Chat with this content: Summary, Analysis, News...
Share on Reddit
Air France-KLM: Europe's Aviation Colossus
I. Introduction & Episode Roadmap
Picture the scene: September 2018, a Canadian airline executive walks into the Paris headquarters of Air France-KLM. The company is hemorrhaging cash, wracked by labor disputes, and its French subsidiary has just lost another CEO to a vote of no confidence. Benjamin Smith, born in the UK but raised in Canada, has been handed the keys to Europe's largest airline group—and he's not even French. The appointment marks the first time in the company's history that a non-French executive will lead the national flag carrier. Some called it a last resort. Others saw it as the beginning of a transformation.
Today, Air France-KLM stands as Europe's largest airline group by revenue. The company reported revenues of €31.5 billion in 2024, with an operating result of €1.6 billion and an operating margin of 5.1%. EBITDA for 2024 came in at €4.2 billion. The Group employs 76,000 people and has a combined fleet of 551 aircraft serving over 300 global destinations.
But this financial portrait barely scratches the surface of one of the most complex corporate stories in modern aviation. Air France-KLM represents the improbable merger of two pioneer airlines—one founded in 1919, the other in 1933—both forged in the crucible of national pride and colonial ambition. KLM, founded in 1919, is the oldest operating airline still using its original name. Air France traces its lineage even further back to aviation's dawn.
The central question of this deep dive: How did Europe's two oldest national flag carriers merge in 2004, nearly collapse during COVID-19, receive over €10 billion in state bailouts, and emerge as an acquisitive consolidator now pursuing both SAS and TAP Air Portugal?
The answer involves a cocktail of state capitalism, cross-border complexity, pandemic survival, and the relentless logic of European consolidation. It's a story about what happens when national prestige collides with commercial reality—and what it takes to build a sustainable aviation business in the twenty-first century.
The themes we'll explore include the unique dynamics of state-owned enterprises in aviation, the delicate architecture required to make cross-border mergers work in a heavily regulated industry, and the strategic positioning that allowed Air France-KLM to emerge from COVID as a consolidator rather than a casualty.
II. Origins: Two Pioneer Airlines with Parallel Destinies
KLM: The World's Oldest Airline
On October 7, 1919, in the aftermath of World War I, a remarkable scene unfolded in Amsterdam. The Koninklijke Luchtvaart Maatschappij voor Nederland en Koloniën (Royal Dutch Airlines for the Netherlands and Colonies) was founded by eight investors from the business and banking sectors. And so, the "Flying Dutchman"—once a legend—became a reality.
The driving force behind KLM was Albert Plesman, a Dutch aviation pioneer who served as the founder and first managing director. Born in The Hague as the son of an egg trader, Plesman developed an early passion for aviation, joining the Dutch Army Air Service in 1915. Plesman's aviation career gained momentum after the war when he organized the ELTA, the first major Dutch aviation exhibition in 1919, which galvanized public and governmental support for commercial air travel.
What made Plesman's vision remarkable was his understanding that the Netherlands' small home market necessitated a global strategy. With a population of just a few million, KLM could never survive on domestic routes alone. Plesman recognized that the Dutch colonial empire—particularly the Dutch East Indies (modern-day Indonesia)—offered the key to building a sustainable airline.
The first KLM flight took place on May 17, 1920. KLM's first pilot, Jerry Shaw, flew from Croydon Airport, London, to Amsterdam. The flight was flown using a leased Aircraft Transport and Travel de Havilland DH-16, carrying two British journalists and some newspapers.
KLM's pioneering spirit was evident from its earliest days. The airline became famous for its intercontinental ambitions, launching epic routes that connected Amsterdam to the far corners of the globe. In 1946, KLM was the first European airline to operate flights between Europe and North America. KLM was the first airline to begin operating scheduled service to New York from mainland Europe, laying the foundation for its transatlantic network.
This "sixth freedom" hub strategy—connecting passengers from various origins to various destinations via Amsterdam Schiphol—became KLM's competitive moat. With geography limiting the size of its home market, KLM turned its hub into the product itself. Schiphol became a global connector, and KLM built an outsized network for a country of its size.
Air France: Born from Consolidation
Air France's creation tells a different story—one of government intervention to rationalize a fragmented market. Tracing its origins back to the 1910s, Air France was formed on 30 August 1933 through the merger of five existing airlines in France.
Encouraged by the Minister for Air Transport, Pierre Cot, the major French airlines joined forces. Air Orient, Air Union, Lignes Farman, CIDNA and, later, Aéropostale joined by merger and acquisition to become a single national airline. At a press conference, Louis Allègre, the Director-General of the new airline, asked journalists to help find the perfect name. Georges Raffalovitch of the Journal suggested 'Air France', which was agreed on unanimously.
The French approach reflected a different national philosophy toward aviation. While KLM emerged from private capital and entrepreneurial vision, Air France was essentially a government project from the start. On 26 June 1945, all of France's air transport companies were nationalised. Compagnie Nationale Air France was created by act of parliament on 16 June 1948. Initially, the government held 70%.
