Staff, the works council, unions: all are still in shock over Thursday evening’s news that KLM is to lose its current Chief Executive Officer, Pieter Elbers, from May 2023. The announcement has come ‘out of the blue’ for most at the Dutch airline and has been received with suspicion and anxiety, as the departure of Elbers seems to open the door to more integration – and less independence – of KLM within the Air France-KLM holding, something Group CEO Ben Smith has been seeking for over three years now. Turbulent times ahead for KLM without Pieter Elbers.
The decision not to renew Elbers’ contract after May 2023 and offer him a third term as CEO has, interestingly, been taken by KLM’s own Supervisory Board in Amsterdam, not by the Group’s Board of Directors in Paris. Chairman Cees ‘t Hart says in a media statement:
“In view of the expiration of his second term, which provides the Supervisory Board a natural moment for consideration, we have, after consultation with Pieter, concluded not to enter into a third term. The continuity of KLM’s leadership greatly benefits from being able to establish this at an early stage. It enables us to initiate a thorough succession process and also to offer a new CEO a sufficient induction period. It is also a time when the restructuring plan has largely been implemented, which positions KLM well for recovery and further development.”
The decision of the Supervisory Board was subsequently approved by the Air France-KLM Board of Directors. Chairman Anne Marie Couderc said: “The Air France-KLM Group and its Board of Directors express their gratitude towards Pieter Elbers for his 30+ years of service to KLM and for the transformation he initiated and continues to conduct as CEO & President.”
Ben Smith responded by saying: “I am grateful for the spirit in which this process has been held. I thank Pieter for his commitment and I know I can count on him and the entire KLM team to ensure a smooth leadership transition with his successor.” Note here that Smith is an active member of the KLM Supervisory Board, a role that was much-criticized when he pushed for this position in 2018. As such, he has been directly involved in the decision not to renew Elbers’ contract.
Pieter Elbers (right) and Ben Smith (left) at the 100th-anniversary event of KLM in October 2019. (Richard Schuurman)
What is the real reason for not renewing Elbers’ contract?
This is where the suspicion comes in. What is the real reason not to keep Elbers on for a third term? And at what level has this decision been influenced by the internal conflicts and rivalry between Smith and Elbers? Some observers say the differences in opinion have subsided over the years, others see it as the most obvious reason to get rid of Elbers in a neat way by not renewing his contract fifteen months before the current one expires.
Having started as a manager of aircraft loading in 1992, Pieter Elbers was promoted to various management roles before becoming CEO in 2014. That he has grown within the ranks of the company was seen as a huge asset to improve KLM’s bargaining position within the holding against Alexandre de Juniac and later Jean-Marc Janaillac. Although the ‘merger’ between Air France and KLM in 2003 has always been seen as a necessity for both airlines and a means to survive, numerous have been the rifts and differences of opinion on strategy and power. Cultural differences between the French and the Dutch, envy between the companies and their unions over the better performances of KLM, and deep divides on where the power should be consistently overshadowed the relationship between the two airlines.
KLM and Elbers must have hoped that the replacement of a French Group CEO (Janaillac) by a Canadian (Smith) in August 2018 would ease the tensions, but the opposite has been true. While Ben Smith might be governing the company less from the interests of Air France and its French stakeholders, he has been pushing for full integration of Air France and KLM to make it a more efficient group, just like Lufthansa Group and International Airlines Group (IAG).
Strong defender of KLM’s position within the Group
Pieter Elbers has always done his best to protect KLM’s interests as best as he could, trying to prevent that KLM would have to surrender flights at Amsterdam Schiphol to the benefit of Air France at Paris Charles de Gaulle, blocking attempts that the profits earned in Amsterdam would be confiscated by loss-making Air France. It almost cost him his job, as in 2019 the Supervisory Board (and Smith) was about to decide not to renew his contract for another four years. Thanks to political pressure and a petition signed by 25.000 staff, Elbers kept his position and was there to celebrate KLM’s 100th anniversary in October. He lost some of his popularity after public debate over a bonus in 2020, the year KLM was hit hard by the Covid crisis that forced the airline to cut 6.000 roles. And yes, Elbers accepted a 20-percent pay cut too.
In June 2020, the Dutch government threw KLM a lifeline with €3.4 billion in direct and state-backed loans, having already increased its share in Group Holding in February 2019 to fourteen percent to equal that of the French state (which was diluted to 9.3 percent after the April 2021 capital increase by the French state). It resulted in new tensions between the countries and within the airline. The 2020 package included amongst others terms on meeting strict reductions of controllable costs (fifteen percent), upping KLM’s sustainability targets, and reducing night operations at Schiphol. The government also parachuted a state agent within Air France-KLM to keep itself informed about the various developments and positions within the group. KLM also received some €1.7 billion in Dutch payroll support.
The Group is now on track to profitability. With the restructuring plan ‘largely implemented’, as the Supervisory Board says in its statement, the question is what would have been next for Elbers. And now for KLM without Pieter Elbers. While he himself says that he is “committed to supporting KLM in this transition to new leadership”, some believe he will not wait until his term end in May 2023 but will leave his beloved KLM as soon as possible. According to the French newspaper La Tribune, Elbers could be offered a position at Delta Airlines, which owns 8.8 percent of Air France-KLM.
The MoU for 100 Airbus A320neo-family aircraft for KLM, Transavia, and Transavia France is an example of fleet integration within the airline group. (Airbus)
Further integration Air France and KLM most likely
Unions and the works council have called for his successor to come from within KLM, but it could very well be that the ‘process’ that Smith is referring to in his statement means something else: the start of an optimization and restructuring phase to fully integrate Air France and KLM, something already outlined pre-pandemic on its Investor’s Day in November 2019. This could result in a painful reduction and resizing of KLM and its management, losing the separate Board of Directors and Supervisory Board.
Some fear the position of Amsterdam Schiphol as KLM’s historical hub is at stake. Two years ago, the previous government renegotiated the so-called state guarantee to safeguard Schiphol’s position until 2025. Can the new government, which entered office this week after nine months formation, extend this guarantee once more? And what will happen to KLM if Schiphol is forced to reduce its capacity by twenty percent to meet environmental rules, something that will be decided this year? What about the financial position of KLM, which has lost almost €11 billion in book value in 2020 (to €27.9 billion) and could require an equity injection?
“I am extremely proud of this company and its fantastic employees”, Pieter Elbers says in a media statement. “Especially in these hectic and difficult times, they remain the strength of KLM. My thirty-year career with the blue KLM family has been an unimaginably beautiful journey that I will always cherish. I very much enjoy the cooperation with my colleagues and look forward to this in the coming period.”
Expect some turbulent times in Amsterdam after this period.