Smith goes to Paris and finds he has to save the same airline twice

From The Globe and Mail – link to source story – Thanks to RL

Eric Reguly, European bureau chief Rome | Published October 1, 2021

Benjamin Smith, chief executive officer of Air France-KLM attends a ceremony for the first Air France airliner’s Airbus A220, on Sept. 29, 2021, in the Air France hangar at Paris Charles de Gaulle airport in Roissy near Paris, France. Rafael Yaghobzadeh/The Globe and Mail

Air France-KLM Group was a mess in the summer of 2018, when Benjamin Smith became the company’s chief executive officer. He had just about managed a turnaround when the pandemic clipped the wings of virtually every air carrier in the world.

COVID-19 pinned the fleets of Air France, its Dutch sister airline KLM, and Transavia, the group’s low-cost carrier, to the tarmac. For Mr. Smith, this meant the company would have to be saved all over again – if it could be saved.

“Bankruptcy? Yes, that was an obvious risk,” Mr. Smith said on a sunny day at an Air France office in Paris, near Les Invalides. “It was not a lot of fun at the time, still isn’t.”

In the second quarter of 2020, the number of passengers carried by the group fell to 1.2 million, from 27.8 million in the same period in 2019. Revenues utterly collapsed, and the company’s net loss exceeded €2.6-billion ($3.8-billion).Even worse was the uncertainty: With no end to the pandemic in sight, Air France-KLM’s executives had no idea how long the group could survive its horrendous cash burn.

“There were just so many unknowns,” Mr. Smith said. “The failure of our airlines would have been dire.”

Mr. Smith’s appointment as the head of Air France-KLM made corporate history. As a Canadian who had formerly served as chief operating officer of Air Canada, he is the first non-Frenchman to lead Air France since the airline’s founding in 1933. (Air France-KLM was born of a merger in 2004.)

Before his arrival, Air France’s executives were, for better or worse (often for worse), sometimes plucked from the halls of the state, rather than the airline industry. The airline was not privatized until 1999, and then only partially. Mr. Smith’s appointment was considered radical and risky. He was an outsider, he didn’t speak French fluently and he was only 47, a mere youngster, at the time.

Mr. Smith is happy to be called “Ben,” a touch of Canadian informality that must seem alarmingly odd – or refreshing – in the stuffy French corporate world. He is slim and trim, fairly tall, and on a recent day he was clad in a dark-blue suit, monochrome dark-blue tie and light-blue shirt with a spread collar. Nothing flashy. If you spotted him on a plane, you might mistake him for the chief cabin steward.

He is soft-spoken and has an easy smile. He and his partner have a nine-year-old daughter. He claims he has no hobbies.

He has been an airline nut – not an airplane nut – since he was a kid. He never dreamt of learning to fly. Instead, he was obsessed with the business itself: the flights, the schedules, the romance of the old Pan Am routes to exotic parts of the planet.

He was born in Birmingham, England, to an Australian father and a Hong Konger mother, both of them medical doctors. In 1975, when Mr. Smith was 4, they immigrated to Canada and became Canadian citizens (they have since returned to Australia). Mr. Smith went to the University of Western Ontario, where he graduated with a bachelor of economics. “When I left school, I wanted to start an airline,” he said.

He never did, but his consolation prize was working for Air Ontario, a regional turboprop airline, during his late university years. (The company was eventuallyabsorbed by Air Canada in 2000.) Mr. Smith learned all the basics, from ticket sales to working the arrival gates, and grew ever more fascinated by the business.

He left Air Ontario in 1992 to start a corporate travel agency. In 1999, he became a consultant for Air Canada. It was at this point that he met Robert Milton, an American airline consultant who would becomeAir Canada’s CEO the same year.

“When I was first introduced to Ben at an Air Canada event in Ottawa, I was instantly taken by his focus on detail and his remarkably deep knowledge of airlines,” said Mr. Milton, now an airline investor and the lead independent director of Air Lease Corp., one of the world’s biggest buyers and lessors of passenger jets. “I attempted to lure Ben to Air Canada within 24 hours of meeting him.”

