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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