Air France–KLM: when cooperation becomes confrontation

Air France planes await their passengers (2010). Mathieu Marquer/Wikimedia, CC BY

On February 27, the unexpected acquisition by the Netherlands of 14% of Air France–KLM’s capital seemed to trigger a diplomatic conflict between the two nations. Because the French state holds 14.29%, this rebalancing of power may seem legitimate. Indeed, to defend its interests, the Dutch state will probably join the company’s board to influence strategic decisions. So the move can be seen as a normalization of previously unbalanced relations between the two partners.

A powerful European alliance that significantly evolved

Air France acquired KLM 15 years ago but it has remained relatively autonomous – the goal was to maintain two strong national brands within a European alliance rather than a merger. The fleets of Air France, 305 aircraft, and KLM, 169, are interdependent and complementary, each with a powerful brand image. However, increasing globalisation has made it difficult for both companies to maintain a strong national identity, and their separate management has proven to be financially problematic.

French and Dutch authorities hold talks to defuse Air France-KLM dispute.

Since the alliance began, KLM has doubled in size and although it remains smaller than Air France, it contributes four times more to the overall operating profit. Air France’s instability, poor performance and labor conflicts have not helped things. Despite the changing financial situation, the group’s governance is still the same. The situation is reminiscent of how the Renault-Nissan alliance was managed, with Renault remaining supreme despite Nissan’s recovery.

Meanwhile, the aviation sector is facing several challenges, the competitors are seeking to strengthen their positions. The other major European airlines, Lufthansa, Iberia and British Airways, want to increase their international activity. Low-cost airlines are putting considerable pressure on prices. American, Chinese, and subsidized Gulf airlines have launched aggressive strategies. Delta and China Eastern each own 8.76% of Air France–KLM, and they will both have 18% of the voting rights.

The reasons for Dutch frustration

In Europe, the Netherlands disagrees with France in many budgetary and military areas, and regularly opposes French proposals. Regarding the Air France–KLM alliance, tensions had arisen over the future of Pieter Elbers, KLM’s CEO since 2011. The group hesitated to renew his mandate, despite his performance and achievements. The board finally reappointed him on February 19. The French Ministry of Economy now insists that the board offered to make him CEO of the group, but that he refused.

If France considers it can hold shares in strategic assets to influence decisions concerning them, it is surprising that it denies another country to have the same right. Given the importance of Schiphol airport to the national economy, the Netherlands want to prevent it being relegated to a secondary position, which may happen given the group’s strategy favoring Charles de Gaulle Airport in Paris. Their reaction is therefore quite understandable.

Since taking office on September 17, 2018, Ben Smith, the new group CEO, has seemed to favor French interests. As a Canadian citizen, he is supposed to be independent and non-partisan, but his readiness to sit on the board aroused suspicions. Then, the French stakeholders took several decisions without informing the other partners, which could have triggered the Dutch reaction, spectacular in its execution, but measured in its proportions.

The recent strategy of wanting to distinguish between the two brands by making Air France more upmarket than KLM could have hurt Dutch pride. Thus, their desire to return to an equal partnership between KLM and Air France seems justified.

An unfriendly but legitimate financial transaction

However, the French state was informed only one hour from the official announcement, just before the deadline allowed for this type of stock market operation. This cover-up may be particularly surprising and vexing for the French authorities, who repeatedly, but unsuccessfully, asked the Dutch government to buy Air France–KLM shares during the summer of 2017, when Delta and China Eastern announced they would be doing so.

Dutch minister of finance Wopke Hoekstra (R) and minister of infrastructure and water management Cora van Nieuwenhuizen during a press conference at the Ministry of Finance in The Hague on February 26. Lex van Lieshout/AFP

Bruno Lemaire, the French Minister of the Economy, considers the Dutch government’s decision “incomprehensible and unexpected”. He talks of an “unfriendly” operation, “trader’s techniques,” and a “value destructive” decision. He was deeply disappointed that he had met his Dutch counterpart, Wopke Hoekstra, the week before, and discussed the alliance without the long-planned approach being mentioned. Bruno Lemaire also denounced the operation as “deceptive” and “secret.” It could not be improvised, requiring decisions at the highest level of state, the complicity of important stakeholders, and careful planning to avoid alerting financial markets. Both ministers vowed to focus on the future, but their visions may not be the same.

Even the French president Emmanuel Macron made a statement, asking the Netherlands to clarify their intentions and recalled, “What matters is that the firm’s interests are maintained.” This is probably an indirect warning to Dutch leaders not to use this type of approach to attract voters in the run-up to important elections in the Netherlands. Protectionism is popular among Dutch citizens, who see it as reaffirming their country’s sovereignty.

Deep and lasting consequences

The talk of treason and disloyalty shows that the breakdown in trust between the two European partners will probably last for some time. This is a new step in the trend away from a European approach to industrial interests and back to a national approach. This trend is symptomatic of more brutal, opportunistic, and interventionist relations, as evidenced by the recent conflicts between France and Italy. It is also a new form of isolationism in the defense of economic interests, like Brexit.

Although France’s position does not appear to be jeopardized because of its double voting rights on some of its shares and the 4% held by Air France employees, it could decide to invest in more capital. Otherwise, the French state might soon be outvoted by an alliance between the Dutch and another non-European nation, USA or China. An accumulation of strategic disagreements could lead to irremediable conflict and the end of the alliance.

The Netherlands spent 744 million euros on Air France–KLM shares, so presumably they consider the investment one of major economic interest. The Dutch airline’s recovery, good management, and profitability testify to its knowhow. Ben Smith may well resign if he considers himself unable to implement the strategy of a full merger, and thus the loss of KLM’s autonomy, which he feels the group needs.