France's colonial empire shaped Air France's route network in ways that would influence the airline for decades. The company built extensive connections to French Africa, Indochina, and the Caribbean—routes that generated prestige and strategic value even when they didn't always generate profits.
Air France also became synonymous with aviation elegance and innovation. The airline was one of only two carriers to operate the supersonic Concorde, cementing its reputation for technological ambition and luxury service.
Common Thread: Flag Carrier DNA
Both airlines shared something essential: they were symbols of national identity as much as commercial enterprises. KLM represented Dutch global reach and trading heritage. Air France embodied French culture and sophistication on the world stage.
This flag carrier DNA would prove both a blessing and a curse. The blessing: both airlines received consistent government support during difficult periods, ensuring their survival through multiple crises. The curse: that same government involvement created bureaucratic constraints, labor rigidities, and political interference that commercial rivals didn't face.
The colonial networks that once defined both carriers would evolve into valuable competitive advantages. KLM's connections to Indonesia transformed into a strong presence across Asia. Air France's African routes became among the most profitable in its network.
By the turn of the millennium, both airlines found themselves at a crossroads: too large for their home markets, too small to compete globally on their own, and too intertwined with national politics to operate like purely commercial enterprises.
III. Pre-Merger Dynamics: Failed Alliances & Market Pressure
KLM's Desperate Search for Partners
The history of KLM's pre-merger period reads like a chronicle of unrequited corporate romance. The airline understood earlier than most that standalone survival in European aviation was becoming increasingly difficult.
As early as 1958, discussions emerged about creating "Air Union"—a mega-carrier combining Air France, KLM, Lufthansa, and Alitalia. The vision was bold: a unified European carrier operating the new generation of jet aircraft like the Boeing 707 and Douglas DC-8. But national rivalries and regulatory complexity doomed the effort before it began.
In 1992, hopes emerged for "Alcazar"—an alliance combining KLM with Scandinavian Airlines, Swissair, Austrian Airlines, and Finnair. The logic was compelling: combine the hub networks of multiple smaller European carriers to create a genuine competitive force against British Airways and Lufthansa. But again, the alliance collapsed amid disagreements over governance and integration.
In 1989, KLM began developing a global network when it acquired a 20% stake in US airline Northwest Airlines. At the time, Northwest Airlines was one of the Big Four airlines in North America. By 1993, KLM and Northwest Airlines transatlantic flights were operated as a joint venture known as the Wings Alliance.
This Northwest partnership demonstrated KLM's innovative approach to circumventing regulatory restrictions. Since foreign ownership rules prevented KLM from acquiring Northwest outright, the equity stake combined with an antitrust-immunized joint venture achieved many of the same commercial benefits. The partnership would prove critical to KLM's competitive position on transatlantic routes.
In June 2000, KLM and British Airways entered merger discussions. The potential combination would have created a genuine European champion, but the talks collapsed. A complicating factor emerged: the US Department of Transportation threatened to renegotiate traffic rights if BA and KLM merged, since the UK hadn't signed an "Open Sky" bilateral agreement with the United States. Without open skies, a combined BA-KLM would have faced severe restrictions on its most profitable route segment.
KLM walked away, but the fundamental problem remained: the airline was too large to be a regional carrier and too small to be a global champion.
Air France: Domestic Consolidation
While KLM searched for international partners, Air France focused on domestic consolidation. On 12 January 1990, the operations of government-owned Air France, semi-public Air Inter and wholly private Union de Transports AĂ©riens (UTA) were merged into an enlarged Air France. Air France's acquisition of UTA and Air Inter was part of an early 1990s government plan to create a unified, national air carrier with the economies of scale and global reach to counter potential threats from the liberalisation of the European Union's internal air transport market.
The merger with Air Inter was particularly significant, giving Air France dominant control over French domestic aviation. This domestic franchise would prove valuable—a guaranteed revenue stream that smaller European carriers couldn't match.
In 2000 the airline joined Delta Air Lines, Korean Air, and Aeroméxico to create SkyTeam, a global alliance. The alliance creation represented Air France's strategy for global reach without mergers: coordinate schedules, share lounges, and present a unified booking experience while maintaining corporate independence.
9/11 and the Breaking Point
The September 11, 2001 terrorist attacks devastated global aviation and pushed vulnerable carriers toward the breaking point. For KLM, already struggling with profitability challenges, the post-9/11 demand collapse proved devastating. Combined with the Iraq War and broader economic uncertainty, KLM's financial position deteriorated rapidly.
By 2003, the pressure became acute. KLM's management recognized that the airline faced a stark choice: find a merger partner or face an uncertain future as an increasingly marginalized carrier in a consolidating industry.
Air France, though better positioned due to its larger home market and domestic franchise, also faced pressure. The liberalization of European aviation had intensified competition from both low-cost carriers and well-capitalized rivals like British Airways and Lufthansa. The strategic logic for consolidation was becoming irresistible.
Both airlines also faced the reality that their alliance partners—KLM with Northwest, Air France with Delta—were increasingly close to each other. A Franco-Dutch combination would create a unified SkyTeam anchor that could compete more effectively with Star Alliance (anchored by Lufthansa) and Oneworld (anchored by British Airways).
