The Air France – KLM Merger

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The Air France – KLM Merger

  1. 1. KLM Approach to Alliances http://www.youtube.com/watch?v=TCipuJZM4 78&feature=related
  2. 2. KLM Background• First airline to start an alliance in 1989• Since merger with Air France 2004 the world’s largest airline• Participated in over 100 alliances with airlines and service partners
  3. 3. Airline Industry Environment • European deregulation of airline industry started in 1987, second step 1993, and 1997 • Development of low-cost carriers put pressure on established airlines
  4. 4. KLM – Northwest• Sustaining market share• A partner was necessary to finance the expansion of Schiphol• KLM bought 20% of Northwest, provided Amsterdam-Minneapolis, NW had own block of seats for which it was responsible to sell• NW in financial crisis
  5. 5. European Alliance: Alcazar 1993 • Pan-European alliance with SwissAir, SAS, and Austrian Airlines was established after failed merger talks with British Airlines • Combined sales were $13 billion = 20% European market share
  6. 6. 1996 Kenya Airways• KLM purchased 26% of Kenya Airways• Established joint-code route Amsterdam – Nairobi• Kenya Airways established KLMs check-in system• Revenues doubled within two years
  7. 7. KLM – NW 1997• Rising tension despite successful and profitable joint venture• After a perceived takeover form KLM some NW board members resigned• KLM established a special alliance department• They got rid of their financial investment in NW• Negotiation of a water-tight joint-venture contract• Each party gave up offices on the other side of the ocean which were then operated by their partner• A alliance steering committee was established
  8. 8. Failed Merger with Alitalia • Establishing a “virtual merger” with shared sales, administration etc. • A gradual takeover was planned • Broke up due to arising uncertain developments at the Malpensa-Milan airport • KLM wanted Alitalia to repay EUR100m • Alitalia then sued KLM for EUR250million • Aftermath = merged too quickly
  9. 9. Code sharing with China Southern • First agreement of European and Chinese airlines • Code sharing on the important Beijing – Amsterdam, Shanghai - Amsterdam routes • Only a small team of alliance specialists from KLM were negotiating the agreement • Further joint opportunity development
  10. 10. The Air France – KLM Merger • Down Turn – Sept 11, 2001 • 7 Billion Euros in 2001 Mar – 6.5 Billion in 2003 • Conversation with Air France • Air France – Profitability
  11. 11. Air France – KLM Merger • Air France (81%) – KLM (19%) Merger in May 2004 • Cost saving up to 75 M– 500 Million Euros • Operating two brand names • Government Regulations • Analysts View • Advantages of Consolidation
  12. 12. Air France – KLM Merger • Overcoming Cultural Barriers France VS Netherlands – “Understanding” • Became the worlds largest Airline in terms of revenue • “Soft Pragmatic Merger” • Frequent flyer/ Network Adjustments • 521m Euros saving – March 2007
  13. 13. Effectiveness of MergerFinancial Year 2006-07 AEA Market Share Offer in ASK (%) Traffic in RPK (%) 2004 2006 xx% Load factor 27.1% 26.2% 20.2% 81% 18.9% 16.9% 79% 16.0% 77% 76% 5.6 4.7 4.3 4.4 5.4 2.5 2.3 3.1 BA LH-LX AEA AF-KL British Lufthansa British Lufthansa AF-KLM AF-KLM AEA Airways + Swiss Airways + SwissASK: Available Seat Kilometres measures RPK: Revenue Passenger Kilometresavailable passenger capacity measures actual passenger traffic
  14. 14. Strategy Since Eighties June 19891985 1999 ? 1990 1992 ? 1993 1995 2000 May 2004 • June 1989 : KLM investment in NW • September 1997 : Global JV • Begin 2002 : informal discussions • Spring 2003 : discussions intensify • September 2003 : public announcement • May 04 : entry into force • September 2004 : Joint holding Air France - KLM
  15. 15. KLM’s Approach to NegotiatingAlliances Commercial or Joint Venture Cross Industry Tactical Feed Schiphol Long Term Cross Industry Extension Marketing office Alliance Integration 11 Full Time 14 Partners 2 Joint Ventures 4 Associates
  16. 16. Joint Venture Model
  17. 17. Building & Managing AlliancesNegotiation Phase • Possible PartnersScreening • Target and Research/ Choice of Partner • MOU/Legal matters/Audit & Changes Scoping • Target for Negotiations • Commercial AgreementContracting • Action Plan
  18. 18. Day-to-Day ManagementPhase • Initiating OperationsImplementing • Setting up Infrastructure • Business Result Reviews Developing • Training – Cross Exposure • Evaluation Managing • Performance Improvement
  19. 19. Governance of Alliances• Alliance Steering Committee (ASC)• KLM’s Alliance Department• Building Personal Relationships and Asian Culture• Take on Culture• Corporate Culture/Professionalism/International Outlook
  20. 20. THANK YOU

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