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CAPA Live. KLM CEO Pieter Elbers: "exit from this will be a bit bumpy"

Analysis

Talking at the CAPA Live on 9-Jun-2021, KLM President & CEO Pieter Elbers spoke with CAPA’s chairman emeritus Peter Harbison. Some of the key highlights can be found verbatim below.

Some of Mr Elbers' quotes:

- " For the last two to three weeks we see an uptick of travel, an uptick of bookings...I think it's fair to say that the exit from this will be a bit bumpy.

- It's time for the EU to make a step forward and the transatlantic market between the US and Europe.

- as an airline, hygiene, flexibility, network, peace of mind, these are the aspects which are important.

- it's so strong that, again, business travellers coming from Hamburg to Boise, Idaho, still the best connection is over Amsterdam.

- I don't believe that COVID has changed our industry, but I do believe that it has accelerated some of the (sustainability) trends which were already there.

- Timing of (Air France-KLM) shareholder structures is probably not parallel. And other factors, like we had elections here in the Netherlands, other factors come into play in these elements as well. But again, it does not affect our day-to-day cooperation."

PH: Good evening. Good morning to you. It is very good to see you again, Pieter, particularly, I think I detect a bit of a smile on your face, because you must be seeing some positive signs. Tell me about how things are in the Netherlands particularly at the moment, and more widely in Europe.

 PE: “I guess by the start of this calendar year, we were saying, ‘There's light at the end of the tunnel’. But then when it was March, we said, ‘There's light at the end of the tunnel, but we're not seeing it yet’. I guess today, it's even further away. I guess today, with all the positive developments, vaccination is increasing, and many of European governments are indeed lifting their travel restrictions, so yeah, you're detecting a smile on my face. We see that light at the end of the tunnel is finally coming a bit nearer. There seems to be an end to this misery somewhere.

PH: What's going to happen next in Europe, do you think, Pieter? Obviously, the UK is getting a long way with the vaccinations. I think the Netherlands, you've got, what, about half of the population with the first vaccination, something like that. Your neighbours, fairly similar. Let's talk specifically short haul: when do you see that starting to recover now? You're on the brink, obviously.

 PE: For the last two to three weeks we see an uptick of travel, an uptick of bookings. It's fair to say that the exit from this will be a bit bumpy, but the direction is undeniable. Looking to what happened in the US domestic and China domestic we can expect, probably in the next three to four weeks, a situation similar in terms of returning of the European traffic

 “Yeah. I think that's the right way of putting it. We're on the brink. Basically, for the last two to three weeks, we see an uptick of travel, an uptick of bookings really. With the summer holidays coming up, starting from basically July, we really see some positive momentum developing.

“Increasingly, European countries, and also here in the Netherlands, these restrictions are being lifted, indeed. The Netherlands, I believe we're somewhere between 11 and 12 million of vaccination, and almost 17 million population. So that's probably more than half, and all the numbers, all the indicators, infections, hospitalisation, they're all pointing in the right direction. With that, the people are really looking forward to make their holidays.

 “I think it's fair to say that the exit from this will be a bit bumpy.  I think the announcements earlier this week from the UK government towards Portugal. So there's going to be still a bumpy exit, but the direction is undeniable, I think, in terms of traffic being restored. Looking to what happened in the US domestic and China domestic I think we can expect, probably in the next three to four weeks, a situation similar in terms of returning of the European traffic.”

PH: That's a good thing to be hearing. I noted particularly you're up to, in terms of gateways, almost your 2019 levels for the US, for example. Do you see that market coming back fairly quickly? It depends a lot on the Dutch authorities, obviously.

 PE: We have tried to keep the network as much as possible intact. So even in the first half of this year, we were operating 90% of the destinations, 50% of the capacity, with 25% of the passengers with the long haul network supported by cargo

“But what we have done basically throughout this entire crisis since last year is try to keep the network as much as possible intact. So even in the first half of this year, we were operating 90% of the destinations, 50% of the capacity, with 25% of the passengers, and clearly, the long haul network supported them all by cargo.

“Indeed, we have recently made the step forward that our US network is back in terms of destination level. It's not yet back in frequency level. But the announcement last Friday by the French government, to start allowing US consumers to come in, provided they are vaccinated, I hope this is preceding a pan-European position where the travel ban between Europe and the US will finally be lifted. Indeed, we have put our network in place, make sure the infrastructure. We know the customers want to fly, and we're ready to welcome them back on board.”

