Air france klm rulling the skies

INTRODUCTION

Global alliances are the way corporations are finding to achieve growth and aligning forces, cutting cost and sharing risk towards sustainability. [1] 

The Airline industry plays a vital role in today globalised landscape.

It is this industry, together with the telecommunications, that can better represent the expression of the “world with no frontiers”

Air transport connects people, connects places, and loads freight all over the world day by day faster, cheaper and more efficiently.

However, the firms in this sector have to hold themselves strong to keep up with the huge costs and pressures.

This essay aims to analyse the nature of Air France – KLM merger and its strategic relevance for the group’s competitive advantage in the industry.

Further, on we will advise the viability of new partnerships and acquisitions for the group.

The airline firm and its web of relational actors

The industry has been undergoing to major changes and impacts. This business is considered very fragile and is constantly affected by four “relationship actors” within the industry (Porter, 1980; Reve 1990) and external forces [2] , modifying demand for flights and its profitability.

External forces are socio, economic, politic and cultural influences. After on we will see the four main relationship impacts in the industry such as the power of buyers, suppliers, complementary suppliers and the rivalry [3] 

The industry emerged between the two world wars as an strategic defence against the rivals .Airline firms started as national business and the necessity of air traffic regulations had become necessary to create rules and stimulates fairness in the industry. Regulatory Bodies and the European governments were applying very high fees, imposing limitation on the frequency and destination in European skyline. [4] 

The deregulation was necessary, opening the market, cutting costs, bringing innovation and growth for the industry as well as value adding for the consumer that from now on could fly more often and everywhere. [5] 

Some other points were made important regarding the freedom of the airspace on Vasigh B., Tracker T., Fleming K.(2008), they mention ” airlines provided revenue to the granted country as landing fees and fuels purchases” and then suppliers responded creating more efficient planes making the refill of fuel less constant.

Impacts such as the threat of bombs on airplanes and epidemics have been generating a great socio-cultural panic on people, influencing the demand as well as generating extra cost for the firms.

Lately, the climate changes have been causing huge financial losses in the sector. The volcano ashes last year, as well as the snow fall during the winter times are causing the airline’s misery. With that the government together with regulation bodies are tighten up the rules for the firms, aiming for a more sustainable of the business and the world as a whole.

The world is in recession and airline companies going into administration, employees are doing frequent strikes (Spanish airspace chaos for 24 hours caused by a strike by the country’s air traffic controllers).

The price of fuel increases in a heartbeat as well as the shareholders is still expecting more and more profit.

According to The Economist, “Many airlines are haemorrhaging cash”. IATA’s chief economist, said to the same source, about the crisis in the industry: “fares and yields are still collapsing in most of the world because capacity cuts have yet to catch up with the fall in demand.”

The last external forces considered in this assessments are Globalisation and technology. It played a major role in this industry, as per Kleymann, B, Seristo H (2004), breaking frontiers, influencing consumers necessities of flying more often and farer and also with “seamless connections”, “diminishing the role of national airlines”.

The power of the buyers is strong and consumer are expecting ‘low price/any airline’.

Rivalry is extreme, considering the entrance of many low cost companies in the market, leading the prices of the market down.

We can assume that the suppliers do not play a huge power in the airline industry The airline producers do not have huge influence on the airline industry for the fact of being only two, to produce Boeing and Aircraft competing to gain airline’s preferences signing contracts based the model quantity versus prices.

The industry outsiders influencing the demand of substitution ways for air transport can be trains and ferries. In Europe, Eurostar represent a big concurrence for medium-haul flight, offering the value of arriving at the centre of Paris as well as targeting consumer that don’t like flying. The improvement on technological communication can connect people easily and efficiently without the necessity of physical contact. Crowded airports and fly delays are considered, causing demand changes.

But how to survive, cope and gain competitive advantage?

The advances in technology have promoted a better efficiency in terms of gain of economies of scale and scope through the improvement of the value chain.

Geographical expansion is bringing a broader market for the firms to compete.

Airlines had to find strategic alliances in order to survive to all these pressure and gain competitive advantage to compete in this fierce industry. A company can achieve growth either by its internal operative system or externally through alignment of powers, through mergers and acquisitions and strategic alliances.

Three global Alliances rules the global market. Star Alliance (23,6% market share) having Air Canada, Lufthansa,Us Airline and Tap as some of the members is the actual global leader.

