Tensions Rise at Air France-KLM Over Fate of Dutch Unit’s CEO

(Bloomberg) -- Just as Air France-KLM looks set to turn the page on last year’s crippling labor strife, the carrier is facing a revolt by its Dutch arm.

A tussle over the reappointment of Pieter Elbers, who leads the KLM unit, sparked a noisy demonstration of support Thursday for the executive from staffers, managers and even Dutch officials, including a petition signed by more than 25,000 employees.

The show of force followed news that Air France-KLM’s new CEO, Ben Smith, was considering replacing Elbers on the grounds that he might not be fully behind plans to strengthen ties between Air France and KLM. The flap brought to the fore long-simmering tensions between the French and Dutch carriers, which joined in a 2004 merger, but operate semi-independently.

“There is a new top man at the firm who is obviously working on the strategy,’’ Dutch Prime Minister Mark Rutte said at a press conference in The Hague on Friday. “The Dutch government, we must try to act to ensure that the decisions within the company are taken in line with what was previously agreed during the merger and in line with Dutch interests.”

Labor Accords

Smith, a former Air Canada executive, took over in September and quickly struck landmark deals with labor representatives, ending a bout of unrest that resulted in costly French strikes last year. An accord with pilots could be next: The results of a referendum over a union-backed pay and benefits proposal will probably be known Tuesday.

A day later, Air France-KLM is likely to report an annual profit, even after the strikes in France cost it an estimated 335 million euros ($377 million).

Now Smith, 47, wants to bring Air France and KLM closer. While some departments are integrated, such as revenue management -- where analysts seek to fill seats as profitably as possible -- others, including aircraft purchasing, still operate separately. To that end, Smith is seeking to join the supervisory board of KLM.

The merger 15 years ago brought together the flag carriers, but their complicated governance structure still reflects guarantees given at the time to safeguard a degree of autonomy for KLM. Subsequent agreements have ensured KLM headquarters jobs won’t be transferred to Paris and the carrier will keep its financial independence. Smith wants to streamline operations.

‘Intensive’ Discussions

He met with KLM’s board Friday to discuss Elbers, joined by the Franco-Dutch carrier’s appointment committee, a spokeswoman for KLM said. Smith spoke with Dutch government officials earlier in the day. Elbers will attend the presentation of Air France-KLM earnings in Paris, another KLM spokeswoman said.

Dutch Finance Minister Wopke Hoekstra and Infrastructure Minister Cora van Nieuwenhuizen, who met Smith on Friday morning, stressed the importance of the carrier to the Dutch economy, Hoekstra told reporters in The Hague. The Dutch government owns 5.9 percent of KLM, while the French state holds a 14 percent stake in Air-France KLM.

The conversation was “intensive and it won’t be the last one,” said Hoekstra, who backs Elbers. “It is strange to see that we have this discussion with each other while the Dutch part has performed well in recent years.”

Higher profit margins at KLM have been a source of tension since Air France acquired the Dutch business. The unit boosted revenue passenger kilometers -- the number of customers times the distance flown -- by 4 percent in 2018, compared with a gain of just 1.9 percent at Air France and its Hop! division.

Possible Unrest

KLM officials sent a letter to Air France-KLM’s board to insist they support Elbers at their next meeting, on Feb. 19. In the missive, the Dutch managers warned of possible social unrest at the company, should Elbers leave. KLM went so far as to hire a public relations adviser in Paris to handle the situation, and spread the #BlueStormRising hashtag to defend the 48-year-old executive.

An Air France-KLM spokeswoman declined to comment on the relationship between the units.

Any strikes by pilots could do damage because of their ability to ground flights. Smith’s two immediate predecessors left the company after labor talks descended into open conflict. The proposed agreement with the French pilots would secure changes to remuneration and increased flexibility, according to the airline.

While that bodes well, Smith will need to follow through with further measures to pare costs and boost sales if the French unit is to close the profitability gap not just to European rivals such as British Airways but also with KLM.

“The strong link between Air France and KLM is seminal for both,” said Geoffroy Bouvet, an Air France pilot and former president of the SNPL union. “Neither has the critical size to exist in this cut-throat market.”

To contact the reporters on this story: Ellen Proper in Amsterdam at eproper@bloomberg.net;Ania Nussbaum in Paris at anussbaum5@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Frank Connelly, Tara Patel

©2019 Bloomberg L.P.