PH: That's good. Certainly, we see this initiative from the UK and US carriers to try and encourage a discussion at G7 about opening up that particular bilateral market. You'd want to get there before the Brits, wouldn't you?

 PE: The response in Europe has been largely uncoordinated throughout the crisis, with different rules and different regulations. It's time for the EU to make a step forward and the transatlantic market between the US and Europe, to open that up, that will accelerate the overall travel

“At the same time would be good. Not later. It has been such a rollercoaster with all the travel restrictions, and now we need to make sure that our consumers should have the certainty on hygiene, should have certainty on flexibility in terms of booking and rebooking, but also should have the certainty that governments are not changing their colouring or their status for certain countries every other day.

“The response in Europe has been largely uncoordinated throughout the crisis, with different rules and different regulations. I think now, it's also time for the EU to make a step forward and the biggest market, the transatlantic market between the US and Europe, to open that up, that will accelerate the overall travel.”

PH: I'd like to talk a bit about the consumer feeling about things. But obviously, the prerequisite is some sort of agreement between your national health authorities, talking about the US market, and the US authorities. Technically, how's that going to happen? Can you play a part in that, as the national airline?

 PE: It's fair to say that the level of vaccination within the US is on a higher level than within the EU. It's picking up speed. As airlines, we do play a role when it comes to all kind of checks on health certificates, on PCR tests, on vaccination certificates. Obviously, we need a lot of digitalisation for that, to make it work

“Well, again, it all started basically in March last year, when the, at that time, President Trump announced the travel ban. I recall it was announced for 30 days, I believe. We said, ‘Okay, maybe it's 60 days’. Look where we are today, in June 2021, as compared to March last year.

“I think, with that, it also requires a European response and a European step forward. I think it's fair to say that the level of vaccination within the US is on a higher level than within the EU. It's picking up speed. It's progressing a lot. With that, I would encourage very much a European step forwards for those consumers who start travelling again.

“As airlines, we can, of course, play a role. In fact, we do play a role when it comes to all kind of checks on health certificates, on PCR tests, on vaccination certificates. Obviously, we need a lot of digitalisation for that, to make it work.

 “It's a concern. Yet at the same time, it's an asset. Looking at the summer ahead, we can expect a busy summer with a lot of operational challenges, but I'm glad we're heading towards a summer which, looking to where we stand now, should be better than last year.”

PH: That's interesting. Talking about your customers and potential customers, obviously, one of the big concerns I have, as you said, it is about opening and closing doors, as we've seen with the UK and Portugal, for example, which is a real deterrent to booking, presumably. But what are the other aspects over which you have some good control as the airline? What are you doing to make people want to come back onto KLM?

PE: Hygiene, flexibility, network, peace of mind, these are the aspects which are important to getting passengers back on KLM

“First and foremost, at this point in time, there's still the importance of hygiene. We're very proud that we've been recognised by APEX as the diamond status, which means the highest status in terms of hygiene. That's been very important. That's one.

 “Two is the booking flexibility, where customers, I don't think they are shy of booking, but they would like to keep the flexibility for all that. So we have extended all kind of flexibility rules on our fares. That's two.

“I think the third part is to have the network not only back, but even broadened. Looking at our network today, we have on the European side, even 2021 as compared to 2019, by adding some more leisure oriented destinations in the south.

“Last but not least, we should have a safeguard for them that, if they are somewhere that we'll bring them back. We did the same last year, by the way. We had a lot of repatriation flights. Especially on the European side, I think, that's a step forward here.

 “So as an airline, hygiene, flexibility, network, peace of mind, these are the aspects which are important.”

PH: Just coming back into Europe too, we've been talking, for example, to Wizz in this session of CAPA Live. Obviously, the low cost carriers are potentially, and are capable of being, much more aggressive and more agile in terms of putting in capacity and taking it out. Ryanair is coming back in very heavily now. Wizz is as well. How do you see your ability to expand quickly in the domestic, in the intra-European market?

