TheChek News Flow

After pacifying unions Ben Smith is looking to revamp the fleet and tackle profit margins

Not long after Ben Smith was installed as the new boss of Air France-KLM, he was offered a word of advice about dealing with his new Gallic colleagues.

“Do not try to shrink lunch time,” the 48-year-old Canadian was told. “Don’t try to change it, because it’s sacred.”

Cultural customs aside, the advice hinted at a deep distrust of management inside the airline that had exploded into a bitter labour conflict which forced out Mr Smith’s predecessor in 2018.

Once a byword for industrial strife, Air France is now enjoying a period of relative calm in workplace relations under Mr Smith, the former chief operating officer of Air Canada. Its parent group hopes this will lay the groundwork to finally fix a laggard of Europe’s legacy airlines.

During recent nationwide strikes against the French government’s pension reforms, the carrier emerged largely unscathed.

“We were able to operate 100 per cent of our operations, except for the flights that were affected by an air traffic control shutdown or slowdown,” Mr Smith told reporters last month in Paris. “This is a big first for Air France. On a peak day we may have had 10 or 11 pilots [on strike] out of 4,000, which did not have any impact.”

Aviation analysts believe the detente at the French flag carrier’s main operations has heralded the best chance in years to make the changes needed to improve its persistently weak earnings.

“There’s a real window of opportunity here,” said Andrew Lobbenberg, an analyst at HSBC. “What’s held it back in the past was the very troublesome labour relations and management struggling to negotiate any improvement in productivity.”

The scale of the turnround required at Air France-KLM was laid out last week in its 2019 financial results. Operating profits fell almost one-fifth to €1.14bn in 2019 due to higher fuel bills and a drop in cargo, despite a 3.7 per cent rise in overall revenue to €27.2bn.

Formed by the merger of Air France and KLM of the Netherlands in 2004, Europe’s fourth-largest airline group has long trailed behind its main continental rivals on profitability. Over the past six years, Air France had among the lowest operating margins of its peers, dragging down the group’s overall financial performance.

This is one of many sources of long-running tensions between France and the Netherlands. The struggle for influence at the company came to the fore last year when the Dutch government increased its shareholding to 14 per cent — roughly matching that of the French state’s — in order to protect its national interests.

Today’s situation is a far cry from the turmoil that Mr Smith inherited. Previous group CEO Jean-Marc Janaillac resigned in May 2018 after Air France staff voted to reject a pay offer during a dispute that cost €335m and even led the country’s finance minister to question its survival.

Despite initial hostility from unions towards Mr Smith — the first non-Frenchman to lead Air France-KLM — his outsider status may have helped. His appointment was followed by the election of a new leader at the main French pilot union, SNPL, who campaigned for constructive engagement with management.

“We immediately met someone who wanted to restore trust with employees,” said Guillaume Schmid, vice-president of SNPL, which represents about 80 per cent of Air France’s 4,000 or so pilots.

“In the past, the leaders of Air France came out of the grandes écoles [France’s prestigious universities], they passed from one CAC 40 company to another without knowing anything about the business,” added Mr Schmid. “Now we have a CEO who understands the business.”

One of Mr Smith’s first tasks was to renegotiate rigid labour agreements at Air France that had stifled growth. Over the course of 2019 this saw Air France sign 37 labour agreements. Employees voted in favour of arrangements enabling the company to more efficiently deploy its aircraft and build up the French arm of its low-cost offering, Transavia.

“He involved himself personally in the negotiations. It’s quite rare. The former CEOs just came for the opening of the talks but not much more,” said Mr Schmid. “From the beginning [Mr Smith] explained what he wanted to do. He also wanted to understand what we pilots want to protect.”

If pacifying the French unions was an achievement, the second act of Mr Smith’s tenure — to reach a medium-term target of 7-8 per cent group profit margins — will rank as an even greater challenge.

In 2018, the figure was 5 per cent, comprising 1.7 per cent at Air France and 9.8 per cent for KLM. This compares to 7.4 per cent at Lufthansa Group and 13.2 per cent at British Airways owner IAG.

A pillar of Air France-KLM’s plans is a long-overdue revamp of its fleet with planes that have lower operating costs, while reducing the number of different aircraft types deployed across the group. It is also aiming to make better use of its network structure, increasing both local traffic in Paris and its share of the premium market.

“The key is how much of the plan can he get implemented and how quickly. How does the group maintain that momentum?” said Gerald Khoo, analyst at Liberum.

Investors remain sceptical. Air France-KLM’s shares fell sharply in the minutes after the airline group announced its strategy in November. This included the new profit margins target — which would bring it in line with rival Lufthansa Group — and plans to restore the dividend for the first time in over a decade.

Analysts put the lacklustre market reaction down to a combination of higher capital expenditure and expected lower cash flow, as well as the lack of structural mechanisms for management to prevent French unions derailing the strategy.

