Martinair: What’s Really Going on – What are Their Options?

The way Air France-KLM are apparently going about shedding themselves of Martinair, leave much to be desired.
There have been rumors for some months now that the Franco-Dutch airline is looking for a way to divest itself of the famous Dutch charter carrier which KLM some time back insisted to the European Union should come under 100 percent of KLM’s control.

The million dollar question: will Martinair’s brand name endure or be replaced by another one?  /  source: MP
The million dollar question: will Martinair’s brand name endure or be replaced by another one? / source: MP

They got their way, it happened, and now because of AF/KLM’s financial misery and lack of business, Martinair ends up on the heap as the first victim.

Whether they can divest themselves of Martinair, remains to be seen.
The carrier is not sold yet and the word on the market is that what the so called “consultants” hired by Air France-KLM say is this is just an exploratory enquiry about a possible sale.
It makes one wonder whether the Air France-KLM guys are on top of their marketing and finances.
Business is not going as it should, that’s a fact. Results for AF/KLM in both passenger and cargo are way below those of their competitors, the marriage with Alitalia still costs a fortune and “still” it seems that they have funds to pay Boston Consulting and Goldman Sachs a lot of money to “look at the possibility of selling Martinair.”
If that’s the case, then more ridiculous than that, you can’t get! If within the combined company they do not have a team of experts in cargo with enough skills to figure out what to do, no wonder they are in trouble.

What’s behind all of this?
Martinair, which previously was made up of it’s passenger, cargo, maintenance, catering and flying school activities, went through hard times on the passenger side due to the drastic rundown on fares across the North Atlantic in the past years.
The result of this was that the sad decision which had to be made was to cease passenger operations and as far as flying activities were concerned, concentrate solely on cargo.
Martinair was previously owned 50/50 by Nedlloyd and KLM.
This changed when Nedlloyd decided to step out and KLM insisted and lobbied to take 100% control of Martinair.
Then came the Air France - KLM marriage where it was insisted that Martinair with its then still flourishing cargo operation be incorporated fully into the Dutch-French carrier. Within KLM as a stand-alone it was allowed to manage its own affairs and was profitable. Then when the AF/KLM management insisted on merging the combined airline’s cargo activities, it was downhill all the way.

 

And, that’s where today’s misery started.
It makes no sense to dwell on what has gone wrong (CFG has reported on this in past issues) but we would like to state one obvious fact, and that is what is happening now is no fault of the Martinair past management.
AF/KLM are facing mounting pressure to cut costs even further. They made a loss in 2013 of more than 200 million euros. It seems that the 2014 results will not be good at all considering that the first quarter shows a loss of around 34-35 million euros.

So, one could normally argue that the company has to get rid of more costs and Martinair seems to be on the top of that list. Why the AF/KLM board did not press the cargo management to utilize the freighters more effectively remains an unanswered question. If Goldman Sachs and Boston Consulting can pitch Martinair for sale to an outsider as a good deal, why is it that the AF/KLM management cannot make a profit as well?
Who is fooling who?

Caption: The Atlas Group operates the world’s largest fleet of Boeing 747 freighter aircraft.  /  source: Atlas Air
Caption: The Atlas Group operates the world’s largest fleet of Boeing 747 freighter aircraft. / source: Atlas Air

But what is there really which can be sold at a profit and what will happen to this once proud airline when sold?
On the list are the carrier’s Airline Operating Certificate (AOC), the fleet, maintenance and staff.
-    The AOC is indeed an interesting issue. Martinair still holds traffic rights to many countries and is especially active on the cargo side in South America and Africa.
However, EU rules stipulate that if sold, that MP be acquired with 51% by a European   entity. Traffic rights do not belong to an airline, they belong to the state. And if the state does not like the new shareholder, what is to stop them from awarding competing rights to a Dutch newcomer?

-    The fleet is something else. The MD-11Fs, of which there are six, are now ageing and    possibly not so attractive anymore for an airline buyer. The four B747-400ERFs are another matter. These are from KLM and are still relatively young, but are large. MP still operates one B747-400BCF. This can be fixed, and quite frankly should have been fixed years ago. The lack of investment in MP is now glaringly obvious, and they have no one to blame for that than themselves.

