Why the CEO of Air France KLM is Having Such a Tough Time Firing KLM’s CEO

Last week I covered attempts by new Air France KLM CEO Ben Smith to unify the two carriers and end KLM’s independence.

Air France was partially privatized in 1999. As part of its acquisition of KLM in 2004, the French government’s stake in the combined carrier was reduced from 54.4% to 44%. The deal made the group the world’s largest airline by revenue.

The acquisition of a flag carrier was controversial, and not only did it require the French government giving up majority control but commitments were also made regarding KLM’s independence. To this day KLM has its own CEO, the independence of whom new group CEO Ben Smith, who came over from Air Canada, apparently bristles at.

The ownership structure of the business is complicated to say the least.

  • Air France KLM owns 100% of Air France, but only the full economic rights at KLM.
  • The voting rights at KLM are 49% controlled by Air France KLM
  • 50% of KLM voting rights are split between Dutch foundations and the Dutch government

My understanding is that the head of Air France KLM — and indeed the Air France KLM board — does not have full control over the appointment of KLM officers.


Copyright: flaperval / 123RF Stock Photo

There’s a clear campaign afoot to push out KLM’s independent CEO by Smith, the group CEO. However Lucky at One Mile at a Time writes that KLM’s CEO is so popular with employees that it’s a problem because it’s hard for Ben Smith to push him out. Over 70% of KLM employees (25,000) signed a petition demanding the group keep him on as KLM CEO.

Skift‘s Brian Sumers meanwhile writes ‘it’s time to let Air France KLM’s new CEO take charge’ concluding “Smith is the CEO and he deserves freedom to name his own team.”

I don’t have a dog in this fight. I do not know Pieter Elbers. However he has been making the group money, and by all accounts he is an excellent leader. The largest shareholder of Air France KLM is the French government, and they ultimately chose their first non-Frenchman to lead the company. However many accounts suggest that had Elbers not come from the KLM side he’d have been the obvious choice.

Contra Brian Sumers, I see Ben Smith’s role as serving the group’s shareholders, and as a starting point the executive responsible for the division that’s been making all of the money at the company probably shouldn’t get pushed out in the name of ‘freedom to name his own team.’ Ultimately that’s what often happens, it’s difficult at this point for Smith to essentially fire (not renew) Elbers. But that doesn’t mean they don’t work out some sort of payment that makes it advantageous for Elbers to leave. That’s unlikely to benefit the morale at KLM, political support in the Netherlands, or group profitability. But it is what it is.

So to Lucky’s point it is only clearly a problem that Elbers is profitable to Ben Smith, and not necessarily to the business. Ultimately Smith may or may not have enough political capital to do what he wants, if he tries and fails he’s undercut his viability early in his time running the company and that could have long-lasting effects. That alone may essentially for others to back him. But the decision should be based on what’s best for the long-term profitability of the business.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. can smith take drunk parker and give AA elbers?
    win win (for anybody on THIS side of the ocean, except chopsticks who still works for drunkie parker)

  2. The war internally between KLM and AF has affected AF’s profitably, but not KLM’s. The Netherlands government needs to end the marriage. KLM is better off on their own. KLM always was the better run airline, ALWAYS! AF has more problems than anyone can fix.

  3. He should embrace the KLM guy and wait for the storm of employee opinion to pass then quietly can get rid of him later. It never pays to telegraph the plays.

  4. Heres a radical idea. How about fixing (or even just improving) the AF side of the business. That might give the Dutch some confidence that he knows what hes doing. Instead hes using up energy trying to change the part of the company that makes money.
    Or else maybe having militant French employees is not enough, and he wants some in AMS also?

  5. I learned a lot from reading this post, Gary. Thank you. From a meritocracy point of view, Elbers would have been the obvious choice for the shareholders to pick as the head of AF-KLM given his track record for the company and as a leader; but they (the French govt) did not. Instead they picked an outsider who is not French nor Dutch … and as a result we are now in this state.
    Certainly there is more to the story/drama and hopefully it will all work out well in the end.

  6. Here’s the thing… whenever I’ve had issues, KLM has been exactly as smooth and efficient as I would expect a dutch company to be. And AF has, on the other hand, been exactly as I would expect a branch of the french government to be. In-flight service on both is great, but I would much rather be stuck at AMS during irrops than CDG.

    Turf wars aside, I can’t see good things coming from a full absorption of KLM by AF.

  7. A number of years ago, the company that I worked for had a division that was problematic and a chronic money loser, primarily because of poor management. The solution we envisioned was that we would buy a competitor who was very successful and profitable and merge the two. That was a good idea until…… We immediately fired the entire management team of the acquired company and voila, overnight we had one division that was now a colossal money looser that couldn’t find it’s rear end with 2 hands. Why does this AF/KLM situation remind me of something?
    BTW, AF is heavily entrenched with Airbus and KLM is entrenched with Boeing. AF wants to call the shots on equipment for the combined carrier. Doesn’t bode well for Boeing

  8. If you look at the current fleet of AF you will see a huge problem arising. That’s why Ben Smith needs the cash of KLM in the very near future. More debt is not a solution because AFKL is just recovering from a heavy burden.
    The popularity of Pieter Elbers is logical if you look at his predecessor which was a complete fuck up. During the period of Pieter Elbers he did nothing wrong and on top of that he needed to make some though decisions (pilot pension scheme) to get KLM back on track which he managed.

    Just today a extremely nasty scenario entered the plot, in a deal between Macron and Mark Rutte. Rutte is offered the position of Donald Tusk after the European Elections of next May. In exchange the Dutch have to back off during the layoff of Pieter Elbers by Ben Smith. If that’s true than somebody never heard of a principle of Trias Politica. It should never ever be the case that a functioning CEO is withdrawn from his position to get a politician into a better job (unchosen).

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