The stars were finally aligning for what would become European aviation's most significant cross-border merger.
IV. The 2004 Merger: Creating Europe's Champion
The Deal Structure
On September 30, 2003, Air France and KLM announced what seemed impossible: a full merger between two national flag carriers from different countries. The announcement stunned industry observers who had watched decades of failed European consolidation attempts.
On 5 May 2004, Air France–KLM was created by the mutually agreed merger between Air France and Netherlands-based KLM. Air France agreed to pay the equivalent of 784m for KLM, through a share exchange mechanism.
The deal structure reflected hard lessons from previous failed mergers. Rather than attempting full integration, Air France and KLM would maintain separate brand identities, separate operating certificates, and separate management structures. They would operate as a single group economically while preserving the regulatory architecture that protected their respective traffic rights.
A new company, Air France–KLM, was created to carry the transaction through, and KLM itself was quarantined in a special purpose company for at least three and a half years, with the Dutch government given options to re-establish majority control if the ownership of the airline was challenged by bilateral partners.
This "quarantine" structure was essential to the deal's regulatory viability. International aviation traffic rights remain tied to airline nationality. If KLM lost its Dutch nationality, it would lose its traffic rights. The complex governance arrangements—including Dutch foundation structures retaining voting rights—ensured that KLM would continue to qualify as a Dutch carrier under bilateral agreements.
Regulatory Concessions
The merger created the world's largest carrier by revenue, which naturally attracted regulatory scrutiny. Air France and KLM agreed to make a number of concessions in respect of the operations of Air France-KLM, including a commitment to release take-off and landing slots to competitors at certain airports.
The European Commission approved the merger in the first six week phase available. As Air France-KLM had hoped, this agreement came quickly. The US Justice Department also indicated that it had agreed to the Air France-KLM tie-up.
The relatively smooth regulatory approval reflected a key insight: the merger was primarily defensive. Unlike horizontal combinations that eliminate competition on overlapping routes, Air France and KLM had relatively limited route overlap. Paris Charles de Gaulle and Amsterdam Schiphol served somewhat different geographic markets. The real synergies came from network optimization and cost efficiencies rather than eliminating duplicate services.
Initial Ownership Structure
As a result of the deal, the French government's share of Air France was reduced from 54.4% (of the former Air France) to 44% (of the combined airline). The French State's stake would subsequently reach 39% if the warrants were fully exercised.
The ownership structure reflected the merger's asymmetry: Air France was substantially larger, so its shareholders owned the majority of the combined company. But the governance arrangements gave the Netherlands protections disproportionate to its equity stake, ensuring that KLM's interests would be represented.
Why It Worked (Initially)
The first year of the merger exceeded expectations. The first year of the merger between Air France and KLM was a resounding success. The teams worked together enthusiastically and the success of their combined efforts can be seen in the 115 million euros of synergies achieved, someway above the initial estimate of 65 million euros.
Several factors contributed to early success. First, both airlines had strong management teams committed to making the combination work. Second, the decision to preserve separate brands and operations reduced integration risk. Third, the economic cycle was favorable—global aviation was recovering from the post-9/11 downturn.
Most importantly, the merger demonstrated that cross-border aviation consolidation could work in Europe. The Air France-KLM template—holding company structure, preserved brands, careful governance—became the model for subsequent European combinations.
Network optimization delivered tangible benefits. Air France stopped serving routes where KLM had stronger positions, and vice versa. Maintenance operations were rationalized. Purchasing scale improved supplier negotiations. The dual-hub model—Paris CDG and Amsterdam Schiphol—provided genuine network advantages.
For investors watching the European aviation landscape, Air France-KLM represented proof of concept: flag carrier mergers could create value despite the political complexity.
V. Building the European Champion (2004-2019)
Post-Merger Integration & Growth
The years following the 2004 merger saw Air France-KLM establish itself as a genuine global force. By 2008, Air France-KLM had become the largest airline company in the world in terms of total operating revenues, and also the largest in terms of international passenger-kilometres.
In the years following the 2004 merger, Air France-KLM sought to capitalize on its integrated network by expanding capacity in emerging markets, particularly Asia and Africa. For the 2006-07 fiscal year, scheduled passenger revenues from Asia represented 15% of the group's total, while Africa and the Middle East contributed 14%.
The transatlantic joint venture deepened significantly. In October 2007, the creation of a profit and revenue-sharing transatlantic joint venture between Air France-KLM and Delta Air Lines was announced, becoming effective in March 2008. This metal-neutral arrangement meant that Air France-KLM and Delta would share economics on transatlantic routes regardless of which carrier operated the flight—a powerful competitive tool.
The group also pursued acquisitions to extend its European footprint. In January 2009, Air France-KLM bought a 25% share in Alitalia for €323 million. Though the Alitalia investment would prove troubled, it demonstrated the group's strategic ambition to consolidate European aviation.
