Air France-KLM chairman Jean-Cyril Spinetta is well-placed to help write the next chapter of the industry's consolidation story
He may be Europe's longest-serving airline boss, but Jean-Cyril Spinetta is not ready to retire just yet. The 64-year-old answers the question about how long he intends to keep turning out for Air France-KLM by referring to a book he is reading by author Philip Roth.
This American novelist is 74 and still going strong, says Spinetta, peering thoughtfully over his spectacles. The message is clear: this man is far from ready to hang up his boots [and in Spinetta's case the preferred sport is rugby where he supports the club teams of his native Corsica].
The reason is simple. While it is four years since Air France and KLM unveiled their merger - the world's largest in the airline business and arguably its most successful ever - there is still plenty of hard work ahead. "I still have a lot of things to do in my position - there is a lot to be done," says Spinetta. For the record, company rules say he can stay on until he is 70, at least.
Much of his job will be steering the group through the inevitable process of further European mergers and acquisitions. "In the coming years things will change and Air France-KLM has to play its role in this consolidation process," he says. Spinetta won't say it like this, but Air France-KLM is at the centre of any European consolidation talk, an amazing achievement considering the moribund airline he took over in 1997. Back then Air France was the Alitalia of today: reliant on state cash to survive, heavily loss-making and saddled with crippling labour problems.
The odd couple
It is four years since Jean-Cyril Spinetta and KLM head Leo van Wijk brought a two-year courtship to the altar to create Air France-KLM. Van Wijk recently stepped down from KLM's top job to become vice-chairman of Air France-KLM, as well as president of the SkyTeam alliance, and will ease out of the airline's front line management over the next couple of years.
There may well be a marked contrast between the personalities of the studious Spinetta and more boisterous Van Wijk, but they have gelled remarkably well to push the merger through. "It is true we really share the same vision - this is rare in a merger process," says Spinetta. "From the beginning I don't remember any case where we had any significant difference on strategic points for the group.
"One of the reasons of the success Leo and I have had is we have no personal egos about who is the first and who is the second - we have never had this kind of problem," he says. Watching them in action together during interviews makes this easy to believe, with neither trying to hog the limelight. They answer questions naturally in order often inviting the other to put their point of view.
"In a merger process the main obstacle is the egos of the chief executives," says Spinetta. The fact that egos were put to one side "is something very important in our relationship and for the group". Their co-operative approach has helped bring staff along too. "Leo and I have played a significant role in building up this trust among our employees," he believes.
It is ironic that today it is one of the top tips, in addition to an Italian consortium that includes local carrier Air One
, to take over the struggling Italian flag carrier. Lufthansa
, its main network carrier rival for Alitalia, has decided not to enter the running. Air France-KLM has been examining a bid for Alitalia for some time and watching the takeover manoeuvres at Spain's Iberia
During an interview in late November, Spinetta carefully avoided giving details of Air France-KLM's thinking around these bids, such as potential local partners. However, the chance to forge tighter links with major carriers in countries that border France [it also has a 2% stake in Alitalia and a joint venture on routes between France and Italy] is tempting indeed.
But what would he think if both deals did get done and Air France-KLM missed out, particularly to a rival? He pauses for a long while before answering. "If it was Lufthansa, for example, that makes and wins a bid it could be a problem to us for sure," he says, referring to the Alitalia situation.
Spinetta is crystal clear though about the conditions that he needs to make any such deal work. "I will never recommend to my board to move on a deal if it will destroy value but is a defensive move. On Alitalia, for example, [the deal] in itself has to prove it will create value. You have got to move for solid positive reasons and not only to avoid the risk of a competitor. If a deal will destroy value it will be a problem for your competitor and they will find themselves in the same situation."
Spinetta recalls a conversation several years ago with then Lufthansa chairman Juergen Weber, who paid the Frenchman the courtesy of telling him that he was thinking of making a bid for ailing French carrier Air Outre Mer [which finally closed in 2001]. "Juergen told me he was mainly looking at it for defensive reasons. I asked him what he thought of the airline. He said his first analysis was that he wouldn't wish them on his worst competitor." Point made.