Some question how long will the harmony at Air France will last, noting that unions are likely to demand a slice of the pie once profits rise.

The peace brokered by Mr Smith is also being put to the test. Unions at Air France Hop, its domestic regional subsidiary, have called strikes over pilots’ pay and pushed for job guarantees for ground staff in protest at plans to cut Hop’s lossmaking fleet and routes.

And while 2020 was expected to be a better year for European airlines as global trade tensions ease and aviation capacity is cut due to the grounding of Boeing’s 737 Max, travel restrictions in response to the coronavirus outbreak is dragging on the sector. Air France-KLM has said that up to €200m could be shaved off earnings if flights to China remain suspended until April.

“What Ben has been able to achieve is simply phenomenal and something very experienced executives were not able to do before,” said Bernstein analyst Daniel Roeska, referring to Mr Smith’s labour agreements. “But this is step one of about 15.”

S&P 500 tops buyout groups’ performance for first time in a decade, report finds

Private equity returns have lagged behind those of stocks in the US over the past decade, the first time that has happened over a 10-year period and a sign of how the industry has struggled to outshine a roaring bull market on Wall Street, a report says.

Investors who have ploughed money into private equity have made an average annual return of 15.3 per cent in the 10 years to June 2019, according to a report from Harvard economist Josh Lerner and the consultancy firm Bain & Co. That compares with the 15.5 per cent they would have made putting the money in the S&P 500, the report found.

The findings come as the industry’s biggest figures, including Blackstone’s Steve Schwarzman and Apollo’s Leon Black, gather in Berlin this week for private equity’s glitzy annual get-together.

“There’s been a huge influx of money into private equity, but when you look at the returns numbers for the last decade . . . it’s hard to feel that there’s really been much alpha at all,” Prof Lerner said. 

The dealmakers gathering in Berlin are grappling with a dilemma created by pension funds, insurers and other investors pouring money into PE funds since the financial crisis. Although the influx of money has buoyed fees, it has also created intense competition deals and fear among executives of overpaying for companies.

The amount of so-called dry powder — money PE firms have raised but not yet spent — hit a high of $2.5tn in December, across all types of funds, the report found.

As the industry gathers for the SuperReturn conference in Berlin, some of the biggest groups are close to striking what may be Europe’s biggest-ever private equity deal, a €16bn move to buy Thyssenkrupp’s elevators unit. 

Two rival consortiums, one led by Blackstone and Carlyle and another led by Advent and Cinven, are in the final stages of talks and Thyssenkrupp is due to make a decision on the sale this week.

Returns of 15 per cent are still “good numbers,” said Brenda Rainey, senior director of Bain & Company’s global private equity practice, who added that it is not easy to compete with a US stock market that has produced “incredible” returns. In Europe, private equity returns still outstripped local public market benchmarks, the report found. 

The buoyant market has led many buyout groups to sell companies and lock in returns, according to the report, which tracks a metric known as “internal rate of return,” which is favoured by the industry but which academics have said can flatter its performance.

“Anyone who had a good asset has likely sold it, partly due to premium prices and partly in anticipation of a recession, when it could be harder to sell,” the authors said. 

While the most successful private equity funds still outperform public markets, the worst offer significantly lower returns.

- Confirms to make monetary policy 'more flexible'

For all the worries about hacking, owners of Internet-connected cameras say they love watching people silently from afar — often their own family members

Margaret Cudia thought her Ring doorbell camera was “the best thing since sliced bread.” She loved watching the world pass by through her suburban New Jersey neighborhood, guarding vigilantly for suspicious strangers and porch pirates from the comfort of her phone.

She hadn’t expected the camera also might capture awkward moments closer to home, like the time it caught her daughter grabbing a beer and talking about how controlling her mother was. “I never told her about that one,” she said with a laugh.

Amazon’s Ring, Google’s Nest and other Internet-connected cameras — some selling for as little as $59 — have given Americans the tools they need to become a personal security force, and millions of people now seeing what’s happening around their home every second — what Ring calls the “new neighborhood watch.” (Amazon founder Jeff Bezos owns The Washington Post.)

But the allure of monitoring people silently from afar has also proved more tempting than many expected. Customers who bought the cameras in hopes of not becoming victims joke that instead they’ve become voyeurs.

The Washington Post surveyed more than 50 owners of in-home and outdoor camera systems across the United States about how the recording devices had reshaped their daily lives. Most of those who responded to online solicitations about their camera use said they had bought the cameras to check on package deliveries and their pets, and many talked glowingly about what they got in return: security, entertainment, peace of mind. Some said they worried about hackers, snoops or spies.

But in the unscientific survey, most people also replied that they were fine with intimate new levels of surveillance — as long as they were the ones who got to watch.