The Flying Blue loyalty program, created by merging Air France's Fréquence Plus and KLM's Flying Dutchman programs, became one of the most valuable assets of the combined group. The unified program offered members seamless earning and redemption across both carriers, strengthening customer relationships.
Competitive Challenges & Management Turmoil
Despite these achievements, the 2010s brought significant challenges. Low-cost carriers, particularly Ryanair and easyJet, aggressively expanded on European routes, pressuring yields. Gulf carriers—Emirates, Qatar Airways, and Etihad—transformed global aviation by building mega-hubs in the Middle East that threatened traditional European gateway positions.
In January 2018, before the French Senate, Jean-Marc Janaillac reported for 2017 a higher revenue due to rising fleet utilisation and faster growth to come, but an operating profit of 6% for the group (Air France 4%, KLM 9%), lagging the 9% of Lufthansa and 10 to 12% of British Airways.
The performance gap between Air France and KLM became a persistent management challenge. KLM consistently outperformed its French sibling, generating higher margins and better operational metrics. This disparity fueled tensions within the group and between the French and Dutch governments.
Labor relations at Air France proved particularly difficult. The airline faced repeated strikes and labor actions that disrupted operations and damaged its reputation. The French part of the Franco-Dutch airline was being torn apart by labor troubles and paralyzed by strikes—made famous by a photograph in 2015 of company executives fleeing over a fence with their shirts ripped off by protesters.
On May 4, 2018, CEO Jean-Marc Janaillac announced his resignation after employees rejected a new salary package in a company-wide referendum. The departure left the group without leadership at a critical moment.
The Air France–KLM Group Board of Directors appointed Benjamin Smith as the new Group's CEO on August 16, 2018, the first non-French chief executive in the company's history. Smith achieved in a few months labor stability at Air France after years of internal conflict.
Smith's appointment represented a gamble. A Canadian executive leading France's flag carrier was unprecedented. But not being French may even have helped Smith at Air France-KLM. He found fraught relations with the company's foreign partners upon arrival, and being non-French and neutral may have made talks easier. Smith helped appease staff at Dutch carrier KLM.
Smith embarked on a Group-wide fleet modernization program which saw the retirement of Air France and KLM's Airbus A380, Boeing 747 and Airbus A340 aircraft, replacing them with Airbus A350s and Boeing 787s. In 2019, a new agreement with Air France's pilot union removed the fleet size and geographical restrictions on the Group's low-cost subsidiary Transavia. A large fleet order of Airbus A320neos was subsequently placed.
The Dutch Government's Power Play
The most dramatic pre-COVID development came from an unexpected source: the Dutch government. On 26 February 2019, the Dutch government announced that it had "purchased 12.68 percent of shares in Air France–KLM" and "plans to build up its stake to around 14 percent".
The Dutch government increased its stake in Air France-KLM to 14 percent on Wednesday, just short of the 14.3 percent held by France. The move came a day after the Dutch surprised Paris by purchasing a 12.68 percent share in the alliance.
French Economy minister Bruno Le Maire said the government had not been informed of the Dutch government's acquisition of Air France KLM shares. "I take note of this stake building by the Dutch government which took place without prior notice to the board of directors and the French government."
The surprise move reflected Dutch frustration with what they perceived as French dominance of the combined group. The Dutch Minister of Finance explained that the Dutch interest was not sufficiently taken into account in important decisions for the entire company. For example, the government was not consulted about the strategic cooperation with Delta Airlines and China Eastern Airlines.
The immediate trigger had been tensions over KLM CEO Pieter Elbers's position. The Dutch government feared that Elbers might be removed by Paris-based leadership, which they viewed as threatening Dutch interests and Schiphol's hub position.
"The shares package was valued at a total of €744 million." The airline's fate is directly tied to Amsterdam's Schiphol Airport, one of Europe's busiest hubs and a key economic driver for the Netherlands.
The Franco-Dutch governance tensions illustrated a fundamental challenge with cross-border mergers: when two governments have stakes in a combined entity, corporate strategy becomes intertwined with diplomatic relations. What seemed like good governance from Paris could look like interference from Amsterdam, and vice versa.
As 2019 drew to a close, Air France-KLM faced a familiar constellation of challenges: competitive pressure from low-cost carriers and Gulf airlines, internal tensions between its French and Dutch operations, and governmental shareholders with potentially conflicting interests. But the management team had no idea that an infinitely greater challenge was approaching.
VI. COVID-19: Near-Death Experience
The Collapse (March 2020)
In early March 2020, the world changed. As COVID-19 spread globally and governments implemented unprecedented lockdowns, passenger demand didn't just decline—it virtually evaporated. For Air France-KLM, the collapse was staggering.
Air France-KLM saw flight activity cut drastically and expected it to remain at around 10% of 2019 levels. Overall group passenger numbers fell 56.6% in March to 3.6 million, with a 50.6% drop in traffic. The airline grounded its entire Airbus A380 fleet and KLM retired its iconic Boeing 747 fleet permanently.
The financial mathematics were terrifying. Airlines have among the highest fixed-cost structures in any industry: aircraft leases, airport fees, labor contracts, and debt service don't stop when planes are parked. Without revenue, cash burns rapidly.
