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Monday, 1 June 2015

Volkskrant: “The state guarantees set by the government of The Netherlands for the protection of both KLM and Schiphol as its main hub, are not exactly rock-solid”. Not that we thought they would have been…

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When the merger between the national airliners of France and The Netherlands, Air France and KLM, was communicated in 2003 and 2004, the news was brought with the usual mixture of:
  • Boasting; 
  • Denial of existing issues at hand;
  • Remaining silent about the more practical reasons for the merger (i.e. reasons of the kind that nobody wants to hear); 
  • Unfounded optimism and wishful thinking regarding the more remote future for both brands. 
The announcements in the media contained the usual expressions like: “great opportunities…, two strong brands will become one even stronger brand…, global leaders…, dramatic increase in flying destinations…, synergy… and win-win situation”. 

Well, you know the drill, don’t you?!

In 2003, it was a few years after the devastating attacks upon the Twin Towers in New York and the Pentagon in Washington. These terrible events were the direct cause for the demise of PanAmerican airlines (PanAm) and left their scratchmarks within the whole aviation industry.

In those days there was a considerable consolidation operation going on within the aviation industry. Therefore it seemed not such a bad idea, that two (formerly) strong brands with some serious issues to tackle in their daily operations, joined their forces. However, only the most naive souls will have genuinely believed that this was indeed a merger between two quite strong parties and not the ‘de facto’ take-over of KLM, that it will prove to be in the end. 

Air France, although business-wise a company that has been in trouble for already quite a long time, will prove to be the strongest and most influential partner of the two. It is the biggest partner in size, with the biggest domestic market AND it has the full force of the French government behind it.

In the beginning KLM might have been the healthier of the two companies, but in the end that just won’t count. Just like it did not count in the days of 1999 when ‘long-term problem child’ British Steel took over the Dutch ‘pearl in the shell’ Koninklijke Hoogovens – combinedly forming Corus Steel – and subsequently started to use Hoogovens’ profits to cover up the losses of BS itself.  

Although the Dutch government made some ‘brave’ attempts to a. warrant the connection between KLM and its domestic hub Schiphol for the future and b. tried to protect the Dutch jobs and economic interests offered by KLM for quite a long period of time, it seems that their attempts have not exactly been rock-solid in character.

This morning, the Dutch newspaper De Volkskrant had an excellent scoop. The journalists Wilco Dekker and Eric vanden Outenaar wrote a very interesting article regarding the flawed sturdiness of the Dutch State Guarantees on behalf of KLM and Schiphol.

And on top of that, they also presented a PDF-copy of the special clause in the 2003 contract between KLM and Air France, which dealt with the original state guarantees, as well as a 2010 prolongation contract between Dutch Transport Minister (2006-2010) and KLM executive-to-be (nudge nudge…, wink wink…) Camiel Eurlings.

Both documents were acquired by the Volkskrant using the Dutch version of the Freedom of Information Act (i.e. Wet Openbaarheid Bestuur or WOB).

Here are the pertinent snippets from the Volkskrant article:

State guarantees for Schiphol and KLM appear to be futile

The state guarantees for KLM and Schiphol appear to have been nearly futile from the very beginning in 2003, when the merger with Air France commenced. 

On top of that, the Minister of Traffic and Waterways has dropped the most concrete guarantees, when the special state guarantees clause in the merger contract was prolonged and renegotiated in 2010. 

This made it possible for the executive management of Air France-KLM to abolish KLM-flights from Schiphol or transfer these flights to French airport Charles de Gaulle.

Twitter-discussion between me and
the authors of this article in De Volkskrant
Click to enlarge

My comments: Today, I had an interesting Twitter-discussion with the authors of this article, about the statement in the red & bold text (see the aforementioned Twitter-screenshot)

I read the sections 2.1 (iii) and 2.2(iii) of the aforementioned special clause, containing the most concrete guarantees as mentioned in the Volkskrant article, and also the rest of it, meticulously. 

With respect to these particular sections, the preface of the special clause already mentioned that the arrangements in these sections would legally mature exactly five years after the merger had been finished (i.e. in May 2009). The other sections of the special clause would come to an end exactly eight years after the merger had been finished (i.e. in May 2012).

In my personal opinion, the earlier maturity date of these fairly concrete sections 2.1 (iii) and 2.2(iii) had been a strategical mistake of Eurlings' predecessor Minister Karla Peijs of Traffic and Waterways. To this respect Minister Eurlings had done nothing ‘wrong’, regarding the aforementioned sections: they had already matured legally when he was demanded at the negotiation table by Air France-KLM, in 2010

Eric vanden Outenaar argued in the aforementioned tweet, however, that Eurlings should have repaired (i.e. prolonged) those already matured sections 2.1 (iii) and 2.2(iii), instead of leaving them as-is. I do sympathize with Eric and Wilco in this matter, but won’t call it a real mistake of Eurlings after all.