Shortly thereafter, Air Canada bought rival Canadian Airlines,making itself into a global carrier. Then it went through a bankruptcy, a hostile takeover attempt (which it fended off), a restructuring and a fleet renewal – a compressed marathon of events that gave the young Mr. Smith a front-row seat to the life, death and rebirth of Canada’s flag carrier.

Mr. Smith at an Air Canada media event on April 29, 2011. At Air Canada, as Mr. Milton’s sidekick, Mr. Smith wrote the business plan for what was then still a novel concept – a low-cost, no-frills airline. Fred Lum/The Globe and Mail

At Air Canada, as a consultant and a close compatriot of Mr. Milton in the early 2000s, Mr. Smith wrote a business plan for what was then still a novel concept: a low-cost, no-frills airline that would eliminate travel agents and pick up “ancillary” revenues by charging passengers for meals, seat selection and other services that were built into the ticket prices at legacy carriers.

The cheapie airline, when it eventually came into being, was branded Tango.It had its own fleet of 13 aircraft. “It was a success,” Mr. Smith said. (Tango’s fleet was merged with Air Canada’s in 2004, but “Tango” remained as the identifier for Air Canada’s lowest fares.) A few years later, Mr. Smith launched the Rouge brand as a low-cost Air Canada subsidiary.

He cites his negotiations with Air Canada’s unions as his proudest accomplishment. In 2014, he led a management team that struck a landmark deal with the airline’s pilots – a long-term agreement that guaranteed no strikes or lockouts for 10 years. Deals with cabin crew and maintenance workers soon followed.

“It turbo-charged Air Canada’s growth strategy,” Mr. Smith said. “We weren’t going to buy all these new airplanes if we have a gun to our head every three years. No one imagined we could get 10-year deals. The agreements gave us a stability that no other carrier in North America had.”

In the same year, Mr. Smith became Air Canada’s chief operating officer. Four years later, when he was on holiday in Italy, he received a call from a headhunter, who asked him if he would pitch for the top job at Air France-KLM.

“This was no surprise whatsoever to me,” Mr. Milton said. “There was always going to be a race between Ben getting the top job at Air Canada or the top job at another of the world’s great airlines.”

Air France was a flying failure. (KLM, its sister airline, was less so.) The sudden resignation of Air France-KLM’s CEO in 2018 amid labour strife had left the group leaderless. It was losing money and market share on its domestic, European and long-haul routes because of intense competition from the European low-cost champions, easyJet and Ryanair, and the new breed of Persian Gulf airlines, including Emirates, Etihad and Qatar Airways.

At the start of the pandemic in March, 2020, Mr. Smith permanently grounded Air France’s 10 double-decker Airbus A380s, the world’s largest passenger jets, whose future was in doubt even before the world economy shut down. Stephane Mahe/Reuters

To make matters worse, Air France was suffering from rolling strikes. During a particularly debilitating one in 2015, videos of workers tearing the shirts off the backs of executives had gone viral.

For Mr. Smith, the priorities were to negotiate union agreements and make the company more competitive by cutting costs, retiring inefficient aircraft and expanding Transavia.

Against all odds, he struck deals with many of Air France’s unions in only two months, and went on to sign many more – 36 in total. Costs were coming down, and Air France-KLM Group’s1-per-cent profit margin headed to 7 per cent, and then to 9 per cent, according to information the company disclosed to analysts. “We were really on a nice path forward,” Mr. Smith said. “We were overperforming just before the crisis hit.”

The pandemic ended the party. In March, 2020, Mr. Smith permanently grounded Air France’s 10 double-decker Airbus A380s, the world’s largest passenger jets, whose future was in doubt even before the world economy shut down. About 95 per cent of Air France-KLM’s total passenger capacity was removed from the air. Only repatriation and medical cargo flights kept going. “For someone like me, who was passionate about the industry, to see hundreds of aircraft sitting on the ground, it was sad,” Mr. Smith said.

While the executives worried about Air France-KLM’s survival, the French and Dutch governments, both of which had significant ownership stakes in the group, stepped in to prevent tens of thousands of jobs from being vaporized. The value of Air France-KLM’s direct state loans and state-backed loans from banks came to €10-billion, a heavy debt burden. France now owns 28.6 per cent of the group, and the Netherlands owns 9.3 per cent, leaving Air France-KLM just short of nationalized.

