By Laurence Frost and Geert De Clercq
PARIS (Reuters) - The Dutch government wants seats on the board of Air France-KLM and more cost cuts, it said on Friday, days after buying a large minority stake in the airline and triggering a diplomatic spat with France.
The Netherlands quietly amassed a 14 percent stake in the airline in a move announced late on Feb. 26, almost matching the 14.3 percent stake held by France, Air France-KLM's biggest shareholder.
"Frankly speaking, Air France-KLM operates in a very difficult environment and is simply not competitive enough. Additional efforts are necessary, including on the Dutch side," Dutch Finance Minister Wopke Hoekstra told French financial daily Les Echos in an interview on Friday.
Air France this month reported full-year operating earnings of 266 million euros, compared with 1.07 billion euros at KLM.
The group has trailed rivals Lufthansa and British Airways on profitability, held back by restrictive French union deals and strikes that last year wiped 335 million euros off earnings and forced out its CEO.
In October, Air France-KLM's new Chief Executive Ben Smith struck a pay deal with French unions, drawing a line under a protracted standoff.
Hoekstra's comments are likely to rile Air France unions, although he did not mention the October pay deal.
"We will not touch what Ben Smith has done, he has our full support," he was quoted as saying.
Hoekstra said the secrecy surrounding the share purchase had been unavoidable, given the regulatory constraints regarding such stock market transactions in both countries.
Earlier on Friday, after meeting his French counterpart Bruno Le Maire in Paris, Hoekstra told reporters the way the stake had been bought was "not very orthodox" but "that it was based on good intentions".
In a letter to French stock market regulator AMF on Friday, the Dutch government also said it would seek seats on the airline's board.
"Through its shareholding, the Dutch state intends to influence future developments at Air France-KLM in order to ensure that the national interests of the Netherlands are respected," it said in a notification published by the AMF.
The AMF said the Dutch state was not planning to buy more shares and was not planning to take control of the company.
After meeting with Hoekstra in Paris, Le Maire said officials from both countries would convene a working group on Air France-KLM and put forward proposals by the end of June.
Shares in the group, which plunged as much as 15 percent from Wednesday through Thursday, recovered after the ministerial talks on Friday and closed 5.44 percent higher in Paris.
Both ministers affirmed their support for CEO Smith.
Dutch ministers ordered the stealth acquisition after Smith appeared unreceptive to their concerns about his plan for closer integration between the Air France and KLM operations, and its potential impact on Amsterdam's Schiphol airport.
The move has been applauded across the Dutch political spectrum as campaigning gets under way for elections in which the four parties of Prime Minister Mark Rutte's coalition are likely to lose their Senate majority.
Since their 2004 merger, the two airline brands have maintained separate corporate structures and boards, and a high degree of management autonomy jealously guarded by KLM.
Smith appeared last month to have resolved a standoff with KLM boss Pieter Elbers, announcing that decisions on networks, fleets and commercial strategy would be taken at group level to improve competitiveness against better-integrated rivals such as IAG, parent of British Airways and Iberia.
Parts of Smith's programme may now face fresh challenges, with a second hefty government shareholder in the boardroom. Together the two states are expected to command closer to 30 percent of voting rights.
In a joint statement, Le Maire and Hoekstra said their working group would address the governments' "views on long-term strategy" for the group, while "defending the interests" of its airport hubs at Paris Charles de Gaulle and Schiphol.
Jointly chaired by senior treasury officials, the panel will also review the two state's shareholdings in Air France-KLM and the makeup of its board, they said.
Le Maire, who had condemned the Dutch stake purchase as "incomprehensible" and "unfriendly", played down the dispute on Friday - even as ripples of indignation continued to be felt in Paris.
"What was unfriendly about this was the lack of warning," European Affairs Minister Nathalie Loiseau told CNews television as Le Maire and Hoekstra were about to meet.
"It may please Dutch voters, but you can't take business decisions for electoral reasons."
(Additional reporting by Toby Sterling in Amsterdam, Dominique Vidalon and Simon Carraud in Paris; Editing by Luke Baker/Keith Weir/Mark POtter)