PE: The sheer size of carriers like Ryanair and Wizz is of a magnitude which is much bigger, in terms of aircraft, than ours, but as a hub carrier and as a network we offer, we've the perfect opportunity to start to grab traffic again, especially when traffic is rebuilding. It's tough competition, but with our model and our system we're ready to compete with them

“Well, the sheer size, obviously, of carriers like Ryanair and Wizz is of a magnitude which is much bigger, in terms of aircraft, than ours. At KLM, we do operate roughly 100 medium haul aircraft, 50 737s, and another 50 Embraer. So that compares to the size. And they're all from one place here, really, at Schiphol. Compared to the local bases and size, it's just a very different dynamic.

“I think for us, as a hub carrier and as a network we offer, we've the perfect opportunity to start to grab traffic again, especially when traffic is rebuilding. That goes both for long haul connectivity, but also goes for inter-European connectivity. There's still quite a few traffic flows and quite a few city pairs, which are well connected over Amsterdam, and not served from a direct way. I think there, our network, we are able to compete with the carriers you mentioned.

“Of course, it's tough competition. We've seen that even prior to COVID. It's tough competition, but again, our model and our system, we're ready to compete with them.”

PH: You've always been fairly aggressive in the business market. We're particularly focused on that for this session of CAPA Live too. What sort of indicators, actual indicators, are you getting in terms of recovery of the business market?

PE: "Hygiene and flexibility are paramount, but we can see an enormous amount of business travel that really wants to come back. We have a relatively small business class, and prior to COVID decided to introduce premium economy, which we have accelerated, and we are reconfiguring the majority of our widebody fleet

“Well, we do have some customer panels, and we get feedback from our loyal customers. Especially throughout this time, we wanted to stay engaged and connected to them. So we have this panel, and we listen to them. What we take from these panels is a couple of things. Of course, the hygiene and the flexibility are paramount. When it comes to what's the outlook, there's a lot of recovery or catch-up traffic to be done.

“I was speaking earlier this week to a very loyal customer who said ‘I can't wait to see my factories again, and to visit my shops all over the world again’. So I think with that, we can see an enormous amount of business travel which really wants to come back.

“That's probably the initial phase. Thereafter, I guess it will quiet down a little bit, and then a more normal or more regular pattern will kick in.

“Looking at where we stand at KLM, we do have a business class, which is a relatively small business class compared to some of our competitors. We've decided, prior to COVID, but we've accelerated to introduce premium economy as a class today. We only have it as an ancillary service. With that relatively small business class and premium economy, and a great network with unique city pairs, I believe that we offer these business travellers a good opportunity to come back.

“If we take the transatlantic, for example, the partnership with Delta and Air France-KLM, Virgin on this side, and Delta on the US side, it's so strong that, again, business travellers coming from Hamburg to Boise, Idaho, still the best connection is over Amsterdam. We'll be happy to see them coming back. I'm a bit more optimistic, frankly, on the business travel than I see in some of the reports.

“We are reconfiguring the majority of our widebody fleet. We have concentrated around the 777 and the 787. All the 78s already had direct aisle access in the business class. We are reconfiguring our 777s to make sure that they direct aisle get as well.

“And we are reconfiguring the aircraft for premium economy to have that positioned as a class, which could both accommodate business class travellers not coming back in business class and economy class, making sure that there's a little bit more room and a little bit more space, which could, again, post-COVID, could be a value element for our consumers.”

PH: The Dutch know what the price of a dollar is, that's for sure. Coming out of the whole business travel thing though, sustainability from both sides, environmental sustainability is a factor which is influencing quite clearly some of the major listed companies. Some of the banks are talking about reducing their business travel by a half after this. Looking at the two sides of it, first of all, how do you see that shaping up? What feedback are you getting back in terms of their attitudes to needing to be sustainable? And what are you doing about it yourselves?

PE: Sustainability was one of the key trends prior to COVID. I don't believe that COVID has changed our industry, but I do believe that it has accelerated some of the trends which were already there. In 2019 we launched our Fly Responsibly campaign and we’ve accelerated our efforts. Earlier this year we had the first flight ever operated on synthetic fuels out of Amsterdam

“Well, let me take a somewhat long approach to this. Prior to COVID, there were a few trends in the industry around digitisation, more individual customer approach, using artificial intelligence and data to have even a better customer service.

