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Tensions rise at Air France-KLM over fate of Dutch unit's CEO

Pieter Elbers has the support of managers and staff but the carrier's new CEO wants to streamline management as part of an overhaul

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Air France-KLM's new CEO thinks that Mr Elbers might not be fully behind plans to strengthen ties between Air France and KLM.

Amsterdam

JUST as Air France-KLM looks set to turn the page on last year's crippling labour strife, the carrier is facing a revolt by its Dutch arm.

A tussle over the reappointment of Pieter Elbers, who leads the KLM unit, sparked a noisy demonstration of support Thursday for the executive from staffers, managers and even Dutch officials, including a petition signed by more than 25,000 employees.

The show of force followed news that Air France-KLM's new CEO Ben Smith was considering replacing Mr Elbers on the grounds that he might not be fully behind plans to strengthen ties between Air France and KLM.

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The flap brought to the fore long-simmering tensions between the French and Dutch carriers, which joined in a 2004 merger, but operate semi-independently.

"There is a new top man at the firm who is obviously working on the strategy," Dutch Prime Minister Mark Rutte said at a press conference in The Hague on Friday. "As the Dutch government, we must try to act to ensure that the decisions within the company are taken in line with what was previously agreed during the merger and in line with Dutch interests."

Mr Smith, a former Air Canada executive, took over in September and quickly struck landmark deals with labour representatives, ending a bout of unrest that resulted in costly French strikes last year.

An accord with pilots could be next - the results of a referendum over a union-backed pay and benefits proposal will probably be known Tuesday. A day later, Air France-KLM is likely to report an annual profit, even after the strikes in France cost it an estimated 335 million euros (S$511 million).

Now, Mr Smith, 47, wants to bring Air France and KLM closer. While some departments are integrated, such as revenue management - where analysts seek to fill seats as profitably as possible - others, including aircraft purchasing, still operate separately. To that end, he is seeking to join the supervisory board of KLM.

The merger 15 years ago brought together the flag carriers, but their complicated governance structure still reflects guarantees given at the time to safeguard a degree of autonomy for KLM.

Subsequent agreements have ensured KLM headquarters' jobs won't be transferred to Paris and the carrier will keep its financial independence. Mr Smith wants to streamline operations.

He met with KLM's board Friday to discuss Mr Elbers, joined by the Franco-Dutch carrier's appointment committee, a spokeswoman for KLM said. Mr Smith spoke with Dutch government officials earlier in the day.

Mr Elbers will attend the presentation of Air France-KLM earnings in Paris, another KLM spokeswoman said. Dutch Finance Minister Wopke Hoekstra and Infrastructure Minister Cora van Nieuwenhuizen, who met Mr Smith on Friday morning, stressed the importance of the carrier to the Dutch economy, Mr Hoekstra told reporters in The Hague.

The Dutch government owns 5.9 per cent of KLM, while the French state holds a 14 per cent stake in Air-France KLM. The conversation was "intensive and it won't be the last one", said Mr Hoekstra, who backs Mr Elbers. "It is strange to see that we have this discussion with each other while the Dutch part has performed well in recent years."

Higher profit margins at KLM have been a source of tension since Air France acquired the Dutch business. The unit boosted revenue passenger kilometres - the number of customers times the distance flown - by 4 per cent in 2018, compared with a gain of just 1.9 per cent at Air France and its Hop! division.

KLM officials sent a letter to Air France-KLM's board to insist they support Mr Elbers at their next meeting, on Feb 19. In the missive, the Dutch managers warned of possible social unrest at the company should Mr Elbers leave. KLM went so far as to hire a public relations adviser in Paris to handle the situation, and spread the #BlueStormRising hashtag to defend the 48-year-old executive.

Any strikes by pilots could do damage because of their ability to ground flights. Mr Smith's two immediate predecessors left the company after labour talks descended into open conflict.

The proposed agreement with the French pilots would secure changes to remuneration and increased flexibility, according to the airline. While that bodes well, Mr Smith will need to follow through with further measures to pare costs and boost sales if the French unit is to close the profitability gap not just with European rivals such as British Airways but also with KLM. BLOOMBERG