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Saturday, 30 November 2013

KLM strongly reduces its cargo plane fleet and puts 2800 jobs on the line. How could these events be matched with growing exports for The Netherlands in 2014 and 2015?!

Since the Dutch economy grew by a teenie weenie 0.1% in Q3, quarter over quarter, many politicians and pundits treat this event as a ‘divine’ signal, showing the light at the the end of the tunnel. They think that the end of the crisis is nigh and the Dutch economy might show again some cautious, but unmistakable growth in 2014.

All this renewed confidence has to do with an increased purchase managers confidence, slightly increased housing sales and stabilizing housing prices in The Netherlands. And the most important thing: these pundits think that world trade might grow considerably in the remainder of this year and next year, as the Dutch exports already have been growing slightly over the last six months (see the aforementioned link).

Well, let me tell you a story from a true insider:

A good friend of mine – let me call him ‘Henk’ – works at the cargo department of KLM aviation at Schiphol, Amsterdam Airport: KLM Cargo. When our children are playing together, Henk and I often talk about his work and the economy in general. If there is one company, where a serious increase in exports would be noticed immediately, it is KLM Cargo; air cargo is a very volatile and pro-cyclical line of business.

Although Henk is a positive and strong man, who likes his work, he had often worries about the amount of business that KLM Cargo could do during the last year. To say that business was rather quiet at his employer would not be an overstatement. And when KLM Cargo has structurally too little work for its people, it might cost many workers their jobs.

When Henk and I talked briefly today, Henk stated that KLM is considering to sell a number of its freight planes and – when I understood him right – even thinks about abolishing the freight transport business, as it is loss-bearing at the moment.

Freighter planes are currently standing still and idle at the airport and cause triple expenses for KLM: 
  • First, when these don’t fly, freighter planes cost thousands of Euro’s per day, as a consequence of depreciation, necessary maintenance and/or lease expenses;
  • Second, Schiphol airport charges considerable amounts in airport dues, when it is used as a ‘parking lot’ for freighter planes.
  • Third, the personnel that is standby in order to load planes – the stowers, team leaders, inspectors and administrative personnel – all have to be paid, even when there is little work to do. Although KLM will definitely have a flexible shell of workers around their fixed staff, the expenses of idel personnel will nevertheless be considerable. 

This is the main reason that KLM considers to sell some of these freighter planes and ponders about additional measures, which might even mean abolishing the cargo business.

From the 2013Q3 report of KLM come the following snippets:

“The Group continued to improve its operating result during this quarter. This is very encouraging since it shows that the roll-out of the measures in the Transform 2015 plan is proceeding in line with our expectation. However, it was considered necessary, last September, to supplement them with additional measures to strengthen the Group within the prevailing uncertain economic environment, particularly in the medium-haul and cargo sectors which are facing major difficulties” said Alexandre de Juniac during the meeting.

Cargo continued to be affected by the economic slowdown and the situation of overcapacity. As a result, traffic declined by 3.8% for capacity down 1.4%. The load factor stood at 60.4% (-1.5 points). Unit revenue per available tonne kilometre (RATK) declined by 9.1% and by 5.2% on a constant exchange rate basis. This sharp decline in revenues (-9.3% to 687 million euros) led to a deterioration in the operating result to -84 million euros (against -69 millions at 30th September 2012) despite significant cost efforts.

In cargo the industrial measures are the continued reduction in the full freighter fleet at Air France and KLM (-4 aircraft taking the fleet to 10 aircraft in 2015) and the sub-contracting of the Orly cargo station. 

The industrial reorganisation of the medium-haul and cargo activities at Air France will entail a headcount reduction of 2,880. To deal with the surplus headcount among ground staff, Air France presented a voluntary departure plan covering 1,826 jobs. The departures will be staggered between February and December 2014. The new voluntary departure plan should generate savings of some 150 million euros on an annualised basis. Pilot (350 FTEs) and cabin crew (700 FTEs) over-staffing will be addressed in 2014 through other measures. Elsewhere, the company is also seeking to better adapt its organisation to the seasonality of the business, which has accentuated in recent years. 

These additional measures, to be put in place during 2014, will deliver their full effect in 2015. However, they should enable, in 2014, a significant reduction in medium-haul and cargo losses, but without enabling them to break even, as initially targeted. As a result, in an environment of low growth and high oil price and currency volatility, and in spite of the strong improvement in the long-haul and maintenance activities, the group expects EBITDA in 2014 to be around 2.5 billion euros, at the bottom of the targeted range, while the two billion euro reduction in net debt will be achieved in 2015.

These snippets speak of four planes that will be sold (see red and bold text) in the coming two years. I don’t know if my friend Henk has been talking about these four planes or that additional planes will be sold. Anyway, the next snippet about the headcount reduction could be extremely bad news for Henk and his colleagues.

I do indeed believe that there is a structural overcapacity in the air cargo business, as it was mentioned by KLM.

What I don’t see, however, is how a 29% reduction of KLM’s cargo fleet can be matched with rising Dutch (international) exports in 2014 and 2015. If the very pro-cyclical KLM air cargo department does not believe in rising exports in the coming years, who does then anyway?!

This development brought me to the following cynical ‘fake’ statement about the Dutch economy: “The Dutch economy is growing and exports will increase next year. By the way, do you know someone who wants to buy freighter planes from KLM? They don’t need them anymore”

And there is more: Kees de Kort, the BNR News Radio macro-economist and someone who is almost as bearish as I am, made the following observation today:

The ‘ultimate economic indicator in The Netherlands aka the Holy Grail of Dutch economics’ is the foreign vacation rate of the Dutch. Kees: “Jobs, salaries, these are all mainly annoying factors for many people. Housing prices, pensions etc, in other words, the works. Serious, but not disastrous.  

Kees de Kort, macro-economist of BNR News Radio
Picture copyright of : Ernst Labruyère
Click to enlarge
But the Dutch not going on a foreign vacation?! That is about as bad as things can be. The fact that there is a serious slump in the amount of booked foreign vacations is a tell-tale factor that the recovery of the Dutch economy is rather sluggish”.

I couldn’t agree more, Kees. 

The fact that these days the global stock exchanges show record quotations everywhere, says more about the enormous void between the financial economy and the real one than that it does about the coming economic recovery. People like my friend Henk, however, have to deal with the real economy on a daily basis. And their outlook is still quite grim…

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