to be behind most other markets in reopening. The no Covid policies in many countries — it seems like it’s proving difficult to unravel. But we’ll have to watch that space.

Smith: I was just reading a couple of hours ago that one of the Australian ministers in the government made a clear, definitive statement that the Australian borders would be open before the Christmas period at the end of December, very clear. So that’s another, I think, big step forward. That mark was probably the most restrictive of all the Western countries over the past year and a half, so that’s a great sign.

Russell: Definitely. For sure. So looking at the fall — staying with an outlook — the U.S. carriers here were looking forward to a strong fall with business travel returning. Then the Delta variant (made) an impact, took a bite out of that and really has slowed things down. But I’m starting to hear a different story in Europe. What is your outlook for the fall? Are things looking better there? Have you seen Delta variant slow down there?

Smith: Well, one thing that we’ve seen since the beginning of this pandemic are booking patterns, booking trends. A lot of our customers are booking much closer in. Some markets probably would’ve had a lot of bookings, say three, four, five months out. Now, maybe just a few weeks or a month out. So to give you a view on where we’re going to be in November or December, I can’t give you the answer with clarity that I would’ve liked to have given you. We do expect, in some markets, for there to be a reduction of what we have in the summer because a big portion of our customers were flying for leisure purposes in the summer. And then obviously, the U.S. will see a big increase. That’s obvious. But business traffic, it’s a bit early to see what levels that’ll be at. We are definitely not expecting levels to be at 2019 for (fourth quarter). However, we are expecting them to be better than 2020. So where will the numbers come in between that?

Russell: I certainly hope they’re better than 2020 with all the progress on vaccines and stuff.

Smith: So with the Delta variant, I think the standard that we’re hoping becomes universal is if you are double vaccinated with some type of a vaccine passport that hopefully will become universally recognized. And then in countries that want an extra level of clarity and certainty, perhaps there’s a PCR test required as well. If that can be the extent of what’s required to enter a country and that’s uniform and universal across the world, that would be great. Keep it simple for everybody.

Russell: Definitely. So you mentioned vaccines. It’s been a popular thing in the media right now to talk about vaccine mandates for companies and even to some degree, travelers. What is your view about vaccine mandates for flying or for your cruise?

Smith: Well, I think where we’ve seen these mandates come in … nobody likes to be mandated to do anything, but these vaccines have proven to obviously offer a lot of protection — a significant of amount of protection (for) this virus. And it’s not only protection to yourself, but also to people around you. And if you’re flying in an enclosed area, despite the fantastic air circulation flows we have in the airplane, I think it gives a lot of people comfort if you’ve been tested or not tested. But if you have proof of vaccine and you’re getting on, it’s probably going to be then one of the most safest enclosed areas to be located in. So our position on mandates, look, it’s a controversial one. I don’t think we come out with a unique position in the countries in which we have significant operations — the Netherlands and France. We see that in certain countries, some companies, some other airlines have mandated it. But it’s not something we’re doing at either KLM or at Air France, at this moment.

Russell: Definitely. Now this is a question that’s bugged me as we’ve been hearing about all these mandates. Do you think there will be any business impact between mandating or not mandating a vaccine for crews. Do you think travelers really care in the end whether there’s a mandate in place?

Smith: I think where we sit today is customers, from what I see and what I hear is … the vaccine passport, if it can be recognized as a universal proof that you are either free of the virus or you have a lot of protection. But that gives a lot of people comfort. The fact that you wear a mask on board is an extra level of protection. So the combination of a vaccine and a mask, I think, is great if you’ve had the virus in the past. From a mandate perspective, I think people are much more comfortable if the majority — if not all of the people on board — have been vaccinated. That’s normal.

Russell: Definitely. No, it’s definitely nice to know when people are vaccinated in the room that you’re in. Shifting gears a bit, you kicked off a massive transformation plan for Air France-KLM in 2019. The goal was to streamline operations, the fleet, (and) boost revenues. (It was) really a plan for the group going forward. The pandemic, of course, changed that. And I’m curious, how does that plan stand with all of the pandemic changes that have come? What are you able to do that you weren’t able to do before?

Smith: Well, look. We came up with a comprehensive transformation plan that we presented to financial analysts and our shareholders at the end of 2019. So the bulk of that plan still is our base for the future. And what it called for was a refinement of the KLM model, which works extremely well. And that is flowing a big portion of our customers over Amsterdam. So those people flying on the KLM — a disproportionate number of those people are connecting and KLM and Schiphol were pioneers in the international travel business. That model works very well. So instead, we’re going to optimize that. On the Air France side, a lot of complexity. The Air France financial results in the years (preceding) 2019 were not great, so this is obviously not sustainable. Fleet was a big part of the reasons, so simplifying the fleet was high on the list.

We had a domestic operation, which was losing an enormous amount of money. A big reason behind that was the introduction of the high speed rail system, high speed rail network in France over the last 40 years. That’s basically the number one competitor that Air France has had in that market. And then, not always the best balance between connection and local customers flying into and out of Paris. And with such a huge market to and from France, France is the largest inbound market in the world — travel market in the world. And Air France has an opportunity to capture a larger portion of that home market. And in most cases, customers who are connecting over a hub are lower yielding than those who are originating (from) or (arriving in) that city. So we were on the path, better balancing that out with the right type of aircraft (and) cleaning up our domestic network.

