Air France-KLM boss covers first leg of long-haul recovery
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.”