By April 2020, Air France-KLM faced an existential question: without immediate government support, the company would run out of cash within months. The flag carriers of France and the Netherlands—symbols of national aviation prowess for a century—faced potential bankruptcy.
The State Bailouts
The French and Dutch governments faced a stark choice: let their flag carriers fail or provide unprecedented financial support. Both chose rescue.
The Air France-KLM Group, Air France and KLM engaged in talks with the French and Dutch governments regarding the implementation of specific aid measures. Following several weeks of discussions, a French state-backed loan of €4 billion was granted by a syndicate of six banks to Air France-KLM and Air France.
The French support package totaled €7 billion: €4 billion in state-guaranteed loans from commercial banks plus €3 billion in direct shareholder loans from the French government. The European Commission approved the support under temporary state aid frameworks established for the pandemic.
Air France-KLM's Dutch arm received a €3.4 billion bailout from the Netherlands, bringing the group's state-aid total to €10.4 billion. KLM received €2.4 billion of state-backed commercial funding and €1 billion in direct government loans.
Air France-KLM received around €10 billion in various loans to get it through the Covid pandemic.
Green Strings Attached
The bailouts came with conditions—particularly environmental commitments. France required Air France to slash domestic flights where rail alternatives existed, halve CO2 emissions per passenger-kilometre by 2030 versus 2005 levels, and dramatically reduce short-haul flying where train journeys under 2.5 hours were available.
These conditions reflected the political bargain required to justify massive taxpayer support. If governments were going to rescue airlines, they would extract environmental concessions in return. The COVID bailouts accelerated sustainability timelines across European aviation.
Devastating Financial Impact
The 2020 financial results revealed the scale of destruction. The group reported a full-year loss of €7.1 billion for 2020. The full-year operating loss was €4.5 billion. Net debt rose to €11 billion—up almost €5 billion since end of 2019.
Operating losses differed considerably between the carriers: KLM reported a full-year operating loss just below €1.2 billion compared with €3.4 billion at Air France. Once again, KLM's smaller size and more efficient operations resulted in better relative performance, though both carriers faced unprecedented challenges.
Massive Restructuring
Survival required dramatic cost reductions. Air France's restructuring plan called for a reduction of 6,560 full-time employees, or minus 16% of total employees by end of 2022. The regional subsidiary Hop!'s restructuring called for minus 1,020 employees, or minus 42%. KLM's restructuring plan called for a reduction of 5,000 employees by end of 2020.
To better align the fleet with lower passenger demand, Air France-KLM Group accelerated the phase-out of older aircraft including the Airbus A380, Airbus A340, Boeing 747, Canadair Jet and Embraer 145. These decisions brought forward cost savings and efficiency gains from operating fewer aircraft types.
The fleet simplification that had begun under Smith's leadership accelerated dramatically. The pandemic provided cover for decisions that might have faced union resistance in normal times—retiring inefficient aircraft and eliminating redundant capacity.
French Government Increases Stake
Additional recapitalization became necessary as losses mounted. The European Commission approved a €4 billion recapitalisation of Air France. The French government's stake increased from 14.3% to a maximum of 30%. The Dutch government's holding was diluted to 9.3%, from 14%.
This dilution created new governance tensions. The French government had strengthened its position relative to the Netherlands, potentially shifting the balance of power within the merged group.
The pandemic period, while devastating, also demonstrated something important: Air France-KLM was too systemically important to fail. When push came to shove, both governments committed billions to ensure survival. This implicit sovereign guarantee—while creating moral hazard concerns—provided a floor under the company's value that pure private carriers lacked.
VII. Post-COVID Recovery & Strategic Transformation (2022-Present)
The Remarkable Revenue Rebound
The recovery from COVID-19 was faster and stronger than almost anyone anticipated. Pent-up demand for travel, combined with reduced capacity across the industry, created favorable pricing dynamics.
As of December 2022, Air France-KLM reported revenues of approximately €26.4 billion, a significant increase from €9.2 billion in 2021, indicating a strong recovery post-COVID-19 pandemic. By 2024, revenue reached €31.5 billion, marking a 4.8% increase compared to the previous year, driven by 3.6% capacity growth and higher third-party maintenance revenue.
The group transported 97.9 million passengers in 2024, a 4.7% increase from the previous year. Available seat kilometers (ASK) grew by 3.6%, while the load factor reached 87.8%, up 0.5 percentage points.
2024 Full-Year Performance
The results, announced on March 6, 2025, were generally favourable, with capacity increasing and the Franco-Dutch airline group benefitting from the use of more efficient aircraft. Group revenues stood at €31.5 billion, up 4.8% compared to 2023, driven by an increase in capacity of 3.6%, stable unit revenue, and increased third-party maintenance revenues. Operating revenues reached €1,601 million with an operating margin of 5.1%.
However, the picture at KLM remained challenging. KLM announced lacklustre earnings for 2024, with its operating result falling by €234m to €416m. Although revenue advanced 5.4%, gains were still capped somewhat, primarily because of escalating equipment, airport fees and personnel costs.