And one of the key components of improving the Air France performance was an expansion of our low cost carrier called Transavia. And prior to the crisis, we had a limit on the number of airplanes that could be flown at Transavia. We negotiated with the Air France pilots to have that limit removed, and then we also were able to negotiate a new contract where Transavia could be used on domestic France. So those are two big wins that release and provide release and restrictions that were very, very onerous, and provide a new tool for Air France to turn around the domestic operation. So what Air France thinks: reduce the number of aircraft types, improve or significantly improve the performance of the domestic markets, (and) balance out the flows between origin and destination and connections. And I’d say, the last point is leverage both brands.

So the KLM brand is solid. It’s 100 years old. We’re 101 years old now at KLM. Make sure the KLM brand does evolve to stay relevant in all of our key markets. On the Air France side, the Air France brand is unique. The Paris market is unique. We still have a world renowned premier, first-class product on Air France, which trickles down into the rest of the product offering. And how to ensure that this unique French offering can be leveraged to differentiate the Air France product from others, and that I believe can be done.

Russell: For sure. It’s a massive program that you undertook, and I’m sure that the pandemic has at least helped you take some costs out of the business. One thing you mentioned that really interests me is the main competitor was high speed rail. And I know that, with your sustainability goals, France’s sustainable goals has been sort of to replace some short flights with trains. It sounds like that fits with some of your strategy to take costs out, being able to not have to fly those domestic flights. Is that working, yeah?

Smith: Well, we’re ahead of the rest of Europe in terms of our commitments to reduce our CO2 emissions. So by 2030, we’ve committed with the bulk, if not all of the European airlines, to reduce our emissions by 50 percent. This is between now and 2030. Then what we’ve got (regarding) domestic (flights in) France, we’ve committed to producing our CO2 emissions by 50 percent between now and up to 2024. So that’s a big, big difference between 2024 and 2030 for France, domestically. We’ve also committed to canceling or removing all of our (domestic) flights in France, where there’s a high speed train option of two hours and 30 minutes. So we’ve done that already.

Some of the examples of the markets would be Bordeaux to Paris, or Nantes to Paris, or Lyon to Paris. These are three examples. We are going to continue to keep those cities linked to Roissy Airport for long-haul connections. But to (that) airport, which is the main, domestic airport in Paris, we’ve replaced (them). Well, we’ve canceled all those flights, and the only way now to get to those cities is either via train or driving. And that seems to be accepted by the marketplace. It’s a big change for us, but we have made some strong commitments. And of course, we’re going to live up to them.

Russell: No, that’s fantastic. We’re running low on time. But I did want to ask you a bit about the group’s sustainability plans. You mentioned 2030 is a big target for you. You have net zero emissions by 2050 as a goal, including sustainable aviation fuels, more efficient aircraft, (and) a lot of things. What (I’m) wondering, or you could maybe leave us with is … what is the most interesting part of Air France-KLM’s climate goals that you’re excited about? Is it electric vertical takeoff and landing aircraft? Or sustainable fuels? What excites you?

Smith: Well, I think all of that. What is totally in our control from an Air France-KLM perspective is the decision on what aircraft we’re going to fly, which aircraft we replace, and at what speed. That is under our full control. And sustainable aviation fuels or synthetic fuels, we’re supportive of that. We will do everything we can to be part of the development and the increased use of those types of fuels. But of course, we do not control the production, the investment or the storage of fuels like that. So that’s a little bit more difficult for us. And then the technology and the research and development of what you’ve just described in terms of alternate ways of powering airplanes, of course, we will support and will be part of the development of such new technology.

But again, this is not something we fully control. But on the first element which I brought up, which was the new aircraft, we’ve made significant decisions to invest in new airplanes. So we have almost 100 new airplanes on order — Next Generation. We have 60 Airbus A220, series 300 aircraft on order. The first one arrives next week. This is the most technological and environmentally friendly airplane of its size, so it’s a huge investment. These airplanes will be used throughout Europe and (for) domestic (flights in) France, and we’ll be receiving 60 airplanes over a four-year period.

Russell: Wow.

Smith: We also ordered 38 Airbus A350-900 airplanes. We’ve received about one third of the order. We will be receiving the rest of those aircraft by the end of 2025, so another big commitment for our long-haul flights. Both those aircraft are on the Air France side. We have exited the Air France A380s as well as the A340s, so we are moving as quickly as we can while being as financially responsible as possible to ensure that we don’t put the company into such a difficult position financially that we can’t continue. But this is what we have in control. On the KLM side, we’ve pulled out all of our 747s. They are out and we’re moving toward a 777, 787-only fleet, which will make the KLM fleet probably one of the most efficient in Europe. We have the 787-10. KLM was one of the launch customers for that, and those airplanes are continuing to be delivered.

Russell: Well, that’s really exciting, especially congratulations. The first A220, that’s … I’ve flown it a few times myself, and it’s a great plane, but that’s a lot of exciting fleet plans. As an (aviation) geek, I look forward to seeing some of those planes flying. Well, Ben, I wanted to say, thank you so much for joining us today. Unfortunately, our time is up. Hopefully, we can see you this side of the Atlantic very shortly. I imagine you’re looking forward to the same as well.

Smith: Yes, for sure. I look forward to seeing you in person.

Russell: Great.

Smith: Thanks, man.

Russell: Thanks, Ben.

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Tags: air france-klm, ceo interviews, sgf2021, Skift Global Forum 2021

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