When KLM and Air France merged in 2003, the Dutch government demanded a guarantee package, which was meant to uphold thousands of jobs at KLM and Schiphol and maintain The Netherlands as a popular hub for airliners. Besides that, the growth of one airport (read: Charles de Gaulle) should not come at the expense of the other airport (read: Schiphol) and vice versa. 

Yet, the composition of these state guarantees, demanded by the Dutch government, was quite vage and ambiguous, as it is disclosed now in the official special clause.

Until now, both the airports are doing fine and there seems little to be wrong. As a matter of fact, Schiphol seems to be doing even better than Charles de Gaulle.

However, the signs for the cargo division of KLM have strongly deteriorated, as it was disclosed in a recently published evaluation. Almost all cargo activities of KLM-subsidiary Martinair have been cut down, with as a consequence a considerable loss of jobs. On top of that, company parts within KLM’s head office have been moved from Amstelveen to Paris.

According to aviation economists, the massive competition will force the merged airliner to reorganize its business and operate it from one single location. There is a considerable chance that KLM and Schiphol will not win this struggle against Air France / Charles de Gaulle, as France has a much larger domestic market.

By itself the guarantees have little value: they are solely a declaration of the intention to let Schiphol grow, according to various pundits that have been inquired by the Volkskrant. 

Apart from the agreement that KLM will remain an independent airliner with The Netherlands as its main hub, three guarantees have been negotiated. In the first two, Air France-KLM promises to operate from two airports and states that it tries to enable growth on both locations; however, without mentioning concrete targets.

In the third guarantee (mentioned in sections 2.1 (iii) and 2.2 (iii)  one section for cargo and one for passenger traffic), there had been some (disguised) targets – concrete destinations and a balanced development. However, these third guarantees, for passenger traffic as well as cargo traffic, have been striken out in 2010.

As I mentioned before, I have read both the special clause containing the Dutch state guarantees from 2003 and the renegotiated contract from 2010 meticulously and I advice my interested readers to do that too. 

It is vagueness and good intensions, but also escape routes, all the way, in my humble opinion. Those two challenged sections 2.1(iii) and 2.2(iii), matured in 2009, for instance also stated: 

For the avoidance of doubt, this does not prevent the Combination to take any adaptive measures in case of and for the duration of a crisis.

In other words: from the beginning the combination Air France – KLM already had the right to overrule this so-called warrant for the growth of Schiphol, in case that a crisis would occur; whatever that may be for the executives of Air France-KLM. This was definitely an escape route to avoid the Dutch state guarantee, whenever deemed necessary.

Personally, I see hardly any possibilities to "re-renegotiate" these contracts for State Secretary Wilma Mansveld of Infrastructure and Environment, who is now responsible for Schiphol. 

The current situation of Air France – KLM is simply too challenging for the French to give much leeway to the government of The Netherlands in their attempts to save either KLM or Schiphol. When deemed necessary, the French will play for keeps and abandon Schiphol if they have to.

Air France is definitely the top dog within the merged aviation company Air France-KLM. When the going would get even tougher for Air France-KLM than it already is today, there is a considerable chance that the French / Dutch aviation company would abandon Schiphol as one of its main hubs and would exclusively operate from French airport Charles de Gaulle.

Ergo: when Air France-KLM would leave Schiphol, it would be ‘the end of the line’ for this self-acclaimed ‘mainport’.

These are the main reasons that I look at Schiphol’s expansion plans with hardly concealed mistrust.

I agree with everybody that aviation is an important economic and strategic factor for a country, for Europe and for the world in general. I don’t want to deny this fact through this article. I also don’t deny that aviation will grow further in the coming 10 - 20 years.

However, with all these plans still in the loop for new commercial airports all over Europe and for the expansion of existing airports, the people should remember that aviation is one of the least profitable businesses in the world. 

I think that it’s very good that De Volkskrant has disclosed these very vague state guarantee contracts regarding KLM and Schiphol and put a bright light upon them.

However, in future situations, when foreign parties again want to take over nationally important (stateowned) companies, we will probably see similar vague and open-ended contracts, full of escape routes for the foreign party taking over the Dutch company. 

Government parties are seldomly the smartest and toughtest guys at the negotiation table. Especially not, when everybody in the Dutch government wants to succesfully finish such a merger, in order to save the future of one of the ‘crown jewels’ of The Netherlands.

So the conclusion of all this could be: first comes the Champagne and afterwards the tears!

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