KLM plans to boost its EBIT by €450m in "the near term", while also aiming for an 8% profit margin between 2026 and 2028. This is expected to support the airline's future strategic and fleet renewal plans.
A significant cost headwind emerged from Schiphol airport. Schiphol announced a tariff increase of 41% as of April 2025, with KLM estimating an EBIT impact in 2025 of €65 million to €110 million. The airport cost inflation illustrates the infrastructure constraints European hub carriers face.
In 2024, the Group's net debt rose to €7.4 billion, up €2.3 billion over 2023 which the Group attributed to a higher new and modified lease debt amount of €1.9 billion, largely driven by the fleet renewal program plus the extension of current aircraft lease commitments to cover delays in deliveries.
2025 Performance & Outlook
The most recent results show continued solid performance. Air France–KLM reported a €1.203 billion operating profit for the third quarter of 2025, essentially flat year-on-year but achieved with a 13.1% operating margin. Group revenues rose 2.6% to €9.2 billion, supported by growth in the Passenger Network, Transavia, and the Maintenance division.
The Group carried 29.2 million passengers, up 4.7% versus Q3 2024, with capacity up 5.1% and traffic up 4.5%, resulting in a slightly lower load factor of 88.8%.
Cash generation has improved significantly. Air France–KLM generated €1.47 billion in operating free cash flow in the first nine months of 2025, allowing the Group to keep leverage at 1.6× EBITDA, within its target range of 1.5×–2.0×. Cash on hand stood at €9.5 billion at the end of September.
CEO Benjamin Smith said: "During the third quarter, Air France–KLM once again demonstrated its resilience in a challenging environment. We maintained solid revenue growth and a stable operating margin, while cash generation remained strong."
Premiumization Strategy
A key strategic pillar has been premiumization—shifting the revenue mix toward higher-yielding business and first-class passengers. Air France-KLM's premiumization strategy continues to gain traction, with La Premiere and Business class revenue increasing to 28.7% of passenger network revenue.
The 2024 results showed a strong trend in Premium revenue, up 12% versus the prior year, with Direct sales growing 29% through the Online Channel.
Smith emphasized: "Premium cabins performed exceptionally well across both Air France and KLM, further reinforcing our confidence in our premiumization strategy. Our fleet renewal continued to progress, with one-third of our aircraft now next-generation, quieter, and more fuel-efficient."
Fleet renewal remains central to the Group's decarbonization and cost-efficiency strategy: 32% of the fleet is now new-generation (A220, A350, 787, A320neo family, E2), up eight points in a year.
European Consolidation Strategy: SAS Acquisition
Post-pandemic, Air France-KLM has emerged as an active consolidator in European aviation. The most significant move involved Scandinavian Airlines (SAS).
The Air France-KLM Group completed the acquisition of a 19.9% non-controlling stake in the share capital of SAS AB in August 2024. This operation followed the receipt of regulatory approvals in Europe and the United States.
The Air France-KLM Group invested a total of $144.5 million USD in SAS AB, by subscribing for $109.5 million USD of common shares and by purchasing $35.0 million USD of senior secured convertible notes.
Commercial agreements covering reciprocal loyalty program benefits entered into force on September 1, 2024. On the same day, SAS joined the SkyTeam alliance, of which Air France and KLM are founding members.
In July 2025, Air France-KLM announced that it would initiate proceedings to take a majority stake in SAS, intending to increase its stake from 19.9% to 60.5%, via a full acquisition of the stakes held by Castlelake and Lind Invest.
This transaction reflects the successful turnaround of SAS and the positive results generated by the commercial cooperation initiated in 2024. Subject to regulatory clearances, the ambition is to close in the second half of 2026.
The move capitalizes on SAS's successful post-Chapter 11 restructuring, which delivered €4.1 billion in 2024 revenue and operational stability, while unlocking projected "three-digit million" euro synergies.
TAP Air Portugal Bid
Air France-KLM has also expressed interest in Portugal's flag carrier. Air France‑KLM intends to formally submit a proposal to acquire all or part of a 44.9% stake in Portuguese carrier TAP Air Portugal. CEO Ben Smith made the announcement during a press conference to present the firm's quarterly results.
The move comes after Portugal's leader approved a government decree in August 2025 that cleared the way for the long-awaited privatization. The Portuguese government is privatizing TAP to recover €3.2 billion in state aid it provided during COVID-19.
In 2024, Air France KLM carried 4.5 million passengers to and from Portugal, a 40% increase from 2019 levels, with plans to boost capacity by 10% in 2025.
Air France-KLM joins Lufthansa and IAG, which includes British Airways and Iberia, in expressing interest in a possible stake. The competition for TAP reflects the strategic importance of Portugal's airline, with its strong positions on routes to Brazil and Portuguese-speaking African markets.
VIII. Bull Case, Bear Case & Competitive Analysis
The Bull Case for Air France-KLM
European Consolidation Leader: Air France-KLM has positioned itself as the primary acquirer in European aviation consolidation. The SAS transaction demonstrates the company's ability to execute cross-border deals, and TAP would extend its network into the strategically important Iberian-Latin American corridor.