“But also sustainability was one of the key trends prior to COVID. I don't believe that COVID has changed our industry, but I do believe that it has accelerated some of the trends which were already there, and made it more prominent, if you wish. I hope that, if we look after 10 years back, we just see a blip in the traffic development, and we see that aviation could go forward. But these trends, which were already there, have accelerated, and have become more dominant. Sustainability, obviously, a key one.

“For us, at KLM, we have been very active on that front already for many years. As Air France-KLM Group, we're in the top of the Dow Jones sustainability index for years. And we've launched, in 2019, our Fly Responsibly campaign, which was widely recognised as a good step forward.

“We've accelerated our efforts here. Earlier this year, we had the first flight ever actually, operated on synthetic fuels out of Amsterdam. We've made a partnership with Shell and the Dutch government and ourselves who have this flight operated to Madrid on synthetic fuel. Basically, we've used the COVID situation to accelerate some of our efforts from our side.

“On the consumer side, the other side you mentioned here, indeed, we recognise the trend. We have adjusted our biofuel programme, which we had for years. We've transformed that into a sustainable aviation fuel programme. That was not just a renaming, but was really, we should broaden from the biofuels into a broader scope.

“We've also opened that, for example, to cargo consumers. We have signed, meanwhile, quite a few contracts where our cargo business partners have signed up for that. So both on the initiative side, on the consumer side, we have doubled our efforts in terms of making that step forward. I believe, broader in the industry, it's creating such a momentum that we'll be able to make a lot more progress, probably, in the next few years than we have been in the past years.”

PH: Pieter, I was interested in the Montreal flight you did. One of the partners designated there was ADP. What sort of partnership is necessary with airports when you're talking sustainable fuels? Where do they come into the game?

PE: We have biofuels already here at the airport. We have committed to support the building of a factory in the northern part of the country. Collaboration between local governments, fuel companies, airlines is absolutely necessary. No one can do this alone

Air France indeed did a flight out of CDG into Montreal, which was a collaboration with Total and ADP. Here in Amsterdam, we have a similar cooperation with the airport. We do have biofuel already here at airport. We have committed to support the building of a factory in the northern part of the country.

“I think this collaboration, the example you saw in France, things we do here in the Netherlands, but also what we see in the US and other places, this collaboration between local governments, fuel companies, airlines is absolutely necessary. No one can do this alone.

“When we launched, in 2019, our Fly Responsibly initiative, the objectives also, and basically the message was let's join forces and join hands to bring this forward as an industry collective. I can see all these initiatives now, from different parts of the world, which are really accelerating that part.

“In Europe, the 10 busiest airports, the availability of biofuel, you'll probably cover a very significant part of the intra-European travel in that element.”

PH: Interesting development. I have to ask you this, Pieter. I think I probably could answer it for you as well. But when we talk about Air France, how are things going between the airlines and your respective governments?

PE: There are two topics. The challenges we're having at KLM and the challenges which my colleague Anne Rigail has at Air France are very similar. We have a permanent exchange of info and best practices. Then we have the shareholder issue, which basically does not affect our day-to-day operational cooperation. The recent support which was given by the French state to Air France, and the Dutch state to KLM. I think both states have expressed their commitment, their long term commitment really, to the group and to be individual airlines

“Well, we have basically two topics here. One is how do we deal with the crisis? There, if I see the challenges we're having at KLM and the challenges which my colleague Anne Rigail has at Air France are very similar. We deal with ever-changing regulations. We deal with operational flexibility. We deal with fleet adjustments. And so on and so forth.

“We have, I would say, a permanent exchange of info, a permanent exchange of best practices, if you wish. We both deal with our social partners, our unions, to move forward. So we have the same challenge. We execute in a somewhat different way, due to local rules or regulations, which are not the same.

“That's working very well, I should say. I think one of the strengths in rebuilding is also the two hubs we're having in CDG and Amsterdam, with traffic coming back.

“Then we have the shareholder issue, which basically does not affect our day-to-day operational cooperation. The shareholder issue, of course, is a very important element. The Dutch state participated a few years ago, and then the recent support which was given by the French state to Air France, and the Dutch state to KLM. I think both states have expressed their commitment, their long term commitment really, to the group and to be individual airlines.

“After the latest capital expansion at the Air France-KLM level, these shares and relative shares have changed again a little bit, but they have changed before. So I think it does not affect our day-to-day operation, our day-to-day collaboration. The direction of the group is very clear and very much supported by the two governments.

