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Strategy Execution
Q.5 Case study
On December 14, 2012, French-Dutch airline, Air France KLM SA (Air France-
KLM), announced an addition of €500 million (USD654 million) to its savings
target for 2013-14, in an effort to match the margins of its competitors. Earlier in
2012, the airline had announced a plan for a €1.4 billion investment in 2013,
followed by a further €1.6 billion investment in 2014 as part of its "Transform
2015" plan. However, with the new savings target, investment would be cut by
€500 million, out of which Air France would contribute €300 million while the
remaining €200 million would be cut from KLM's budget.
After the changes, Air France-KLM's capital expenditure would be €1.1 billion in
2013 and €1.4 billion in 2014. "This is a necessary reduction, but given the
group's younger fleet age versus competitors they have the flexibility to do it.
The Transform plan is gathering pace and should be well on track to deliver,"
said analyst Donal O'Neill at Good body Stockbrokers.
Air France-KLM was formed through a merger of French and Dutch carriers in
2004. With sound financials in the initial years, the merged entity became an
example of how a cross border merger could prove a success. However, from
2009, the company was struggling to remain competitive in the changing global
aviation industry. In 2011, the company's net debt was at €6.5 billion, €2 billion
more than it had been the previous year. The company also incurred a
substantial operating loss for the fourth consecutive year in 2011. It attributed
its deepening indebtedness to increasing fuel costs, competition from low-cost
airlines, and the after-effects of the financial crisis. "We have been incapable of
financing our investments for the past three years, as we don't generate enough
cash flow," said Alexandre de Juniac (Juniac), CEO of Air France.

2. The company had announced the "Transform 2015" plan in January 2012. This
included reducing unit costs by 10 percent and slashing €2 billion from its net
debt by the end of 2014. The company also planned to cut some 5,000 odd jobs to
turn around its short- and medium-haul business. Aviation experts welcomed the
restructuring initiatives of Air France-KLM. However, they were worried about
whether the company would be able to achieve the targets mentioned in
"Transform 2015". According to a Bank of America report published in March
2012, "the core structural longer-term issue of value destruction in this business
remains unresolved".
On September 30, 2003, Air France and KLM announced their intention to
merge through a public exchange offer. In May 2004, the two merged to form the
largest European airline group, Air France-KLM. On May 5, 2004, Air France-
KLM shares were listed for trading on the Euro next Paris and Amsterdam
markets as well as on the New York Stock Exchange. Two days later, Air France
was privatized following a transfer of the majority of its shares to the private
sector, thus diluting the French government shareholding. On September 15,
2004, the group's organizational structure was finalized with the creation of the
Air France-KLM holding company, regrouping the two airline subsidiaries, Air
France and KLM. The merger between Air France and KLM was a unique
example, not only because it was a cross border merger, but also because two
airlines with different cultures formed one company where both companies kept
their brands alive by flying their planes under their respective names. In the
initial years, the merger was considered a success story, because of early
anticipation of the needs of consolidation in the European aviation industry.
In 2007, the company completed its first phase of integration and became the
best performing airline globally in terms of profitability. It was a global leader
covering 240 destinations in 105 countries with its 900 aircraft. In the financial
year 2006-07 ended March 31, 2007, Air France-KLM generated revenues of €
23.1 billion, an increase of 7.6 percent year on year. However, the company
started facing problems from 2008. The global financial crisis of 2008-09 affected
the airline industry very badly. The industry responded by reducing capacity and
cutting costs. In the financial year 2008-09, Air France-KLM reported revenues
of €23.97 billion and an operating loss of €129 million. From then onward, the
airline started struggling to improve its financials. In the financial year 2009-10,
Air France-KLM reported a 15 percent decline in revenues to €21 billion, and an
operating loss of €1.28 billion.
In 2012, Air France-KLM continued to counter the effects of downturns in its
domestic market as well as in several of its foreign markets: Japan, the Middle
East, and North Africa. In France, the company was grappling with high costs

3. due to increasing fuel prices. Moreover, weak economic growth due to Europe's
financial crisis aggravated the problems for the airline. On October 8, 2012, Air
France-KLM and Etihad Airways signed an agreement to code share on flights
across the airlines' networks. The code share agreement would allow both
airlines to offer joint codes on destinations in Europe, the Middle East, Asia, and
Australia. At the same time, Air France- KLM also announced another code
share agreement with Air Berlin , in which Etihad Airways held a 29.21 percent
stake
Question:
(4 × 5 = 20)
1. Analyze the problems faced by Air France-KLM
2. Evaluate the turnaround strategies adopted by the airline
3. Analyze the issues and challenges in transcontinental and cross-cultural
Alliances.
4. Analyze the future challenges of the airline and how these can be
Overcome.
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