Premium Positioning: The premiumization strategy addresses the fundamental challenge of competing with low-cost carriers on price. By focusing on business and first-class travelers, Air France-KLM targets less price-sensitive segments where service quality and network connectivity command premiums.
Dual-Hub Advantage: Paris CDG and Amsterdam Schiphol provide genuine geographic and operational diversification. Paris serves Southern Europe, Africa, and parts of Asia more efficiently; Amsterdam optimizes connections to Northern Europe and complements transatlantic coverage.
Fleet Renewal: With 32% of the fleet now next-generation aircraft, Air France-KLM is investing in fuel efficiency and customer experience. Newer aircraft reduce operating costs, lower emissions, and provide competitive cabin products.
Maintenance Revenue Growth: The MRO (Maintenance, Repair, Overhaul) business provides counter-cyclical revenue diversification. The maintenance segment continued its strong growth in Q3 2025 with third-party revenues up 12.9%, driven by a strong recovery in engine activities. The order book amounted to USD 10.4 billion as per the end of September 2025 versus USD 8.7 billion at the end of December 2024.
The Bear Case for Air France-KLM
Margin Gap Versus Peers: Air France-KLM's 5.1% operating margin in 2024 trails Lufthansa Group and IAG significantly. The structural cost disadvantage—partly from French labor regulations and high airport costs—may prove difficult to close.
KLM Challenges: KLM is finding headwinds are hampering its overall performance, with a range of cost-cutting measures being actioned. The 41% Schiphol tariff increase creates significant near-term headwinds, and KLM's 3.3% margin is insufficient to fund fleet renewal.
Government Ownership Complexity: With the French government owning approximately 28% and the Dutch government 9.1%, corporate decision-making inevitably involves political considerations. The 2019 Dutch stake acquisition demonstrated how national interests can complicate governance.
Competition Intensity: Gulf carriers continue to grow, Turkish Airlines has emerged as a major competitor at its Istanbul hub, and low-cost carriers attack the European market relentlessly. Air France-KLM must defend its position across multiple fronts.
Integration Risks: Both SAS and potentially TAP acquisitions carry execution risk. Cross-border aviation mergers have a mixed track record, and labor integration in particular can prove challenging.
Porter's Five Forces Analysis
Threat of New Entrants: LOW-MODERATE Aviation requires massive capital investment, regulatory approvals, and slot access. However, low-cost carriers continue to find growth opportunities by targeting underserved routes and price-sensitive segments. The threat is manageable but persistent.
Bargaining Power of Suppliers: MODERATE-HIGH Boeing and Airbus effectively constitute a duopoly for commercial aircraft. Airports with capacity constraints (including both CDG and Schiphol) have significant pricing power, as demonstrated by Schiphol's 41% tariff increase.
Bargaining Power of Buyers: MODERATE Corporate travelers have some switching costs due to loyalty programs and corporate contracts. Leisure travelers are highly price-sensitive and can easily compare fares online. Overall, pricing power is limited in competitive markets.
Threat of Substitutes: MODERATE High-speed rail is a genuine substitute on routes under 500-600 kilometers. Video conferencing reduced business travel during COVID, though volumes have partially recovered. Long-haul aviation faces minimal substitution threat.
Competitive Rivalry: HIGH European aviation is intensely competitive. Legacy carriers compete with each other and with low-cost carriers like Ryanair and easyJet. Gulf carriers and Turkish Airlines compete for connecting traffic. Price wars are common on competitive routes.
Hamilton Helmer's 7 Powers Analysis
Scale Economies: MODERATE Air France-KLM benefits from purchasing scale, maintenance economies, and network effects. However, scale advantages are partially offset by higher labor costs and regulatory burdens.
Network Effects: MODERATE-HIGH The Flying Blue loyalty program and SkyTeam alliance create network effects that increase with more members and partners. However, competitors have comparable programs.
Counter-Positioning: LOW Air France-KLM's business model doesn't prevent competitor imitation. Low-cost carriers have effectively counter-positioned against legacy carriers.
Switching Costs: MODERATE Loyalty programs create switching costs for frequent flyers. Corporate contracts provide some stickiness. However, leisure travelers face minimal switching costs.
Branding: MODERATE Both Air France and KLM have strong brand recognition, particularly in premium segments. However, branding provides limited protection against price competition.
Cornered Resource: LOW The airlines don't control unique resources that competitors can't access. Slot positions provide some advantage, but these can be contested.
Process Power: LOW Superior operational processes don't provide sustainable competitive advantage in aviation—best practices spread quickly across the industry.
Overall Assessment: Air France-KLM possesses moderate competitive advantages through network scale and brand strength, but lacks the powerful moats that would enable sustained premium returns. The bull case depends heavily on execution—particularly in cost management and successful integration of acquisitions.
IX. Key Metrics & Investment Considerations
Critical KPIs for Monitoring Air France-KLM
1. Operating Margin by Segment (Air France vs. KLM vs. Transavia)
The performance gap between Air France and KLM remains the most important internal metric. In Q3 2025, Air France delivered a 14% operating margin (+0.8pt YoY) while KLM's margin declined to 9.5% (-1.6pt). Sustained divergence would indicate structural issues; convergence would validate management's integration efforts.
