Good morning. Welcome to the Paris Air Forum. My name's Tim Hefer from Reuters, and I'm here as every year, it's a pleasure and privilege to welcome Ben Smith, CEO of Air France-KLM. Thank you for joining us.
Ben, the theme this year is sovereignty of this conference. Not a word you often hear from modern business leaders who talk to financial markets, but you described the possible TAP acquisition, which we'll come back to, as a question of strategic sovereignty. You want to be the architect of European aviation. You said to your shareholders, 'These are pretty grand words.' Do you see airlines as a tool of national sovereignty?
Most definitely. So, you know, our airline that's based here in Paris, Air France, and our other big global subsidiary based in the Netherlands, historically were national airlines. They were owned by their respective governments and were tools of sovereignty and were used to link both countries throughout the world. And many countries in various parts of the world did exactly the same thing. So, in Germany or in Italy, Spain, etc. Now, over time, most of these airlines have been privatized. So, their main priority is to make money, is to be for profit. However, having an airline based in your country does offer all kinds of benefits for tourism, for business, etc. So, there are at the base, it is you could call it sovereign, you could call it strategic, but having an airline based in your country, linking as many cities as possible, is extremely important from our perspective.
I'm just curious to know your thoughts on that because this is really exactly the argument that Gulf carriers have used. The Gulf countries took a strategic decision to bolster their airlines as a matter of national priority. Now you're finding that competition very difficult. You've complained about it very loudly. They're just playing by the same rules, aren't they?
I think they have the same objectives. You know, to have as many links as possible from their home markets helps boost their tourism, helps make their regions more attractive to businesses. And these cities, if we take the Gulf carriers as an example, they had and for the most part have very small home markets and in order for the links that they like to have to their cities or to their airports, they require customers and traffic from other countries. And this is why you see the development and the support of these massive hubs in the Middle East and also now in Turkey. Three in the Middle East, Emirates, Qatar, and Etihad. And these three airlines that fly through their hubs, they source a lot of traffic through Europe, other parts of the world as well to feed and develop their network. Which is a great business model, but what is very difficult for us to accept is to come into Europe and be able to source European traffic in a way that makes it very difficult for us to compete. And there are a number of reasons why that is.
Well, you've said that the current crisis in the Gulf, the war in Iran, is a particular wake-up call for European governments. What are you expecting them to do for you?
Well, what's evident why we use the term wake-up call is the amount of capacity that's in the market today for customers who want to fly between, say for instance, the Indian subcontinent or Southeast Asia and Europe, a big part of that goes via the Gulf on a connection basis. And with the Gulf at the beginning of this war, you could call it, and these airlines having to reduce their capacity significantly, it was clear there was a big lack of capacity to transport this traffic. So, it was an opportunity for us and it was an indication that Europe or some parts of Indian subcontinent are extremely dependent on flying via the Gulf to get from A to B.
The counter-argument that I guess would be that they don't have a monopoly. There is a choice. Everybody can see on the internet what's available. They sell these seats because they have a very good product. What's the problem with just competing with them on the basis of the product?
We have no problem competing with any airline around the world. We're not looking for any protection. We're not looking for any presence. However, we're in a global business and we expect the jurisdictions that regulate us and impose taxes or charges do ensure that we're operating on a level playing field. So, you know, there's an example which I've used in the past which clearly illustrates how we are operating in a distorted market from a competitive perspective. You know, we give an example of somebody who is based in Nice and wants to fly to Tokyo. There is no non-stop service, so they need to make a connection somewhere. If the connection is via a European point, let's take for instance Paris, there is an ETS tax which is applicable. And the airline that transports them from Paris to Tokyo is subject to a SAF blend for to push environmental causes, which is fine. However, if you're based outside of Europe, the ETS tax is not applicable to the connection. So, if you go, let's say, for instance, needs to to Dubai onto Tokyo, you're not subject to that ETS tax because it's only applicable to flights within Europe. And the airline is only subject to the SAF blend on the first leg because Europe is not in a position to impose it on the second leg. So, that example there shows that we have to somehow take into account those two incremental charges, which our competitors don't have to do. So, that adds a lot of cost to us. We can try to pass some of that onto the customer, but when our competitors don't have that, it gives them a huge advantage, which is one example where you can take some of that money to invest in the product, which makes it even more difficult for us to compete. And if I go one step further, when you have a government which is highly supportive of this industry, the aviation industry, building fantastic airports with no curfew, at charges that are very low. I see our CEO of Aéroport de Paris here in the audience. He doesn't get the support of the French state the way Emirates or Dubai Airport get from the UAE state. So, it's very different and very difficult for us.
