KLM Could Break-Up With Air France Over State Subsidies

The current crisis that is heavily affecting all carriers around the world could profoundly change the landscape of the airline industry for the years to come. According to the Dutch financial newspaper Financieele Dagblad, Air France and KLM may return to operate as independent carriers.

The two airlines merged in 2004 and have been operating conjointly ever since, but the relationship between the two units has deteriorated in recent months and the COVID-19 crisis has only exacerbated the tension. While at the time of the merger Air France was the more profitable of the two carriers, now the relationship has all but reversed, with KLM generating three times as much surplus as its French partner. According to Dutch sources, this is mainly due to costs that at Air France appear to be out of control.

Last Friday, the French Government announced a loan for seven billion euros to help Air France during the crisis. However, the announcement had not been coordinated with their Dutch counterparts, that had to scramble to make a parallel announcement without negotiating first with their own government. It is believed that KLM should receive a government-guaranteed load of between two and four billion euros, provided that the carrier can return to 80 percent of pre-crisis air traffic levels by the end of 2021.

KLM is expressing doubts about whether the loan extended to Air France by the French Government will be enough to save the company, especially considering that more than four billion euros are due to be repaid within 12 months. In Paris there does not seem to be the willingness to slash costs in a way necessary to save the carrier without more public money infusions, KLM believes.

Furthermore, both Dutch Finance minister Wopke Hoekstra and his French counterpart Bruno Le Maire have emphasized on Friday that public money should only benefit their own airline, therefore opening the way to two nationalized carriers operating independently.

Sources from inside the Dutch parliament told Financieele Dagblad that the Netherlands only wants to make money available if there are firm guarantees that books will be put in order.

Both France and the Netherlands currently hold 14 percent of the shares of their respective carriers, and the Dutch Government has not ruled out further aid in the form of an increased ownership stake in the carrier. “It may be part of the recipe,” said Hoekstra.

Despite the lack of confidence from Amsterdam, Air France CEO Benjamin Smith was quite positive in an interview published on Monday on French newspaper Les Echos: “The deal reached with the Government was not easy, it required many weeks of hard work – explained Smith – but now we have the means to get through the next few months, when our liquidity could have reached critical levels, and continue to operate for up to 18 months, waiting for demand to recover.”

Smith confirmed that domestic operations within France lost approximately 200 million euros in 2019 and this crisis represents the opportunity to make the structural changes that Air France needs to compete with the other big European carriers. “We can already see how unit costs at Air France have been decreasing faster than its competitors’ during the last months of 2019, and that is despite the salary increases conceded last year, which have been offset by an increase in productivity.”

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Vanni Gibertini

Vanni fell in love with commercial aviation during his undergraduate studies in Statistics at the University of Bologna, when he prepared his thesis on the effects of deregulation on the U.S. and European aviation markets. Then he pursued his passion further by obtaining a Master’s Degree in Air Transport Management at Cranfield University in the U.K. followed by holding several management positions at various start-up carriers in Europe (Jet2, SkyEurope, Silverjet). After moving to Canada, he was Business Development Manager for IATA for nine years before turning to his other passion: sports writing.

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