“Timing of shareholder structures is probably not parallel. And other factors, like we had elections here in the Netherlands, other factors come into play in these elements as well. But again, it does not affect our day-to-day cooperation, which I'm having with Anne Rigail and which work[s] perfect well.”

PH: Good to hear, which you need, obviously at this time, coming out of such a deep hole as the industry is in. Are you going to need to go back to the Dutch government for further funding? Or are you in a reasonably good cash position?

PE: Last year we got 3.4 billion in a combination of a 1 billion loan and 2.4 billion in guarantees. By the end of 2020 we used 940 million out of the 3.4 billion. So we still have a solid basis and solid foundation. On the cash side, we're good, and there's no need for further steps

“Well last year we got 3.4 billion in a combination of a 1 billion loan and 2.4 billion in guarantees. By the end of 2020, it's public information, we used 940 million out of the 3.4 billion. So we still have a solid basis and solid foundation in which some of the light at the end of the tunnel, our view today is that, on the cash side, we're good, and there's no need for further steps.

“Remains a question on the balance sheet, like all the companies have absorbed a lot of debt, and how does it work with equity. That's a process we're doing with Brussels. They concluded its efforts with Brussels that was announced and concluded. The Dutch state is still in the midst of a discussion with Brussels on the issue of equity, not so much the cash, but the issue of equity.”

PH: As is the German government, of course. On a wider scale, let's assume that we are looking at probably a good six to nine months before we see a really substantial recovery globally. Are you of the opinion that there will be a much greater government role in the airline industry, particularly in Europe, because of the likely equity positions the governments are taking?

PE: Governments have supported these airlines, not out of charity purposes, but really as part of an economic agenda and a societal role we play. The objective is to gradually reduce these governments' positions

“Well, the impact of COVID on the airlines was such that airlines being a critical part of infrastructure and economic prosperity, and one could even say, rebuilding of some of the economies, it's obvious that these governments have supported these airlines, not out of charity purposes, but really as part of an economic agenda and a societal role we play.

“Today, the only way to do that was by loans and equity and guarantees. Going forward, I would assume that balances out. That's also why the European framework has allowed for a certain time frame and a certain length of it, with the objective to gradually reduce, again, these governments' positions.

“I think it's a bit too early to speculate when and how precisely. We need probably another six months before the industry is more solid back on its feet. Again, we're struggling out of the crisis now, but that will be solid on our feet by the end of the year. That's probably also a time to look a little bit for what's the time frame on these elements.”

PH: I guess, the implications for a liberal marketplace are obviously something that come out of that government involvement. We've just got a couple of minutes left. Tell me a little bit about what you've been doing on the front of actually getting vaccines out to the world, as a freighter airline.

PE: There have been a couple of positives. Our cargo teams did a wonderful job initially bringing equipment from China and other places to Europe. More recently with vaccines which has been great for crews who have been through a tough time. Recently we took vaccines to Ecuador, where the President was standing on the ramp saying ‘you are the bringer of hope’!

“Thank you for mentioning it. I think this crisis had a lot of negatives, but it also had a couple [of] positives. The positives on the passenger side was the repatriation we were doing, was a lot of social work we've done. We've helped a lot our communities with people. We helped in hospitals.

“But also on the cargo side, I think the teams did really a wonderful job, initially with bringing equipment from China, from other places, bringing it to Europe, and more recently with the vaccines. It's fantastic to see, last week, flights full of medical support went from Amsterdam to Suriname. But we've flown a lot of vaccines to a lot of places in South America. Our Air France-KLM cargo teams, Martinair, really did a wonderful job. Often, you'd see these pictures with the president welcoming aircraft on the stage.

“I think it's really great also for our crews and our flight crews. They've gone through a tough time. They've had to be quarantined in hotels rooms. They couldn't go anywhere. Then they fly to, I think it was a great example, I think it was Ecuador, where the President was standing on the ramp, and basically say, ‘You are the bringer of hope’. I think that's great. It's great for the society. It's great for airlines also to be able to play that role. I'm really proud of our cargo team, who did it in a wonderful way.”

PH: That's a great note to conclude on, Pieter. It certainly does reflect the role of the airline industry. Let's hope that you can continue to play your extremely important part in that process.

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