KLM: a decade after Air France merger, the smaller, but more profitable partner also needs cost cuts

KLM, the world's oldest airline still operating, turned 95 in Oct-2014, after passing the 10th anniversary of its merger with Air France earlier this year. A pioneer of the international hub and spoke model, KLM's continued operational effectiveness is illustrated by its industry leading load factor. Although, before the merger, it often struggled for profitability, it has consistently achieved higher operating margins than its sister airline Air France since their 2004 union.

In spite of these marks of success, KLM CEO Pieter Elbers, promoted to replace Camiel Eurlings in Oct-2014, is asking employees to suggest ways of making cost savings of EUR700 million over five years. This is to fund widebody upgrades and service enhancements, including new seats for 15 Boeing 777 aircraft and business lounge expansion. KLM is also placing a freeze on new cabin crew hires and giving consideration to job reductions.

Much of the commentary on Air France-KLM Group's new Perform 2020 programme has focused on Air France, loss-making since FY2009. In this report, we look at KLM's post merger track record at a time when its margin is under pressure.