The aviation sector is in severe financial distress since the start of the global pandemic. To prevent the sector from collapsing, the Dutch government is negotiating terms with, among others, pilots. Floris de Haan, senior researcher in Air Transport Economics at Erasmus School of Economics, provides an analysis of the situation to sketch a picture of what the future may hold for Air France-KLM.
President-director Pieter Elbers of KLM has put the future of the company in unmistakable terms in the case that pilots don’t agree to turn in part of their salary: the end could be near. Wopke Hoekstra, the Dutch Minister of Finance, has made a salary cutback a major condition for the lending of an aid package entailing 3.4 billion euros to the aviation sector. The pilot union reacted fiercely, but De Haan expects the unions to agree to these terms and take their responsibilities: in the following five years salaries are probably agreed to rise again.
Uncertainty
However, these measurements don’t implicate that KLM will be safe for the years to come. According to forecasts, funds are expected to be exhausted in the course of 2021. How long these funds will last exactly, is hard to say, according to De Haan: ‘In order to fly you must be allowed to, want to and be able to’. Multiple factors are of influence, such as demand for flights and the availability of alternatives. Even if a vaccine will be available to the general public and people will be able to sit next to each other in airplanes again, it is not a given that the aviation industry will recover. Prices of flight tickets are rising, alternatives for flights to hold business meetings such as Zoom, MS Teams and Skype, and an upcoming financial crisis are real threats to the viability of the sector. In order to overcome these challenges, KLM will have to restructure salaries and cut costs. Furthermore, demand for flights will have to rise in order to be able to generate more income. Whether this scenario is likely, is the question: research shows that there is a strong correlation between a country’s Gross National Product and demand for flights.
Possible nationalisation
If the situation continues to be as it is right now, the need for a second round of aid measures will be reality. De Haan suggests that the Dutch and French government might opt to increase the share they hold in Air France-KLM. What this will mean for the power relations between these major shareholders is still unclear. One of the possible consequences of a second capital injection is nationalisation of the enterprise. Bankruptcy is less likely: the infrastructure that Air France-KLM provides is an important allocation factor for companies.
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The radio performance on NPO Radio 1, 2 November 2020, can be listened to here.