In-depth interview with KLM CEO Pieter Elbers

Transcript

Peter Harbison:

Very happy to welcome back Pieter Elbers, who's president and CEO of KLM, for those who won't recognize that very familiar face. Pieter, great to see you again.

Pieter Elbers:

Peter, good afternoon to you.

Peter Harbison:

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.

Pieter Elbers:

Yeah. Well, 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 restriction, 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.

Peter Harbison:

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 neighbors, fairly similar. Let's talk specifically short haul, when do you see that starting to recover now? You're on the brink, obviously.

Pieter Elbers:

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, hospitalization, they're all [inaudible 00:11:13]. 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 [inaudible 00:11:23] 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.

Peter Harbison:

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.

Pieter Elbers:

Yeah. Sure. 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 [inaudible 00:13:05].

We know the customers want to fly, and we're ready to welcome them back on board.

Peter Harbison:

Yeah. 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?

Pieter Elbers:

At the same time would be good. Not later. No. I think it's important that ... We need ... It has been such a rollercoaster with all the travel restrictions, and [inaudible 00:13:38] 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 coloring 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.

Peter Harbison:

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?

Pieter Elbers:

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 forwards. I think it's fair to say that the level of vaccination within the US is on a higher level as 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 traveling 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 digitalization for that, to make it work. That's one of the ...

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.

Peter Harbison:

Yeah. 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?

Pieter Elbers:

Yeah. First and foremost, at this point in time, there's still the importance of hygiene. We're very proud that we've been recognized 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.

Peter Harbison:

Mm-hmm (affirmative). Just coming back into Europe too, we've been talking, for example, to Wizz in this session of CAPALive. 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?

Pieter Elbers:

Yeah. 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 [inaudible 00:18:34]. So that compared to the size. And they're all from one place here, really, at Schiphol. Compared to the [inaudible 00:18:41] and size, it's just a very different dynamic.

I think for us, as a hub carrier and as a network, we offer, we're 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 fares, 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.

Peter Harbison:

You've always been fairly aggressive in the business market. I know there are a lot of ... We're particularly focused on that for this session of CAPALive too. What sort of indicators, actual indicators, are you getting in terms of recovery of the business market?

Pieter Elbers:

Yeah. 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 [inaudible 00:20:10]. 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 from [inaudible 00:20:21] "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 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 a 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 travelers 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 travelers 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.

Peter Harbison:

Yeah, yeah, yeah. When I said you've been aggressive on business, you've done it in a very targeted way, without going to the very premium end of the market, which seems to be, in that segment, probably the best way to be at the moment.

Are you reconfiguring, for example, for the premium economy, or is that just an adjustment of the economy class?

Pieter Elbers:

No. We are reconfiguring. We are reconfiguring the majority of our wide body fleet. We have concentrated around the 777 and the 787. All the [inaudible 00:22:20] already had [inaudible 00:22:20] in the business class. We are reconfiguring our 777s to make sure that they get [inaudible 00:22:25] as well.

And we are reconfiguring the aircraft [inaudible 00:22:29] for premium economy to have that positioned as a class, which could both accommodate business class travelers 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.

You're right. We're very targeted. The Dutch market is relatively small, but again, with these city pairs we have all over the place, it's such an important connectivity we offer to them that that's basically our strategy.

Peter Harbison:

Yeah. The Dutch know what the price of a dollar is. That's for sure.

Pieter, again-

Pieter Elbers:

I think that's a compliment.

Peter Harbison:

It's absolutely meant as a compliment, I assure you, particularly in the airline cost context.

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?

Pieter Elbers:

Yeah. Well, let me take a somewhat long approach to this. Prior to COVID, there were a few trends in the industry around digitization, 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 the 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 recognized 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 recognize the trend. We have adjusted our biofuel program, which we had for years. We've transformed that into a sustainable aviation fuel program. 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 [inaudible 00:25:59]. We have signed, meanwhile, quite a few contracts where our cargo business partners have signed up for that.

So both on the initiative side, [inaudible 00:26:08] 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.

Peter Harbison:

Yeah. 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?

Pieter Elbers:

Yeah. 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, you're probably ... The 10 busiest airports, the availability of biofuel, you'll probably cover a very significant part of the intra-European travel in that element.

Peter Harbison:

Interesting development. Yeah. I have to ask you this, Peter. 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?

Pieter Elbers:

Yeah. Well, we have basically two, I would say, 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, [inaudible 00:28:28], 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 strength in rebuilding is also the two hubs we're having in CDG and Amsterdam, with traffic coming back [inaudible 00:29:08].

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 there. 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 longterm 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 [inaudible 00:30:18], and which work perfect well.

Peter Harbison:

Good. Good to hear, which you need, obviously at this time, coming out of such a deep hole as the industry is.

Are you going to need to go back to the Dutch government for further funding? Or are you in a reasonably good cash position?

Pieter Elbers:

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 00:31:20]. 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 [inaudible 00:31:33] issue of equity.

Peter Harbison:

Mm-hmm (affirmative). 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?

Pieter Elbers:

Well, the impact of COVID on the airlines was [inaudible 00:32:07] 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 timeframe 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. You're right. 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 timeframe on these elements.

Peter Harbison:

Yeah, 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.

Pieter Elbers:

Yeah. Thank you for mentioning it. That's one of the ... I think this crisis had a lot of negatives, but it also had a couple 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 precedent 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.

Peter Harbison:

Yeah. 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.

Pieter, thanks very much for being with us on CAPALive today. Let's look forward to it soon.

Pieter Elbers:

You're welcome. [crosstalk 00:35:18] live in Boston at the IATA. I think it will be on. That would be great that we can finally connect in person again.

Peter Harbison:

Lovely. Look forward to it. Thank you.

Pieter Elbers:

Thank you. Take care.

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