You as a group of legacy carriers, you have though for a long time, even before ETS, about the Gulf carriers. You've lost a lot of market share to the Gulf carriers. But, you've also lost a lot of market share to low-cost airlines in Europe. I mean, if everything were going well, you would maybe if it was just a problem of trade distortion, you might expect that you wouldn't have lost your domestic market share, that you would be doing better in Europe. But, you know, maybe there's a common pattern here. Do you think about that? Not everybody can be wrong.
If you look at the markets where the distortion is either minimal or non-existent, such as transatlantic to North America or to South America or to Africa, we can compete quite effectively. Our product is usually ranked, I'm talking about the Air France product for now, is usually ranked very high within the marketplace and we make good profits in those three particular markets. Where we have a challenge is going eastbound. When we're competing against a wall of competition, where we are not on a level playing field and this puts at risk non-stop flights. We could be flying to a lot more destinations east of the Gulf or east of Istanbul if we didn't have this unfair competition in between. So, for somebody based in Paris, we could be supporting many new non-stop flights to destinations that don't exist today and each one of our non-stop flights are put at risk because of this heavy competition between the non-stop point and Paris. So, I would say the attractiveness of Paris compared to other cities that have non-stop diminishes without these non-stop flights. And then to your question about low-cost carriers, this is we don't view this as an issue of level playing field. This is when Lufthansa or Air France were created many years ago, they were state-run companies and then over the decades, as they developed, contracts were put in place between the various work groups which were derived during regulated eras and they're quite expensive. It's very difficult to roll those back to be competitive with new airlines that have more flexibility. So, it's not something that we view as unfair. It's our situation. We deal with it. Here in France, we've developed our own low-cost carrier called Transavia, which has very competitive rates to deal with the segment that is looking for that. But, the Air France model is not designed and is not set up to be able to compete with that. Our cost structure is not such and the flexibility in our contracts are never going to be able to match the low-cost carriers.
Well, talking of low-cost carriers then, there have been reports that Castlelake is interested in EasyJet and you have partnered with them on SAS. Now, it's early days, but is that a scenario of possible transaction on EasyJet with Castlelake, for example? Is that something you've thought about?
Well, Castlelake has been a great partner in the transaction we've been part of with SAS. Excellent partner. Those of you that don't know, we bought 19% of SAS a while back along with Castlelake and the Danish state with the objective of always buying their portion of the investment to take over a majority stake and that we're hoping to close here to the end of the year after we pass a European Commission regulatory approval. So, you know, our relationship with Castlelake is great. This information that came out of the public about Castlelake looking to purchase EasyJet was I don't think something they were looking to have out in the public. So, we have not had any discussions at Lufthansa KLM with Castlelake to join them in a bid. They have not asked us as far as I'm aware, they have not asked Lufthansa or IAG. So, would we be interested in doing something with them? Perhaps. There are some amazing assets that EasyJet has which I think any airline would be interested in looking at. But, as far as are we actively looking at EasyJet? No.
How often do bankers come and pitch EasyJet to you?
Oh, it's not lately. Not in the last few years. I think these bankers are always looking for a transaction to make money. So, there have been some interesting transactions that have been proposed to us, but these ideas, we always listen to but most of them are not doable.
How important is it for you to get TAP and perhaps as importantly that Lufthansa doesn't?
Well, the Iberian subcontinent is extremely strategic. You know, it's very geographically well placed to access Latin America. We have a great position already to and from Europe from Latin America. There are only two hubs on the Iberian Peninsula. There's Madrid and there is Lisbon. Madrid is controlled by IAG through their subsidiary Iberia. And today TAP is independent. However, it is part of the Star Alliance, but they operate on a relatively independent basis. So, there are three European groups and two hubs on the Iberian Peninsula. So, somebody is going to be without a partner. So, for us it's very important that we be the group that gets their hands on the second hub.
On consolidation, there's been a report that you're thinking of renaming the parent group, the Blue Group. Is that true?
Not true at all. Are you attracted by the sort of holding company concept that IAG uses for the totally different identity from the network airlines?
