Air France-KLM CEO’s Strategic Plan Draws Investor Skepticism
Air France-KLM Aims for Return of Dividend in Five-Year Plan
(Bloomberg) --
Air France-KLM Chief Executive Officer Ben Smith has a big job ahead in convincing investors the carrier can raise profitability and regain market share lost to rivals.
Canadian-born Smith on Tuesday unveiled a five-year plan that would see the airline fatten margins and resume paying a dividend at an unspecified date. The last was in 2008, when the financial crisis ushered in years of losses and strikes.
Investors were unimpressed, sending shares down as much as 4.2% in Paris trading.
The “ability to execute” the strategy will be key, Goodbody analysts said in a note, calling for more details on how the CEO plans to narrow the profitability gap between the carrier’s two arms, Air France and KLM, and keep labor unions on board.
With the long-awaited road map, Smith has revealed his ambitions for the carrier, which lags behind British Airways-owner IAG SA and Lufthansa AG on a number of financial measures. When he took the helm more than a year ago, Air France-KLM was reeling from months of labor unrest and deep divisions within its workforce in France.
More recently, lower third-quarter earnings disappointed investors as the economic slowdown, trade tensions and higher fuel costs showed the fragility of a nascent turnaround.
Smith’s new plan will focus on three brands, Air France, KLM and low-cost Transavia, and its hubs in Paris and Amsterdam as well as “pragmatically analyzing consolidation opportunities,” according to the statement. IAG on Monday unveiled a plan to acquire Air Europa.
Consolidation
“Consolidation for us is obviously very important,” Smith told analysts, cautioning the company will take a “conservative” financial approach.
The CEO wants Transavia to become the leading low-cost airline in France, where Ryanair Holdings Plc and EasyJet Plc have made inroads.
The goal for an operating margin of 7% to 8% compares with the 4.8% achieved in the first nine months of the year. For the first half, it lagged behind IAG and Lufthansa.
Smith, 48, has taken a step-by-step approach to reforming the airline, which has a long history of labor unrest that has sometimes turned violent. He scored early victories by signing agreements and pay rises with French and Dutch unions.
His relative youth and foreign background have distinguished him from past CEOs, who have traditionally come from the country’s elite schools and civil service.
Smith also uses unconventional methods for France. He was able to win the trust of union representatives -- tired of conflict and hard-line leaders -- and earn plaudits for spending a night out bowling with them.
He took tough early decisions such as withdrawing the costly Airbus SE A380 planes from Air France-KLM’s fleet and shutting down the discount Joon arm that was started with a lot of hype by his predecessor.
Plane Geek
Smith has also built a reputation as a sort of airline geek with deep knowledge of plane models and operations.
He has worked to improve service standards on Air France, making clear he wants the carrier to match the often-glamorous image of the country abroad. This has included new cabins, planes and improved menus.
Among the biggest challenges at Air France-KLM will be repairing frayed relations between the French and Dutch units as well as and balancing shareholder influence by both governments.
Dutch employees have long resented labor strife in France and narrower margins at Air France compared with those at KLM. The Netherlands stealthily acquired a 14% stake in the carrier in February, matching the French government’s holding.
--With assistance from Chiara Remondini.
To contact the reporter on this story: Ania Nussbaum in Paris at anussbaum5@bloomberg.net
To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Tara Patel, Frank Connelly
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