2. Unit Cost Development (CASK excluding fuel)
Cost per available seat kilometer determines long-term competitiveness. Management targets low single-digit unit cost increases, but achieving this while managing labor inflation and airport cost increases will be challenging. Any acceleration in unit costs relative to competitors would be a warning sign.
3. Premium Revenue Mix
With premium revenue now at 28.7% of passenger network, tracking this mix provides insight into the premiumization strategy's success. Continued increases indicate successful product investment and corporate market share gains; declines would suggest competitive pressure.
Regulatory & Legal Considerations
European Commission Oversight: Both SAS and TAP transactions require regulatory approval. The Commission has historically scrutinized airline consolidation carefully, though recent approvals (including Lufthansa-ITA) suggest pragmatic acceptance of consolidation.
State Aid Challenges: Air France-KLM was granted €10.4 billion in state support during the pandemic. Judges of the European Union's General Court annulled decisions approving both French and Dutch state aid after rulings that other companies of the parent group should have been considered as beneficiaries. Both decisions followed challenges brought by Ryanair. While the Commission has re-approved the aid, ongoing legal proceedings create uncertainty.
Slot Regulations: Changes to slot allocation rules at congested airports could impact Air France-KLM's hub positions. Any regulatory moves to increase slot trading or alter use-it-or-lose-it provisions merit attention.
Myth vs. Reality
Myth: "Air France-KLM receives unfair government subsidies that distort competition."
Reality: While COVID bailouts were substantial, the loans have been largely repaid and came with significant conditions. The French government reduced its dividend expectations and imposed environmental requirements. Other European flag carriers (Lufthansa, TAP, SAS, Alitalia/ITA) received comparable or larger support relative to their size. Low-cost carriers like Ryanair benefited from different but equally valuable advantages—lower airport fees at secondary airports, more flexible labor arrangements, and simpler networks.
Myth: "The Air France-KLM merger failed because the two airlines still operate separately."
Reality: The preserved brand strategy was intentional and arguably successful. Integration of operations proceeded where it created value (cargo, loyalty, maintenance, purchasing) while preserving traffic rights and brand identity. By 2024 standards, Air France-KLM achieved more integration than most European flag carrier combinations.
Myth: "Government ownership prevents effective management."
Reality: Management has demonstrated significant autonomy, including the appointment of non-French CEO Benjamin Smith and the pursuit of aggressive consolidation strategies. Government shareholders have generally supported management strategy, and shareholder dilution during the pandemic created a more diverse ownership base.
X. Conclusion: The Long Game in European Aviation
Air France-KLM's story illustrates the fundamental tensions in European aviation: national pride versus commercial logic, government involvement versus private capital, and legacy cost structures versus low-cost competition.
The company that exists today bears little resemblance to the two national champions that merged in 2004. It has survived near-bankruptcy during COVID, repaid billions in state loans, rationalized its fleet around modern aircraft, and emerged as the leading consolidator in European aviation. That journey—from flag carrier fragility to acquisitive strength—represents a remarkable corporate transformation.
Yet significant challenges remain. The margin gap versus competitors persists. KLM's cost challenges at Schiphol require resolution. Both SAS and TAP acquisitions carry integration risk. And the structural headwinds facing European aviation—environmental regulations, airport capacity constraints, competition from low-cost and Gulf carriers—show no signs of abating.
For 2025, Air France-KLM expects a capacity increase of 4-5% compared to 2024, with unit costs increasing to low single digits. The strategic plan for 2026-2028 aims for an operating margin above 8% and significantly positive adjusted free cash flow.
The 8% margin target represents management's ambition, but achieving it requires continued cost discipline, successful premium positioning, and value-accretive acquisitions. Execution will determine whether Air France-KLM can close the profitability gap with Lufthansa and IAG.
For long-term investors, Air France-KLM represents a bet on European aviation consolidation and on management's ability to extract synergies while navigating complex governmental relationships. The company offers exposure to global travel recovery, a strong loyalty program, growing maintenance revenues, and potential upside from successful M&A.
The risks are equally clear: cyclical exposure to demand shocks, structural cost disadvantages, integration complexity, and the ever-present possibility that Franco-Dutch political tensions could disrupt strategic progress.
Benjamin Smith, the Canadian outsider who walked into Paris headquarters in 2018, has navigated labor crises, a pandemic, government bailouts, and Franco-Dutch political tensions. The next chapter—potentially adding SAS and TAP to create a truly pan-European aviation group—may prove his most ambitious undertaking yet.
One hundred six years after KLM's founding and ninety-two years after Air France's creation, their corporate descendant remains a work in progress. The "Flying Dutchman" legend merged with French elegance to create something new: Europe's aviation colossus, perpetually navigating between commercial imperatives and national interests, between legacy complexity and future ambition.
Spotify
Apple Podcasts
Amazon Music
Audible
YouTube
Castbox
Pocket Casts