France is often criticised for its heavy-handed approach to cross-border industrial collaboration. Remember the tensions unleashed in the Renault-Nissan alliance when Paris pushed for a merger of the carmakers, knowing that Japan was strongly opposed? Or the battles between France and Germany for control of Airbus, the Franco-German aircraft maker?
Now it is the turn of Air France-KLM, the airline created in 2004 by the so-called merger of France’s flag carrier with the Netherlands’ own champion.
But, this time, it is not only French interference that is creating friction ahead of a vital fundraising — and possibly jeopardising the future of Europe’s first aviation alliance. It is also the illusion perpetuated by Dutch politicians and KLM’s management that the carrier is still an independent entity, despite having sold itself to Air France almost two decades ago.
For that is what KLM did when it agreed to create what was then the world’s biggest airline by revenue. At the time, Air France was not only bigger, but healthier, than KLM.
True, there were many safeguards built into the agreement that still give KLM some independence. But both airlines knew then — and should know now — that their post-Covid fortunes are better together than apart. While there has been progress on collaboration, the group needs to go further if it is to compete successfully when the market recovers and the likes of Ryanair and Wizz Air are gunning for market share.
Right now, Air France-KLM is struggling with a balance sheet that cannot bear the weight of €10.4bn in loans backed by the French and Dutch governments to help it through the pandemic. While there is no immediate need for cash, a big capital increase is required to cope with that debt burden.
But fundraising discussions must first overcome deeply embedded Dutch suspicions about the French state that — not illogically — wants greater integration of the airline to improve competitiveness. The Dutch government, perhaps also understandably, wants to ensure that not a penny of Dutch taxpayers’ money goes to Air France, which, unlike KLM, has consistently failed to tackle the labour costs that have weighed on its profitability.
This is not a new problem. Tensions have been bubbling for years. While KLM benefited hugely from the alliance, a failure to restructure Air France — and violent protests over various attempts — have made the Dutch wary. Complicating matters, the independence of KLM, a symbol of the Netherlands’ heft in the global economy, is as much a political issue as a corporate one.
The appointment in 2018 of a non-French chief executive in Ben Smith, formerly of Air Canada, should have improved matters. Instead, he trampled on Dutch sensitivities by attempting to assert his authority over KLM’s chief. Insiders say the two are barely on speaking terms. The Dutch government’s subsequent acquisition of 14 per cent of Air France-KLM, to balance the French state’s 14.3 per cent, was regarded as hostile by Paris.
That said, the coronavirus crisis may be changing mindsets. One condition of the French bailout was that Air France close lossmaking routes and parts of its domestic network, Hop. Had Air France done this without government sanction, it might have been far more difficult, analysts suggest.
And the mass resignation of the Dutch government last week could be positive, too. French and Dutch finance ministers have crossed swords too often to find an easy path back to collaboration. A change of guard might help — although the Dutch finance minister, as head of one of the country’s biggest parties, is likely to retain influence.
In an ideal world, the governments would let management find the best way to extract efficiencies. But yielding power in an iconic company is not a good idea ahead of an election. Nor is it likely to be a new government’s first act.
So, in the absence of disposals, the way forward has to be delivering a competitive Air France. When it is no longer regarded as a deadweight by the Dutch, there will be more incentive to take integration further.
But the Dutch must also stop imagining that the partnership with Air France is temporary. When the Dutch finance minister suggested late last year that the alliance did not have to last for ever, he might have scored some political points. But for Air France-KLM and its 86,000 employees, he was only further destabilising a partnership that could be delivering so much more.