Having laid out his guidelines for how Air France-KLM plays in the consolidation game, Spinetta is ready for more. "Our industry is going to be more fully liberalised - we have to be prepared. Will it take five years, 10 years? Nobody knows."
Spinetta has been watching closely how Asian carriers have been forging cross-equity links. "I am very impressed by the strategy of Qantas. It is still an Australian company but is becoming more and more an Asian company investing in developing operations out of every Asian airport. I think the future for all of us is in this direction - not only in Asia. We have to anticipate how to work in a fully liberalised environment.
"We have the foundation to go ahead and try to develop this kind of vision, but you know vision is nothing without money. I don't know if we have the vision, but we certainly have the money," he jokes.
Among his peers, Spinetta's vision most closely resembles that of his great continental European competitor Wolfgang Mayrhuber, who leads Lufthansa. Both have major mergers under their belt - for his part Mayrhuber has brought Swiss under Lufthansa's wing - and are eager for more. Of Europe's big three British Airways, despite its 10% stake in Iberia, is the least enthusiastic on pursuing consolidation.
As he watches events unfold in Italy and Spain like a hawk, Spinetta has been busy sorting out Air France's transatlantic strategy in the wake of US-Europe Open Skies, which takes effect at the end of March. Based on its partnerships through the SkyTeam Alliance, the centrepiece is a joint venture with Delta Air Lines that starts in 2008 and a four-way venture with Air France, KLM, Delta and Northwest Airlines that will be put in place in 2010 if they can secure antitrust immunity.
"Working in a joint venture is the only way to work with companies that have different revenues and costs," he says. The joint venture with Delta will have an estimated $1 billion in annual revenues in the first phase on selected destinations. The carriers will share the profits equally on the extra money the partnership makes. Spinetta is big fan of this way of working, and has admired the way KLM and Northwest have quietly forged their North Atlantic partnership since 1991. In 2007-08 the carriers will make nearly $600 million profit from the joint venture between them, the most ever. "It is a scheme that could be applied to other partnerships, especially with Asian carriers," he believes.
The highly profitable KLM-Northwest alliance is not the only example of good KLM business practice Air France has sought to emulate. It was clear when the merger took place the Dutch carrier was much more profitable than the French one. "In the first year of the merger the gap was large, but it is closing," says Spinetta. His co-conspirator in the merger, which is now just over four years old, is former KLM head Leo van Wijk. In conversations between the two, van Wijk cheekily suggests that "KLM is still better", but that "KLM is cheating because every time Air France gets close we change the target".
The reason is that KLM has benefited significantly from joining with Air France "more than we ever anticipated", says van Wijk. For example, simply being part of Air France's loyalty programme, which has 10 times more members that KLM's, is an immediate win, giving it access to thousands of all-important corporate travellers.
With its small domestic market, reliance on transfer traffic from its Amsterdam Schiphol hub and exposure to tough low-cost carrier competition, KLM has been highly motivated for years to get its house in order. "It is a must that our unit cost must be lower," says van Wijk. Transferring the cost-cutting and efficiency mantra from KLM to the more traditional and bureaucratic Air France is far from quick and easy, but it is happening, say both leaders.
Deliberately keeping the airlines separate not only enabled each to transfer best practices between them, but to satisfy Dutch political and labour sensibilities to retain the KLM brand and identity, at least for the foreseeable future. Not taking full control of KLM was a price Air France was more than willing to pay to make the deal happen. "A merger comes to disaster when you take the worst practices of the other," says Spinetta. "Until now only the best practices have been copied by Air France and KLM, which helps explain our success."
The sceptics who doubted the merger would work have been well and truly silenced, says Spinetta. He believes their move, plus that of Lufthansa and Swiss, shows mergers can be successful. "Their real success from an economic point of view could inspire other moves in Europe or out of Europe with equivalent schemes." But Spinetta is quick to concede the timing was good, catching the market as it began to swing upwards two years after the industry's collapse following the 2001 terror attacks. "In 2003 we said that it was the right time to decide to merge. Our bet was to start implementing the merger when the market was trending upwards."
A civil servant
Born on 4 October 1943, Jean-Cyril Spinetta's star has risen steadily through French political and business circles. His education culminated at the École Nationale d'Administration, which turns out the vast majority of the country's political elite, with degrees in public law and political science.
