Outsider must rebuild trust at Air France-KLM

New chief seeks to heal damage of bitter strikes andmake French side of carrier competitive without state bailouts

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Benjamin Smith is the first foreigner to run Air France-KLM (right)

Benjamin Smith, the new head of Air France-KLM, faces one overriding question: can he make peace with the same French unions who pushed out his predecessor and in 2015 stripped executives at the airline half naked, forcing them to flee over a fence?
 It is a tough challenge for a self described “aviation geek” who takes over a group riven by conflict that has struggled to deal with recalcitrant unions that have cost the airline €335m in strikes in the first half of this year. Everybody knows that “what's been done in the past has not helped anybody. Nobody has gained, except the competitors,” said Mr Smith from the airline's office in central Paris.
 “I think there is a strong realisation that this is the case and I think there is a strong realisation that . . . a new approach has to be taken if you want a different result,” added the new boss, who has been in charge less than two weeks.
 Air France-KLM, which was formed by AirFrance's 2004mergerwithDutch carrier KLM, had been without a permanent chief executive since the shock resignation of Jean-Marc Janaillac in May after he lost a staff vote over a pay deal that had been rejected by Air France unions. The carrier's previous boss, Alexandre de Juniac, also left after constant battles with the pilots' unions.
 The challenges facing Mr Smith, who has spent his life fascinated by aeroplanes, are manifold: to rebuild a damaged brand, to make the French side of the business competitive once again and to establish trust between Air France and KLM.
 While analysts say good progress had been made shoring up the balance sheet in 2017, the group's first-half results saw KLM and Air France's fortunes diverge, with an operating profit of €388m at KLM and a loss of €164 mat AirFrance. The pilots union is seen as the main barrier to a deal. A senior figure familiar with the company said Mr Smith's priority is to “try to find an agreement with the pilots — but not at any price”.
 “Other legacy carriers have gone through difficult restructurings,” said the same person, “but the outcome has to be an agreement that's favourable to the company.”
 Even before Mr Smith officially arrived, the battle lines were being drawn, with unions calling it “inconceivable” the French flag carrier would be led by “a foreign leader”.
 But analysts say he is making the right moves. He quickly pledged to reinvest halfofhis€900,000fixedsalaryintothe group's shares after his overall pay package generated controversy, while the fact he is an outsider is “a bold choice”, according to Neil Glynn at Credit Suisse.
 “Clearly, at whatever level, the French state has effectively sanctioned a Canadian to come in who has a good record with restructuring, with relations with unions, with low-cost carriers,” said Mr Glynn, who remains neutral on the stock.
 Despite the record for executives at the airline, Mr Smith remains confident, partly due to a first “respectful” contact with the French unions who saw he “wasn't their worst fear”.
 Another part comes from seeing union disputes up close. At Air Canada, where he was chief operating officer, he helped mediate a pilots' dispute involving opposing sides who couldn't “even talk to each other” and “I'm listening to this thinking ‘they actually want the same thing'.”
 Now he believes he can convince both sides at Air France to “buy into the objective”, to build up “mutual trust and respect” and make it clear “it's in everyone's interest” to turn around the carrier.
 Mr Smith wants the airline to stand on its own two feet, without government support, since it is not being “attacked in a disproportionate or unjust way, it just has a competitive model that doesn't work.”
 The government owns 14 per cent of AirFrance, and Delta and ChinaEastern are the next largest shareholders with close to9per cent each.
 If Mr Smith can win an agreement with the unions, he thinks it can do just that: “There are every, very few brands in the world, in the airline business” like Air France, but “there might not be any money to invest if we are having our lunch eaten by some of the competitors.”
 “It's simple in my mind, eat or be eaten,” said Mr Smith, adding that's why “there is a lot more defence that we have to play”, including using Air France's lower-cost offerings to build up space to develop the premium brand he desires.
 Getting an agreement with unions will remain central to that effort: “Realistically, we are not going to get wage reductions from any of our staff and that's not the desire. That would be dreaming in technic colour if I thought that was doable. Will we get the flexibility to grow our airline to the benefit of all our stakeholders? Hopefully.”
 Savanthi Syth, an analyst at investment bank Raymond James, broadly agreed: “If you look at the core of Air France-KLM, the franchise is highly valuable. Paris and France is one of the world's biggest touristmarkets . . . now it's more about execution.”
 With the unions, “there is going to be some posturing on both sides, and I think Smith is going to have to stand strong,” said Ms Syth.
 In order to do so, Mr Smith wants the government to maintain its stance that there is no bailout coming for the airline.
 “The negative influence of the state being a shareholder is that the management is always concerned about being undermined by the government,” said a senior industry figure. The unions think the company is “immortal”.
 In May French finance minister BrunoLe Maire warned that “AirFrance will disappear” if the airline did not get more competitive. “Those who think that, whatever happens, the state will come to the rescue of Air France and mop up the losses of Air France are wrong,” said the minister.

'I think there is a strong realisation that . . . a new approach has to be taken if you want a different result'

Mr Smith said the government had made the right signals so far, saying it was the state's “desire” to sell “at the right time” but that it should continue to make it clear it does not backstop the airline.
However yesterday, Mr Le Maire pushed back at suggestions the state would sell in the near term, saying a sale “is not an option on the table today”. “It is not one of the priorities, my priority is the recovery of Air France,” added the minister. “The state would be a poor manager if it started selling its shares in a company that is not in good shape.”  
Additional reporting by Josh Spero

Air France-KLM striving to be more competitive

Operating profit (€m)

Only two times in the past 13 quarters has Air France outperformed its partner
Sources: company; Thomson Reuters Datastream

DAVID KEOHANE — PARIS

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