-    As we understand it, staff consists mainly of around 200 pilots which have so far not
been integrated into KLM’s cockpit due to them having separate contracts. On top of this comes Martinair’s Regional Jet Centre (RJC) which was formed about a year ago as successor their previous maintenance set up which was also fully incorporated into KLM’s engineering department.
RJC, which is based at Lelystad Airport in the greater Amsterdam Region maintains KLM’s City Hopper fleet as well as giving training for commercial and private pilots. Surely an arm which still makes money.

How then will Boston Consulting and Goldman Sachs come up with potential candidates to take on the issues mentioned above?
How many carriers or financial investors could be interested in this formula?
On the European side we have a few contenders, being Cargolux and Atlas Air through its Global Supply System (GSS) subsidiary. But would they or can they take on more in the present market environment?

CargoForwarder Global has information that the U.S. American carrier Atlas Air is showing interest in order to be able to position themselves in the European market.

They have the EEC shareholding solved via their “partners” in GSS based in Stansted, UK. It’s no secret that since the loss of BA they have been looking for a solution to that JV company even if only as a supplier of ACMI services within the region. An Amsterdam base would be much more attractive. However, there is no doubt that Michael Steen of Atlas, and formerly of KLM Cargo, will be looking at this as a serious opportunity to place aircraft that otherwise he has no use for. In addition one of the KLM 747s is ACMI leased to Etihad, a client which is of great importance to Atlas as well. By using the Martinair traffic rights portfolio Atlas can offer its customer base full access to these rights, and in addition it would be surely insisting on some sort of commercial agreement with KLM as well. Access to the belly capacity of KLM would make a newly funded and properly fleeted MP a powerful force.

But would the EEC really believe that GSS UK has control and not Atlas? That remains to be seen, but one should witness the investigation now of the Etihad and Alitalia deal; it seems they are taking this more seriously.

Cargolux is in desperate need of a second hub that has been going on since the days of Uli Ogiermann, and must be still on the management’s minds as they have to try and make their China venture in Zhengzhou pay. Two hubs that require trucking to and from to reach the real markets in Europe and China make no economic sense and will not work. By having flights at least directly into AMS, they can solve half of the problems. Also, Cargolux desperately needs access to KLM’s belly capacity for long term survival. Without this scale, they are always going to be chasing markets that are being lost to belly cargo day by day.

Rumors say that Etihad’s helmsman James Hogan might be interested in MP.  /  source: EY
Rumors say that Etihad’s helmsman James Hogan might be interested in MP. / source: EY

And - then there are the Middle East carriers who are striving to make even more headway in the cargo market. Etihad has now more or less firmed up on the Alitalia deal, but what sense for them to take Martinair Cargo? The rumours that they are interested are still kept alive by the AF/KLM management.
What is in it for them then?
For a start it gets them further into the AF/KLM camp which is a much needed European base for the UAE based carrier. The Alitalia deal, coupled with Martinair, cements the alliance in many, many ways. It would be an indirect cash infusion into AF/KLM which is badly needed and allows Etihad to rid itself of expensive ACMI contracts as the four KLM 747-400ERFs become immediately available and the company has the cash to rid itself of the older MD-11Fs for the plentiful supply of 747-400ERFs that will become available soon, mostly from AF Cargo itself.

It all makes business sense and there is no question that Etihad should be looking at it. One of the worst scenarios for EY Cargo would be that Martinair falls into “unfriendly” hands. This all might make sense - but the EU 51% ruling puts that out unless they were to come up with some form of European Holding Company or strategic partner to do it. They certainly have plenty of options with their current holdings in Air Berlin and others.

And, we should not discount the Russians!
It’s no secret that Volga-Dnepr wanted Air Cargo Germany for the traffic rights. Is this another possible way in?
This, however, would be very risky for any EEC based partner in view of the current mood regarding Russia in Europe. It again is no secret that Alexei Isaikin will never accept to be a passive investor.