They analyzed their neighbors. They monitored their kids and house guests. And they judged the performance of housekeepers, babysitters and other domestic workers, often without letting them know they were being recorded. “I know maybe I should” tell them, one woman explained, “but they won’t be as candid.”

She installed a Ring camera in her children’s room for ‘peace of mind.’ A hacker accessed it and harassed her 8-year-old daughter.

Ring and Nest representatives said they had recently implemented new privacy and security measures to help protect customers’ accounts and that they encourage new users to make it clear that the cameras can record at any time. Ring’s installation guide suggests customers use stickers or signs to “let visitors know that your home is under audio/video surveillance by a Ring device.”

But the cameras’ offering of secretive observation, some customers told The Post, often felt too enticing to ignore. Mari Gianati, whose Nest cameras watch over her waterfront home in Puerto Rico, said she uses the cameras to examine the housekeepers, the pool guy, the fumigator, the people who feed her birds and any strangers who pass by her private road, most of whom she said don’t know the cameras are there.

“I have to admit: Sometimes I just watch,” she said. Once she looked on for hours as her sister argued with workers over a delivery of damaged furniture. “Thank goodness I had WiFi!” she said.

All that added vigilance has come at a cost. Hackers have peered into children’s bedrooms. Police officers have asked homeowners for video of their neighbors. And families have had to reckon with the delicate new bounds of home privacy — including one woman who didn’t realize that her lovemaking with her husband had been caught on camera until it was too late.

But most people said those concerns weren’t enough to persuade them to turn off their cameras. Device sales have surged in recent years amid falling prices and rising public acceptance: The companies won’t give full sales figures, but they say millions of cameras now are online nationwide. Ring said in November that its doorbell cameras were dinged more than 15 million times on Halloween, nearly double the previous year’s total.

Matthew Guariglia, an analyst for the online-rights group Electronic Frontier Foundation, said the rush of new home cameras threatened to make the problems of widespread surveillance — the chilling of free speech, the erosion of privacy — that much more intimate and inescapable.

“Who hasn’t looked out and watched other people through their peephole? There’s a kind of morbid fascination to it,” he said. “The problem is when it’s not just you behind a peephole but a camera that’s on at all times, saving to a cloud you don’t control.”

No gadget since the smartphone has so quickly normalized personal surveillance. The motion-detecting cameras are cheap and come in a range of styles, from outdoor units with sirens and floodlights to battery-powered “stick-up cams” that can be placed virtually anywhere. Owners can watch the cameras live or save the videos for a few dollars a month.

Some cities offer rebate and voucher programs for the cameras in hopes that more surveillance footage will make crimes easier to solve. The cameras have also become popular Christmas gifts, and Google and Amazon have advertised them around the holidays with hashtags like #CaughtOnNestCam and #AlwaysHome. (In December, Ring also sold festive holiday camera faceplates.)

The extra eyes have been a huge gift to American law enforcement. Ring lets police officers use a special tool to ask customers for videos captured in and around their houses, and the number of police agencies with access has more than doubled since September, to nearly 900 agencies across 44 states, a Post analysis found. “Ring believes when communities and local police work together, safer neighborhoods can become a reality,” Ring spokeswoman Yassi Shahmiri said in a statement.

Privacy advocates have called the Ring-police partnerships an unnerving escalation of criminal surveillance powers. But nearly every Ring owner contacted by The Post said they would have no problem providing video to law enforcement if it could help solve a crime. Police and prosecutors last month pushed to use Ring doorbell footage in a Texas murder investigation and a New Hampshire assault trial.

Some homeowners said they had already tried to be police informants, logging in several times a day to Ring’s companion app, Neighbors, in which people can share video of break-ins, lost dogs and seemingly unsavory characters.

By tallying up neighborhood reports of suspicion and uncertainty, the social network can also turn harmless moments — the kind most people would have been blissfully ignorant of — into signs of danger or sources of dread.

That heightened level of suburban surveillance has also triggered some false alarms. One man labeled a “Suspicious Male” on Neighbors because he stepped onto a Boston porch later defended himself by saying he had been reminiscing about his old house. “I used to play with my dog in the backyard,” he said, according to a Boston Magazine story. (Perhaps to lighten the mood, Ring this month unveiled a new category for Neighbors app users wanting to share recorded acts of kindness: “Neighborly Moments.”)

Some customers said the cameras had sparked conversations within their families about trust and privacy in a new surveillance age, often with answers they would rather have gone unsaid. After Rik Eberhardt set up a Nest camera inside his home in the Boston suburbs, he found it increasingly awkward being reminded of every late-night trip he or his wife took to the kitchen. “I started feeling like: What am I even using this for?” he said. (He has since aimed the camera at his cats’ food bowls.)