After joining government service in 1972 he moved through various posts in education, social affairs and employment, culminating in a post as the principal private secretary to Michel Delebarre, a leading socialist whose various ministries included transport and the sea. A role in transport was next for Spinetta, who was appointed to lead stated-owned French domestic carrier Air Inter in 1990, which was later merged into Air France. Three years later he moved back to civil service with jobs in industrial and home affairs before bouncing back to the airline industry to lead Air France on 27 September 1997.
As far as network carriers go, co-joined Air France-KLM has become one of the most profitable. For the six months to the end of September it saw its operating profit rise by 16% to €1.14 billion ($1.6 billion), an operating margin of 10%. Revenues grew modestly by 4% to €12.4 billion. Spinetta simply describes this performance as "excellent", and says "we expect our profitability will continue to rise in the years ahead". From an economic point of view the merged carrier has done better than expected in reducing debt and in identifying synergies. "We had identified annual synergies of between €390 million and €490 million after five years, but they have been more than €500 million after three years and in seven years could be around €1 billion a year. This is really very impressive." One of the most difficult areas to make synergies is in IT. "It has taken longer than forecast," says Spinetta. The IT work is now being overseen by van Wijk to give it extra impetus.
One of the greatest risks to a merger is creating complexity from the mixing of the two management groups, as well as competition for the best jobs between them. Air France-KLM has tried to avoid this by ring-fencing each process being altered and controlling the change carefully. It is a conservative approach, but one that Spinetta is convinced has been crucial to making the merger work.
Spinetta points to a recent convention of 800 senior managers from both airlines in Amsterdam where they were asked if the merger had been good for each company. It was a secret ballot. "The vote showed that 96% of people said it was a good thing for Air France or KLM."
As Air France-KLM grows into a mammoth $30 billion group it is comfortable with its size. Spinetta has watched the trend started by Air Canada, and now being copied by Qantas, of selling off parts of the group to unlock value. The Air France-KLM board periodically reviews whether to keep or sell its assets, like Amadeus or its maintenance businesses, but for now it is going to hang onto them, he says. At present it simply does not need the cash. However, windfall profits from selling shares in the Amadeus Global Distribution System have boosted Air France-KLM's bottom line in recent years, although the group will retain its remaining 23.6% stake, says Spinetta. "We always said we wanted it as a strategic stake - and it is still strategic."
The Frenchman does not believe a European Commission probe into the ownership structure of Amadeus - in addition to Air France-KLM, Iberia and Lufthansa have stakes of 11.5% each respectively - will force the airlines to relinquish their holdings.
In terms of growth, Air France-KLM will add capacity across most markets, but Spinetta singles out Asia for particular attention. "Clearly the priority is Asia where we will have 8% growth each year for the coming three years." The Asian story at Air France is remarkable. "When I arrived, Japan was the only profitable part of this region for us. China and the others were a disaster." Now the region is a "very profitable" part of the network.
Air France-KLM could eventually forge closer ties, probably through investment links, with Asian carriers. "We have no target on that but it will happen one day," says Spinetta. The first move could see the creation of a cargo joint venture with SkyTeam partner China Southern. "Our aim is get an agreement in 2008," he adds.
Spinetta says the company saw signs of recovery in both cargo and Asian markets in what was a very strong fiscal second quarter. And for now it is not seeing the much anticipated market slump. "We see no sign of any downturn," he says. In fact, high-yield long-haul forward bookings for the next three months are up by 12% at Air France and 10% at KLM and he expects this strong performance will continue "in this fiscal year and beyond".
As one of Europe's most respected airline leaders, Spinetta is proud of what the team at Air France-KLM has done. But one thing is certain: Spinetta will not dwell on his achievements. "It is only natural that people want to relax and rest on their laurels," he says. There is no chance of this under Spinetta's reign. "It is my job to understand the world we are entering. I believe it will be a world with more competition - we have to be prepared to cope with this - we have to prepare for the next phase of consolidation." Expect Air France-KLM and Jean-Cyril Spinetta to be involved in that process in some shape or form.
"Our industry is going to be more fully liberalised - we have to be prepared. Will it take five years, 10 years? Nobody knows"