Dr. le Jekyll and Mr. van Hyde: As Air France navigates a maze of labor tensions, KLM is quietly improving
Poor financial results. Heavy indebtedness. And of course, labor unrest. All three come quickly to mind when thinking about Air France/KLM in its current troubled state. But it’s the French airline, much more so than the Dutch one, where most of these problems fester.
Air France 62%, KLM 38%— that was the breakdown of each carrier’s revenue contribution to the group in 2015, not counting their Transavia subsidiaries and other non-airline business units like cargo, maintenance and catering. KLM, however, punched above its weight in producing not 38% but 45% of their combined operating profits. In margin terms, Air France earned a 3% result last year, while KLM’s result was 4%.
Not terribly impressed by the difference? Well, that’s not quite the whole story. Last year was particularly difficult for KLM given its outsized exposure to troubled markets in East Africa and the ASEAN region, the latter ever more exposed to Gulf carrier encroachment. In fact, KLM even underperformed Air France in 2015’s first and fourth quarters. But that’s not usually the case. In 2014, KLM earned a $230m operating profit that helped soothe the pain of a $413m loss on the French side. The margin differential then was positive 2% versus negative 2%. Operationally too, KLM proved critical in keeping people and funds flowing during a two-week Air France pilot strike that fall.
So far this year, KLM is again doing the lion’s share of the company’s heavy lifting. In the first six months of 2016, it contributed 38% of revenues. But this time, it contributed 93% of operating profits. Air France barely broke even, while KLM’s operating margin was 5%. If it were an independent airline, KLM’s performance wouldn’t be quite as good as that of British Airways. But it would be similar to Lufthansa’s.
Or maybe not. KLM, of course, is not an independent airline, and its current profits are greatly assisted by the benefits it enjoys from being attached to Air France—the amplified schedule utility and greater traffic feed, for example, and the lower prices it pays for aircraft and other assets thanks to the group’s muscular purchasing power. Also critical are the revenue synergies it derives from powerful overseas ventures, most importantly one with Air France, Alitalia and Delta. Indeed, KLM knows its fortunes are more secure with Air France than without it. And it recognized the perils of loneliness…
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