An uncertain future for KLM

Het Financieele Dagblad

Billions of euros are being coughed up to help the Dutch airline KLM. The financial help amounts to a total of 10.4 billion euros, when adding the aid from France to that of the Netherlands, for a company that only has a market value of 1.75 billion. As a result of all the loans and financial aid, the airline has found itself deep in debt. According to Floris de Haan, senior researcher in Air Transport Economics at Erasmus School of Economics, the company faces an uncertain future.

Unpredictable future

The debt burden will continue to rise, and it is uncertain whether KLM will ever be able to repay the huge debt. ‘You can't really say anything meaningful about this,' says de Haan. KLM has the difficult task to adjust its earnings model in an unpredictable market. ‘The question is whether we will still be able, or even dare, to fly in the short term.’ Even if a vaccine becomes available, developments on the market remain unpredictable. There could even be a structural decline in air traffic, and that would seriously hurt the company, says de Haan.

Cost reductions and state guarantees

Luckily, the billions are not just handed out freely. Besides a high interest rate, the government has attached several conditions to the financial support the company receives. There must be an overall cost reduction of 15%. This cost reduction must, at least partly, be realised by reducing the salaries of the biggest earners within the company. The number of nighttime flights must also be reduced from 32,000 to 25,000 and KLM must take its part in this. The Netherlands has also appointed a state agent to prevent the government's billions from being diverted to Paris. And then there are also the Dutch state guarantees which contain agreements on the preservation of Schiphol's network function.

Consolidation

De Haan is not really impressed by all this. ‘Those state guarantees already existed. They do carry some value, by the way. What you are actually buying is the ability to divide the company. This could happen if, for example, a "weird" French government would come into power.’ According to de Haan, it may be wise to choose for consolidation. ‘Take for example Lufthansa. Brussels has deliberately given Lufthansa a smaller role. Travellers would simply have to transfer in Frankfurt. Both Amsterdam and Paris could be given a more dominant role in this.’ Another big advantage of consolidating is a big improvement in margins, which would allow KLM to invest in innovation and sustainability, de Haan suggests.

More information

The full article from Het Financieele Dagblad, 27 June 2020, can be downloaded above (in Dutch).