After Ben Smith became CEO of Air France-KLM last year, he looked at Air France’s Africa network, one of the company’s jewels. France no longer rules much of the continent, but Air France retains air rights other airlines covet.
Smith didn’t like what he saw. In his previous job, as chief operating officer of Air Canada, he preferred simplicity and consistency, and Air France’s network is, well, complicated. Many routes operate less than daily, and some go in a circle, like AF 775, which twice weekly departs Paris for Bangui, capital of the Central African Republic, before stopping in Yaoundé, capital of Cameroon, and sitting for about four hours before returning home.
Sometimes there are reasons for odd routings, like security concerns, but worldwide, Smith said, the airline’s operation is more complex than it needs to be, a reason the carrier underperforms its peers on many financial metrics.
“You go look at the Air France African network and you just go, ‘What is this?'” Smith said. “It’s like this tangled web.”
He’s not the first person to notice Air France’s complexity. Rivals often talk about the airline’s potential, saying they envy its strengths, including its iconic brand, vast global route network, and Paris hub. But since its 2004 merger with KLM, Air France has languished as its two main European rivals overhauled their businesses. Rivals have cut bloated infrastructure; Air France retains a legendary bureaucracy.
Previous CEOs have tried to tame it. Some ran into inertia while fighting powerful unions or the French government, which owns 14.3 percent of Air France-KLM. The last two CEOs resigned after failing to persuade French unions to accept their turnaround plans.
Smith, the first non-French executive to lead the parent company, might be different. Smith, 47, joined last August, and after some early personnel missteps — with one decision, he antagonized Dutch politicians so much the government bought stake in the company — Smith is beginning to put his imprint on Air France-KLM.
Recently he has focused on the French side, letting KLM CEO Pieter Elbers run his company, which in recent years has produced much of its parent’s profits. Smith seeks to mold Air France into the airline he wants: a simpler operation with better relations with unions and other stakeholders.
“For Air France, one of the key features for success is going to be to simplify,” he said. “It is complex. I got in there and thought, ‘Wow, where do we start?'”
Before he resigned a year ago, former CEO Jean-Marc Janaillac introduced Joon, one of the more mocked brands in aviation history.
His team conceived the airline-within-an-airline to compete against low-cost carriers in Europe, North America, and the Middle East, which had been undercutting Air France on price. Joon needed to attract all customer segments, but in advertising it billed itself as a millennial-oriented airline, claiming it had a “fashion brand, a rooftop bar, an entertainment channel, [and] a personal assistant.”
It was not much more than a regular airline with snazzy crew uniforms, fancy alcoholic drinks, and an inflight entertainment system. It wasn’t even a low-cost airline, as management had not won real concessions from employees, other than flight attendants, who were paid less than at Air France, and hated the airline for it.
Smith scrapped it, as he negotiated a new agreement for Air France flight attendants, that should make the main airline more competitive.
“It broke the trust of management and flight attendants,” Smith said. “You couldn’t fix that, so we had to get rid of Joon. There was no way we were going to be fighting with our flight attendants every day, forever, over a product they didn’t understand and they wouldn’t accept.”
Smith, who created Air Canada Rouge, a discount subsidiary, said he understands low-cost, long-haul airlines may steal share from Air France. But he said Norwegian doesn’t pose so much of a threat that Air France needs another airline to combat it.
“Are we going to start a whole new airline because of Norwegian?” he said. “Not today. I’d like to wait and see. The model hasn’t been proven. I’m not convinced yet. I think most people in the industry are not convinced that you should go buy brand-new 787s without a true premium cabin, while not being able to get prime slots at the best airports. Let’s see how this works.”
As long as Norwegian exists, Air France may go with a simpler strategy to thwart it. Air France has large airplanes, including the 516-seat Airbus A380 and a 468-seat Boeing 777-300ER. Air France can discount the last 50 or 100 seats and still make money, Smith said.
“In the summer if you want a price to New York, or to L.A., or to San Francisco, we have built-in LCC on some of these big airplanes,” he said.
There are other places Smith wants to simplify. More than many airline CEOs, Smith is a product person, taking care to choose seats and other cabin elements. At Air Canada, he was fanatical about consistency, so while the airline may not have the world’s best product, business travelers knew what to expect.
Air France is nothing like that. It has a mishmash of products for first and business class, and key customers sometimes don’t know what they’ll get, because the airline is always swapping planes among routes.
