Air France-KLM Chief Demands Proper Merger, 14 Years After Deal

(Bloomberg) -- Air France-KLM Group’s new chief executive officer says it’s time the carrier’s French and Dutch arms began behaving like a single company -- 14 years after they formally merged.

Ben Smith, who started last month, used his first formal call with analysts to make clear he wants the units to resolve tensions over labor strife and unequal levels of profitability and build a business as tight as merged rivals that came together far later.

“The more we can do to optimize and do what most major groups do when they consolidate, that’s obviously our goal,” the former Air Canada executive said on a conference call after the group reported a decline in third-quarter earnings. “Any internal struggles should be addressed as quickly as possible.”

The combination, which Smith called a “unique set up,” dates from Air France’s 2004 takeover of KLM. The two still operate as separate entities, unlike merged airlines in North America, and while IAG SA and Deutsche Lufthansa AG also contain distinct carriers, those groups are dominated by their most successful members. Air France, by contrast, is far less profitable than smaller KLM.

Tensions have ebbed and flowed, with Dutch workers often critical of pay demands and strikes involving Air France staff who are generally less productive. The latest conflict has intensified since February, when French employees walked out in a campaign for an immediate raise, ultimately leading to the resignation of former CEO Jean-Marc Janaillac. KLM has in turn pressed for changes in the management structure to gain more sway.

KLM had an 18 percent profit margin in the third quarter, a level Smith called “adequate,” compared with just 11 percent at Air France, though the CEO sought to strike a balance by suggesting that both units need to lift profitability. While the units face different tax and regulatory environments, they should still not be so far apart, he added.

Smith has already eased the situation somewhat through an agreement with a majority of Air France unions sealed earlier this month that quelled fears of new strikes for now.

Still, there’ll be further talks with Air France pilots, the carrier’s most powerful staff and often the most belligerent, that are likely to prove more telling. Their SNPL pilots’ union has long complained that business has been moving from Paris to Amsterdam since the merger. KLM cockpit crew reached a deal in September.

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