Coronavirus Leading To An Air France-KLM Breakup?

by Giovanni

KLM management is preparing for the coronavirus crisis to lead to the end of Air France-KLM according to insiders quoted in a new report in the Dutch financial newspaper, Het Financiële Dagblad.

KLM Prepares For Breakup

According to the report, a critical factor in whether the combination can survive is whether Air France can make the drastic cost cuts KLM believes are necessary. KLM management is unconvinced that the French are willing to particularly after the French government’s €7 billion cash infusion. According to a KLM insider speaking to FD, “that strengthens the position of the government, to the detriment of the company leadership.”

All of these factors and continued inefficiencies are leading KLM to believe that the Parisian head office of the holding company should be scrapped. In such a scenario, the two Sky Team carriers would limit themselves to coordination.

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Air France-KLM Friction

The airlines have had a tenuous relationship on the downswing.  The Dutch have been annoyed for years that Air France leads the combined airlines while being unable to control its own costs and struggling more than the Dutch side of the business. KLM has historically been more profitable and stable than Air France. Meanwhile, the parent company is headquartered in Paris and KLM is treated as the secondary airline in the group.

The fight early last year over the reappointment of Pieter Elbers as CEO of KLM and the Dutch government’s decision to make an equity investment to protect its interests in the combined company are recent examples of the friction between the sides.

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French and Dutch Bailouts

Both the French and Dutch governments are preparing bailouts for their flag carriers due to the Coronavirus crisis.

The Dutch bailout for KLM consists of a government-backed loan of between €2-4 billion. KLM believes that to be sufficient assuming traffic begins to return to 80% of normal levels by the end of 2021.

Air France is getting a €7 billion loan package from the French government. According to FD, there is doubt that this will be enough to get Air France through the crisis.

Both Dutch Finance Minister Wopke Hoekstra and his French colleague Bruno Le Maire emphasized that the bailouts can only benefit their own airline. Dutch funds will go to KLM exclusively while the French bailout will go to Air France. But since they are still one company, KLM believes the recapitalization will be difficult to negotiate.

Even the two press conferences last Friday were not coordinated. The Dutch press conference was held before negotiations with KLM could be completed because the French announced their support for Air France. KLM believes that this friction could lead to the airlines being renationalized.

The Upshot

The group hasn’t been a happy couple for a while and the Coronavirus has only heightened the tensions. The result of this renewed conflict could be a divorce and the two nationalized airlines operating independently. According to FD, KLM is preparing for a potential corona-breakup but hopes to stay friends and coordinate with Air France.

Hat tip to Olivier Rutgers.

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