“We’ve got 29 airplanes equipped with La Premiere, the Air France first class, which has two products,” Smith said. “One of the products just won best in the world. And we had them on so many routes, some daily, some non-daily, at different times of the day. To Beijing, we have been flying two aircraft types, depending on the day of the week. How the hell do you market that product?”
By next summer, he said, Air France should have a consistent product on transatlantic flights, except for its Airbus A380s, which will retain an antiquated cabin for the foreseeable future. Retrofitting the jets will cost 30 to 35 million euros per plane, he said, and it’s not clear that it’s worth it.
More to It
If Smith succeeds where others have failed, he’ll need to do more than simplify. He must persuade stakeholders Air France cannot continue the same way as ever.
France’s domestic market could be a test. Air France is an iconic national airline, and politicians and travelers expect it to fly among the country’s major cities. The problem is the business stinks: Air France has lost share to high-speed trains, including a new line from Paris to Bordeaux, and it’s probably not coming back.
In May Smith outlined a plan to cut 15 percent of capacity from the short-haul market over the next two and a half years. But he said the airline probably needs more changes.
“This all has to be restructured,” Smith said. “We’re losing almost 200 million euros a year. We have a regional operation which just can’t compete against low-cost carriers. We’ve got this train. We have to figure this out.”
Smith may have a tool to stem the losses. Air France and KLM each run a low-cost, short-haul airline called Transavia, and both are reasonably competitive. However, because of union agreements, Transavia France can only fly 40 airplanes, so it lacks the scale to fly all the routes Smith would like.
In May Air France pilots voted to allow their union to negotiate with the company on increasing the 40-airplane limit at Transavia France. In the past pilots have been angry whenever the airline has proposed adding new airplanes at Transavia, so Smith said he sees this as a good sign. But he still needs a deal.
Even if he gets one, it’s not clear unions or politicians would let Transavia take over domestic Air France routes. Even if it cannot, Smith said he sees Transavia as an effective competitor on short-haul international routes against established low-cost airlines, like EasyJet and Ryanair. None is so big in France, but several are an annoyance, he said.
Jay Shabat, senior analyst at Skift Airline Weekly, said Air France could be a major force if Smith can tweak the short-haul network. For longer flights, he said, Air France and KLM are in strong shape, not only across the Atlantic, but also in Asia, Africa, and even South America.
“They just bleed money on short haul,” he said.
Not everyone is sure Smith has what it takes to reform Air France-KLM.
Daniel Röska, senior research analyst at Sanford C. Bernstein, said many European investors soured on Smith in February, when reports indicated he wanted to push out KLM’s Elbers. Employees and politicians in the Netherlands rebelled, and to maintain influence, the Dutch government upped its stake in Air France-KLM to 14 percent.
“He really miscalculated that move with Pieter Elbers,” Röska said. “The Dutch government went on a rampage and said, ‘You are not going to fire this guy.”‘
Elbers and Smith say they have a fine working relationship, but the episode may have repercussions. Smith now runs a company where roughly half the stock is owned by strategic investors with disparate interests. The French and the Dutch governments may want one thing, while Air France-KLM’s other owners, including Delta Air Lines (8.8 percent), China Eastern (8.8 percent), and employees (3.9 percent) seek something else. They could keep Smith from taking a decision that would help the company but hurt one of the investors, Röska said.
Röska, a former vice president at Lufthansa, also said he questions why Smith spends so much time on Air France. At other European airline companies, the group CEO handles high-level strategy, while others lead the airlines. But with Air France, Smith has a higher public profile than Air France CEO Anne Rigail.
Röska said European equity markets have mostly given up on Air France-KLM, saying the group has not proven it can sustain the same margins as its competitors. In its most recent fiscal year, Air France-KLM had an operating margin, excluding special items, of 5 percent, far less than International Airline Group’s 13.2 percent, according to calculations by Skift Airline Weekly.
“From the investor community, the only people who still care about Air France are in France,” Röska said. “The only airline that is less investable than Air France-KLM right now is Norwegian.”
Some journalists, analysts, and rival airline executives have asked if Smith will be a short-timer. But Shabat said it’s too early to know.
Shabat said a good parallel could be Alan Joyce, an Irish executive tapped to run Qantas, the Australian national carrier, in 2008. Early in his tenure, Joyce was hated by many passengers, investors, and workers for making tough decisions they did not like or understand. Today Qantas is consistently profitable, and Joyce is considered one of the world’s most adept executives.
“These things play out over time,” Shabat said. “Smith is very skilled. He knows what he is doing. With the Dutch thing, he may have done that in a way that was a little bit messy, but I don’t think that’s going to have a deep effect long term.”
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