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Wednesday, 29 October 2014

KLM probably won’t layoff 7500 employees… yet, but still seems on a flight, ‘leaving with destination unknown’.

First to fall over when the atmosphere is less than perfect
Your sensibilities are shaken by the slightest defect

The massive strike at Air France made the financial problems of Air France-KLM more imminent for the general public, but might distract airline watchers from the structural, hard-to-overcome problems of this ‘in between’-airliner. To these eyes, the shaky financial position of Air France-KLM is more than a ‘temporary inconvenience’.

Today was the day of the quarterly data for KLM, the Dutch branch of Dutch/French airliner AirFrance-KLM. In spite of the fact that there was still an operational profit of approximately €250 million for this Dutch airliner, in contrary to French branch of the company, Air France, the data were yet generally disappointing.

The following snippets come from Het Financieele Dagblad:

Airline company Air France-KLM is trailing in Europe.This was stated by CFO Pierre-François Riolacci, during his statement at the presentation of the Q3 data. He tried to mitigate the unrest surrounding the challenged airliner, by stating that the stories regarding a technical bankruptcy of the company are fairytales.

In spite of the loss of €416 million at Air France, as a consequence of the pilot strike in September, the airline combination sticks to the earlier submitted targets for 2014. The operational results (ebitda), corrected for – among others – a share of the lease obligations, should hit the €2.4 billion mark at the end this year. However, after the first nine months of this year, there is only €1.3 billion on the counter. Traditionally, Q3 should be the best quarter of the year.

Riolacci did not offer a more detailed draft of the additional austerity measures, which are required now in order to keep the bi-national airliner afloat. According to him, that was not necessary, in spite of the commotion that emerged around KLM during the past days. ’Numbers, like the 7500 required lay-offs at KLM, came totally out of the blue’.  

The financial executive maintains his story that Air France-KLM is well on course with its current austerity programs. More clarity will be offered in February, during the presentation of the annual data.

This indifferent attitude of Riolacci is heavily contrasting with the negative equity of the airliner combination. Yet, Riolacci is not bothered. ‘Analysts and financiers always look at the operational cashflow. This cashflow is still satisfactory within the company.

Negative equity is like a dead canary in a coalmine for Air France-KLM: an undisputed signal that there is something seriously wrong with the company. It means that the consolidated assets of Air France-KLM have less value than the total amount of debt of the airliner.

Yet, as long as the analysts and the financiers of Air France-KLM recognize the satisfactory operational cashflows as the ‘clothes of this emperor’, the company will remain in business. And perhaps Transavia’s transition – from a Dutch, national low-cost carrier into a pan-European low-cost carrier – will succeed in such a way that the company can indeed run the gauntlett against Easyjet and Ryanair. I have serious doubts about the probability of this scenario, but sometimes miracles do happen.

I also guess (and hope) that Riolacci did not lie to the press, when he stated that the story of the 7500 required lay-offs at KLM, which was brought by the AD and De Telegraaf yesterday, was a ‘canard’ (i.e. a hoax).

Still, you might wonder where the future, structural profits of Air France-KLM will come from after all?!

At this moment, Transavia is absolutely not able to offer fierce competition to Easyjet and Ryanair, due to its current, small size and to the fact that Transavia has not been a genuine pricefighter from the beginning of its existence. The latter means that Transavia does not have the concept of price-fighting, as well as the required killer instinct, in its genes like the other two airliners do.

To name an example: if it would be possible to fit chairs on the wings of a plane and subsequently fly it on water, Ryanair would probably manage to put 40 chairs there and settle for only 500 gallons of water for the whole flight, while asking its customers additional payments for the wing-view.

This is the main reason that Transavia will trail its biggest two competitors by years at best and will probably never surpass them in revenues and profitability.

On top of that, the chance that the French pilots will soon fully embrace the Transavia business model and settle for a much lower reward, in exchange for keeping their job, is that of a snowball in hell. Unless Transavia will start to hire pilots from low-wage countries, through opaque labour constructs and off-shore employment agencies, the company will remain too small, too poorly funded and yet too expensive to become a true competitor for Easyjet and Ryanair. One could call this Transavia plan ‘dead on arrival’ for this very reason.

At the other end of the airliner scale (i.e. the high end scale), there is fierce competition for Air France-KLM from Turkish Airlines and other Middle-Eastern airliners.

Turkey is currently developing a mega airfield near Istanbul, which should pale Heathrow in comparison. Besides that, the country is trying to turn Turkish Airlines into ‘the world’s favorite airline’, through generous sponsor contracts and commercials featuring some of the biggest sport celebrities in the world. To achieve this goal, the country offers government grants, regarding taxes and investment subsidies; probably to the tune of millions and millions of Euro’s.

Countries like Dubai, the United Arab Emirates and Qatar on their behalf, have invested heavily in their cities, as well as in their airliners and air infrastructure. In order to earn this money back and warrant future employment for their populations, these countries do litterally everything to lure visitors and transitory travelers to their freshly built tinseltowns-in-the-desert. Money is not an issue for them, due to their nearly infinite, oil-based resources.  Consequently, money isn’t either an issue for the airliners and airports that these countries support, although these countries themselves categorically deny handing out forbidden government grants.

If Air France-KLM wants to fight its battle against the pricefighters at one end of the spectrum and the high end airliners at the other end, it seems to be a fight, which is impossible to win.

In The Netherlands we have the beautiful expression that ‘a company – in this case Air France-KLM – is too big for the napkin (i.e. the price fighters), but too small for the table cloth (i.e. the high end airliners)’. Air France-KLM is stuck somewhere in the middle between these two, very contrary targets and still seems to be on a flight, ‘leaving with destination unknown’. 

Although the required lay-offs at KLM – to the tune of 7500 employees – have fortunately been recognized as a canard at this very moment, the bitter truth is that such an event still could come any moment: rather sooner than later in my humble opinion. Until then, future profitability remains a mirage at the horizon.

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