The best solution.
For our reader’s information, the author of this article was for almost 20 years a member of Martinair’s management team in Europe and has seen how good this carrier was in the past and in his view how it still could operate as an independant company, even in this difficult market environment.

So, how about that AF/KLM reverts the carrier back to its previous independent status and gives it its own P&L free of the AF/KLM burocrats which have provided less than stellar support? Bring back some of those experts that left MP in the past years and some of those that were integrated into KLM last year, and let them do what an independent all cargo airline does best, namely, provide a low cost and flexible product to the market.
AF/KLM could retain ownership, but then the new Martinair should report directly to the board as a part of its holdings and not part of the greater mess that is AF/KLM Cargo today.
 Make a deal on positive revenue return, make interline capacity agreements and a strategy that ensures it contributes to the needed AF/KLM cooperation with Etihad and thereby ensure that the carrier once again operates profitably and successfully.
Once that is achieved MP as an independent company can prove its value to the group strategy, produce profits and make sure the Etihad and AF/KLM belly capacity is as full as it can be.
It would certainly give the management more than will come from this latest consultant led exercise in futility.
 
Is this not a better option? Maybe it might even help get AF/KLM back to being a major player in air cargo again.
If so, then a strong investor personality is needed at the top.
Where is he?

John Mc Donagh

Write a comment

Comments: 6
  • #1

    Juan M Rodriguez Anza (Monday, 07 July 2014 21:38)

    Certainly a sharp analysis on the matter.
    Let´s hope that MP is allowed its former glory by being again an independent & reliable cargo operator.
    It seems that all former cargo airlines (and divisions) are now part of the Operations Depts of major airlines, with no real focus on the market.
    Regards

  • #2

    Roberto Loayza de la Melena (Monday, 07 July 2014 22:01)

    MP does not deserve the treatment it has been receiving from the KL/AF Cargo management. The reputation gained thru effort and hard work shud not be wasted in worthless efforts to sell the company, let it be independent once again and profits will come as it used to. Many of us, ex-MP employees in LatAm, would be glad to help!!

  • #3

    Radharamanan Panicker (Tuesday, 08 July 2014 06:10)

    Excellent article and well articulated. Hidden behind the article on Martinair, is the fact that AF-KLM dont have the strategic management depth to play the cargo game anymore. Poor decision in hiring/placing correct top management team in Cargo has resulted in the situation that we see today with AF-KLM.

  • #4

    Stan Wraight (Tuesday, 08 July 2014 14:09)

    No airline the size of Air France and KLM will be better off without a small, well run dedicated freighter fleet. To ensure maximum profitability, to make sure they can "fill the bellies" this is an obvious must. However what we see here is the tremendous burden that a European Airline legacy carrier faces as it tries to restructure to compete effectively. Gulf carriers are free of that legacy, and can build from scratch, US based carriers have used Chapter 11 bankruptcy rules very effectively, but this tool is not on the table for Europeans.
    What is the answer I don't know, but for sure AF/KL should ensure that any deal that they accept includes the provision of efficient, low cost freighter capacity to the sellers, and better still to Skyteam as a whole. Let the bird go free, and perhaps get Martin Schroder to be Chairman of the Board, he knew how to make the Martinair, the little airline that could, profitable.

  • #5

    Shirley (Tuesday, 15 July 2014 09:38)

    Martinair is more flexiable than any other freighter company, that is one of their major reason why they are profitable in past.

  • #6

    Ken Smith (Tuesday, 15 July 2014 23:44)

    It seems that all those expensive KLM pilots, that cost AF/KL more than 250 million euros per year in pension contributions alone, are keeping KLM management hostage and prevent KLM making a profit that would enable to keep Martinair within the AF/KL group. Pension contributions are really that high due to the contract's early retirement scheme at 56 that is being upheld by the pilot union VNV as rightful and honest, believe it or not.
    Although many older pilots fight the mandatory retirement age of 56 and are willing to work without getting any pensionfund contributions by management whatsoever, union rules and is in effect denying Martinair to remain part of AF/KL ops.