Pieter Elbers leaves KLM. Good or bad news?

Pieter Elbers, KLM’s Chairman and CEO since 2014, will not serve a third term at the helm of the Dutch airline. The news may come as a relief to some, given the tensions between Air France and KLM, but it will not solve all the airline’s problems – far from it.

Elbers “accompanied” towards the exit?

One thing is certain: KLM’s Supervisory Board has decided that Pieter Elbers will not serve a 3rd term, a decision subsequently approved by the Air France-KLM Group’s Board of Directors. He will therefore leave office at the end of his second term (May 2023), or earlier if a successor is found quickly.

Then, depending on the source, the decision was made “jointly” with Elbers, or even at the latter’s instigation.

Did he decide to leave on his own out of tiredness, or did a political game lead KLM to offer him this exit, or even convince him that continuing was futile? We’ll never know, but as we’re about to see, it won’t be all bad news for the Group or even Air France.

The protector of Dutch interests

Indeed, Pieter Elbers will be sorely missed on the Dutch side. Two things will stand out in his record.

The first is to have made KLM an economically successful airline, or, to be precise, the best performer in the Air France-KLM group. Sometimes the only company to make a profit when Air France was racking up losses, and the first to return to the green during the COVID crisis. In the Netherlands, this state of affairs has perpetuated the image of a KLM that is rigorous, efficient and “business driven“, in contrast to an Air France that struggles to make radical decisions, is bogged down in political and union politics, and is excessively costly. Which is a little reminiscent of the opposition between the frugal and the others during the negotiation of the European recovery plan, but that’s another subject.

The second is the hard-fought preservation of KLM’s independence within the Air France-KLM group. For the reasons given above, KLM has never been happy to be dictated to by an Air France with little credibility in its eyes. I’m not even going to mention the “lack of brotherhood” repeatedly pointed out by Air France flight crews, but, for example, the refusal of cash-pooling (KLM did not share its profits within the Group), the rogue move by the Netherlands to increase its stake in Air France-KLMor the fact that the loans guaranteed by the Dutch State during the COVID were only intended for KLM, not Air France-KLMunlike those guaranteed by the French government. Among others.

This clearly shows the convergence between the vision of the airline’s interests defended by both its Chairman and the State, each in its own role.

Anything but a team player

So if you look at it from a Dutch perspective, Elbers has been an excellent President in every respect. The proof is in the 25,000 signatures gathered by a petition when he was in the hot seat during a change of governance.

Because while KLM and Elbers have been good performers, they have often managed to do so by playing against the group or against Air France, preventing a number of synergies. While KLM has pulled this shaky marriage together on its own, and Air France cannot be absolved of its many mistakes, it’s a safe bet that the two airlines would have done better individually and collectively if they’d done it together.

Which brings us back to the real problem at Air France-KLM: a marriage that is nothing more than a sham, never consummated, where everyone has separate bedrooms, only to argue over breakfast. Compared with its European rivals, the Lufthansa Group (Lusfthansa, Swiss, Brussels Airlines, Austrian…) or IAG (British Airways, Iberia, Aer Lingus…), the level of synergy within the group is quite different. This at least partly explains why, in 2019, Air-France KLM posted a margin of 4% (and 1% for Air France), while its competitors IAG (British Airways) and Lufthansa were around 8%.

As soon as he arrived, Ben Smith wanted to put the house in order and turn Air France-KLM into a real group. One of the most visible decisions in this direction was the first group order of aircraft for the renewal of its medium-haul fleet (from Airbus, whereas KLM had always favored Boeing for its medium-haul fleet), the consequences of which were the numerous frictions mentioned above.

With Elbers gone, Air France KLM is finally ready to fly with two engines thrusting in the same direction?

Will Elbers’ replacement be a political one?

Air France-KLM has appointed a headhunter, who now has a year to find Elbers’ successor. A guarantee of the arrival of a new “Air France compatible” president. Nothing is less certain.

With Elbers gone, those who once pushed him, supported him and in a way gave him his implicit mission statement remain. Namely, the Dutch state as shareholder and, to a certain extent, KLM employees, who are opposed to anything resembling interference in the management of their airline, and are keen to see it retain its identity, culture and independence within the Group.

With almost 10% of Air France-KLM shares, compared with 29% held by the French state (the Dutch state was “diluted” because it did not follow France in the group’s recent capital increase), the Netherlands will certainly have less influence on the choice of Elbers’ successor, but it will also have a major influence on the choice of the new CEO. it’s hard to see them letting a president put in place who will sacrifice KLM’s sacrosanct independence.. And we know that when governments come into the game, their weight in the corridors is rarely proportional to their weight in the capital.

What about other shareholders? Delta and China Eastern first? They will certainly want a solution that promotes synergies.

If the choice of Pieter Elbers’ successor were simply a question of skills and business, the future would seem clear. But it’s to be feared that the choice is also partly political, and to ask the question is already to some extent to have the answer.

What choice for Ben Smith?

So what options does Ben Smith, Chairman of Air France-KLM, have?

The next KLM president will undoubtedly be someone who knows the airline business inside out, and is a pure product of the sector. An obviousness? Maybe worldwide, but look at the list of Air France and Air France KLM presidents before Ben Smith and it’s anything but obvious.

A Dutchman? This would be a gesture of goodwill to KLM, but with the risk of ending up with an Elbers bis, perhaps a little gentler.

A Frenchman? Certainly not. Unless you want to turn a failed marriage into a successful divorce. Divorce with employees guaranteed.

A foreigner? As Ben Smith has managed to find his sweet spot at Air France and Air France-KLM, perhaps it would be a good idea to entrust key positions to professionals who are above parochial squabbles.

While Elbers’ departure will certainly come as a relief, the scope for replacing him will be limited. And beyond individuals, everything will depend on the willingness of the two countries concerned to let the management teams work in peace, and the employees of both countries to form a united group where everyone heads in the same direction. And to return to the original sin, it will be up to Air France to show that it is a rigorous partner more concerned with business than politics (internal or external). But with new management and Ben Smith…for once we want to be confident.

An emergency for Air France-KLM

To understand what is really at stake in this long-term appointment, we need to put the church back at the center of the village and business at the heart of Air France-KLM.

The Group will need to recapitalize once or twice in the coming months and years. The group needs to get out of debt quickly, and repay its state aid as a matter of priority: until it does so, it will be unable to participate in the consolidation of the European sky, which could cost it dearly. For example, seeing ITA succumb to Lufthansa’s appeals.

To do this, it needs to restore margins to the level of its competitors, the only way to give itself the means to achieve its ambitions, and reassure the markets that it is in good health before calling on them. If Lufthansa has proceeded in this way to settle its “COVID debts” to the German state, and Air France-KLM has asked to defer its repayments, there must be a reason.

To achieve this, you need synergies, and to achieve synergies, you need people who want to work together.

It’s as simple as that.

Bottom line

Pieter Elbers’ departure from KLM paves the way for more peaceful relations between Air France and KLM, provided that the choice of his successor does not perpetuate old quarrels, that each airline shows the other that it can be trusted, and that everyone finally decides to go in the same direction.

It’s all about the survival of the group.