Others said they were growing exhausted from the hyper-vigilance the cameras seemed to demand. The motion-activated devices can send alerts whenever someone walks by and also can be triggered by the movement of cars, dogs, squirrels and windblown trees, leading some customers to feel startled or under siege.

Several customers offered tales of strange noises, bizarre whispers and ghostly apparitions: One mother said she worried her toddler’s nightmares might have been caused by the unblinking camera in his room. The mortal realm has not always appreciated being recorded, either. One apartment dweller who said he used his Ring camera to record people littering at the community mailbox was told by his landlords to knock it off.

Molly Snyder, an education blogger and mother of three in the suburbs outside Columbus, Ohio, said videos from Ring doorbells and other home cameras had become the biggest source of conversation and outrage in her neighborhood Facebook group.

“There’s never video of porch pirates or criminals. It’s all what we’re doing to each other, or what the mailman is doing to frustrate our day,” she said. The postal worker’s biggest transgression, she said, is not pulling all the way to the side of the road when delivering packages: “People capture that on video, and there’s always a lot of rage commenting, with everybody dumping on the mailman.”

Her neighbors, she said, regularly post videos of children walking down the street alongside comments like, “Whose kids are these?” They don’t look like they’re doing anything wrong — a typical breach involves taking a shortcut through someone’s lawn — but her children told her they knew of kids who had gotten in trouble after video was posted of them hitting a tree with a stick.

“We’re not a neighborhood that’s unsafe. We’re also not a neighborhood where people spend a lot of time outside, interacting with each other,” she said. “So we turn our Rings on and start dissecting all the children. Shouldn’t we be encouraging each other to go outside, say hello and not just get alerts that you’re walking past?”

This ability to see into homes has already been weaponized: Hackers have used the camera systems to shout racist slurs at an 8-year-old girl in Mississippi and a 15-year-old boy in Florida; spew sexual expletives and kidnapping threats at a 4-month-old baby in Texas; and broadcast pornography into the bedroom of a 2-year-old girl in California.

Tania Amador, a teacher’s aide in Texas who used her Ring camera to coo at her cancer-stricken bulldog, shared video with The Post showing a hacker laughing as he blasted a deafening siren through her living room while she and her boyfriend hid just out of view. She is suing the company, arguing its lax security controls left her open to abuse.

Shahmiri, the Ring spokeswoman, declined to comment on the ongoing case but said Ring’s network had not been compromised. In some cases, Ring has argued that hackers used log-in details stolen from other sites; Amador said she had used a unique, 14-character password and had no idea how her cameras had been breached.

“It felt like a nightmare,” she said. “Even now, it’s tough to deal with the fact that we may have been watched for a while without knowing. What if the hacker (was) smart enough just to be quiet and watch?”

Ring partners with hundreds of police forces, extending surveillance concerns

Beyond outright hacks, the systems’ technical errors have reminded users of how creepy the glitches can be. The owner of a Google Nest video screen saw footage recorded inside other people’s homes, including a close-up of a baby sleeping in a crib. Google said the issue was the fault of the camera maker, the Chinese tech firm Xiaomi, and temporarily disabled some links to the devices.

The potential for mayhem has led some camera lovers to rethink their everyday use. Keith Keber said he liked using the cameras around his home in suburban Washington state to watch the hummingbirds and talk to his cats. But after his cameras’ maker, Wyze Labs, announced in December that it had suffered a data breach, he has been unplugging his cameras and leaving them in a drawer. “All these Internet-of-things devices, they’re portals,” he said, “not just to look out but to look in.”

Some customers also voiced anxiety over who might have access to their in-home feeds. An Amazon executive told senators last month that Ring had fired employees following four complaints that they had abused access to customers’ video data; the company has declined to provide further detail. Criticism of the systems has also come from inside the companies: Amazon software engineer Max Eliaser wrote last month that the mass deployment of Internet-connected cameras was “simply not compatible with a free society.”

“Ring should be shut down immediately and not brought back,” he wrote. “The privacy issues are not fixable with regulation, and there is no balance that can be struck.”

Despite privacy concerns, some customers said the cameras are a unique way to keep track of their families. One woman said she had installed cameras from Nest and the Chinese company Yi Technology to monitor her three children, ages 3 and younger, when they are alone in their rooms.

But other camera owners said they would never dream of installing the systems inside. Catherine, a 58-year-old Florida snowbird who uses Blink cameras to watch her home in Minnesota and who requested to use only her first name, said the cameras have become so easy to turn on that many people don’t really think about what’s at stake. Parents who installed cameras in kids’ rooms, she said, might end up depriving them of the privacy they need to grow into independent adults.

“We’re all getting too paranoid. Everybody thinks they’re going to be the next victim. And it’s set into us this mentality that we have to watch everything and everybody,” she said. “They think, ‘If I put all these cameras up, I’ll be safe.’ Safe from what? … It’s only making them more afraid.”