More than 10,000 employees left the company, which brought its total work force down to about 75,000. There were some layoffs at KLM, but none at Air France.

If government and bank loans kept the group from collapse,it wasthe European and North American vaccine drive that gave it a fighting chance to survive. In the second quarter of 2021, the number ofAir France-KLM passengers rose to 7 million. Though that represented a massive recovery from the previous year, it was still only 25 per cent of the group’s passenger load in the second quarter of 2019. Group revenues more than doubled, to €2.7-billion, and the company’s operating loss fell by half, to €752-million.

By summer, some air-travel markets were booming. Leisure travellers, weary of lockdowns, hit the beach. “We actually had 80 per cent more capacity to Greece this summer than we did in 2019, and Portugal and Spain were up 25 per cent over 2019,” Mr. Smith said.

Rafael Yaghobzadeh/The Globe and Mail
Rafael Yaghobzadeh/The Globe and Mail

On Wednesday, Mr. Smith was in an exceedingly good mood, for two reasons.

The first was that, the week before, U.S. President Joe Biden had reopened America’s borders to Europeans who are fully vaccinated. Mr. Smith said there was an immediate “explosion” of high-margin business travel to the U.S., which represents 40 per cent of Air France’s long-haul revenues. In the third quarter, the airline was running at 62 per cent of its passenger capacity, compared to the same period in 2019.

The second reason was the delivery of Air France’s first Airbus A220, a smallish jet originally developed by Bombardier, before it divested itself of its commercial aircraft business.The plane had taken off from Montreal’s Mirabel Airport the morning before. After an overnight polishing, it made its gleaming debut at the airline’s biggest hangar at Charles de Gaulle Airport. Several hundred guests, including a government minister and members of the media, were given tours of the new craft.

Air France has ordered 60 A220s – list price US$50-million each – and has options and purchasing rights for another 60. The 148-seat planes will replace aging Airbus A318s and A319s on short-to-medium-haul routes.

Mr. Smith calls the Canadian plane a game changer, since its fuel burn and carbon emissions are 20 per cent lower than those of the aircraft it replaces. The A220 will play a key role in cutting Air France’s emissions per passenger/km (one passenger, flown one kilometre) 50 per cent by 2030. “There was really no other choice for us for our fleet,” he told the crowd.

But Mr. Smith still has more than his share of worries. He cannot say whether business travel is returning to prepandemic levels. There has recently been a surge, but he does not know if it can be sustained. Air France KLM SADaily closes, in Euros, since Benjamin Smith became CEO

A recent Bloomberg survey of 45 large companies found that more than 80 per cent plan to spend less on business travel. “We believe business travel will come back, just not right away,” Mr. Smith said.

Mr. Milton more or less agrees. “The pendulum has swung hard away from business travel, but those companies holding the line on air travel will hold the line only until a competitor jumps on a plane to visit clients and nabs an account,” he said. “Also, I think we will see more leisure business-class demand.”

Air France has said that fully half of its travellers in business and first class are leisure travellers.

Investors are not convinced airlines are going back to prepandemic passenger levels any time soon. Air France-KLM shares have risen in price by more than 45 per cent in the past year, giving the group a market value of €2.7-billion (the smaller Air Canada is worth the equivalent of €5.7-billion). That is still less than half of the company’s 2019 value, and well below the recent high set in February.

In addition to the uncertain business-travel rebound, the big unknowns for Air France-KLM include industry consolidation in Europe, as small, pandemic-whacked carriers struggle for altitude. Mr. Smith thinks a merger-and-acquisition flurry is inevitable. Hewill also be keeping a careful eye oneasyJet and Ryanair, which he believes will move with alacrityto exploit the weaknesses of other airlines. Government restrictions on short-haul air routes, intended to boost climate-friendly train travel, are another risk, as are rising fuel prices.

“Our hypothesis is that it will take us at least until 2024 to come back to the same capacity and revenue numbers we had in 2019,” Mr. Smith said.

In other words, Air France-KLM is not saved yet. Mr. Smith’s winning streak has been long and remarkable. But, as any airline veteran would have admitted even before the destabilizing events of the past year and a half, success in the industry is never guaranteed to last.

Air France employees stand around the first Air France airliner’s Airbus A220 during a ceremony. Rafael Yaghobzadeh/The Globe and Mail