Air-France-KLM together with Delta, Northwest, and Alitalia, along with others are part of the Sky Team (20, 7% are the second on market share) In third comes One World (13, 5%) with British Airways and Iberia for example.

The merger

“Merger is the combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock” [6] 

Analysts hugely criticized the merger, regarding its necessity. Both companies are quite similar in terms of business model and are physically close. There were not much to learn from each other, were stressed the specialists. Instead, they would have to share profits between a larger numbers of shareholders. [7] 

Nevertheless, the action was taken forward from 2004 Air France -KLM Group came to existence.

According to Porter (1987) acquisitions and mergers should be take into action only if brings to the new business model competitive advantage, if the money invested in the convergences will be justified later in the form of gains and if the “new unit will be better off together”.

“Inter-organizational cooperation is one of the moves available to a firm to enhance its competitive advantage or decrease a competitors’ advantage. This move may be offensive, when the firm’s goal is to expand its power in an industry, or defensive, when the firm’s goal is to defend a threatened position” [8] 

The two companies found the necessity of cooperating in order to persue market grow to face global giants based on equity share arrangements. [9] “diminishing opportunistically leaving the alliance” (Deeds and Hill 1998), making the new path more reliable and motivating for both. [10] 

In the corporate scope the structural decision was, therefore, to maintain, the three main businesses for both firms: passenger, loads and maintenance.

There was a necessity of restructuring the corporate governance to align the two companies to build the group into a learning organization, “Transfer of functional skills” “they can be transferred as know how” ” not only assets” (Wit B. and Meyer R).

The group’s agreements towards leveraging resources were made mainly to aggregate knowledge on their national markets to combine and gain a stronger strategic position, as well as build new skills to new market entrances.

Another focus is the bargain power to be imposed toward their suppliers, diminishing unit cost.

Regarding collaboration to integrate their individual activity systems into more efficiently one for the group, the agreements were:

The main focus here was the synergy of an unique IT SYSTEM unit for the whole group, making possible the gain value to the chain.

The CEO, explains that if one of their flight is cancelled in Paris, their fully integrated IT System can accuse new options to offer to the costumer, making him fly KLM throught Amsterdam. It is the value chain, more efficiently transforming inputs into outputs, avoiding losses and generating profits.

Cuts on overlapped routes aiming the alignment integration of the operating assets of the firms as well as reduction of unprofitable routes.

More cuts, now on crew staff on medium-haul flights, to able to compete with low cost companies present in the market.

Investments had to be made on marketing to alleviate the negative impact on quality on this flights.

After these modifications, Air France-KLM defined its position on the medium-haul flight for business travellers concerned about modernisation as well as low price.

Both sides agreed to keep their own home base, operating licenses and air traffic rights.

Price policies had to be reviewed and standardized in order to maintain both comparing competing as group, as well as keeping them as strong individuals.

The group decided to maintain their national identities, logos and the brands separately.

conclusion

The decision of merging into one big group by Air France and KLM was based on the awareness of the conditions of the industry and its “web relational actors”. [11] 

“No firm exists in complete isolation.” Ford et (1998). Cooperation is necessary and interaction with the environment is unavoidable. [12] 

The group recognized, therefore, the necessity for global leaders, adopting a pro-active approach towards a more competitive position unifying existing markets, counting with the advantage of having the strategic presence and the knowledge in strategic points of the market, making strategic connections between these markets, as well as together exploring new ones.

The merger was horizontal, considering two similar firms with two similar markets. Where they were able to diminish risk and cost with the gain of economies of scale and become the European market leader.

The bilateral arrangement is friendly equity-based, turning the merger into a “trust governance” process, valuable for both parts. The avoidance of “dominant” player and a “hostile environment” can build “ability to understand each other, which improves the chances of alliances success” [13] 

The looked into improve its commercial operations with the integrated IT system, cooperate hubs and eliminate overlap in operations in order to gain a better strategic market growth as well as reducing cost to face the actual global downturn.

Therefore we conclude that the Air France-KlLM’s agreement was of horizontal merger equity- based nature with the strategic objective of, by cooperating in their knowledge/ position in international markets, to growth together in a global scale.

new partnerships

In respect of counselling regarded the development new partnership or acquisitions, we positioned ourselves cautiously.

Unfortunately there is not a recipe for a successfully global network.

Considering the actual economic landscape and the crisis in this industry, its important to stress , that high investments are risky and the industry is runny with low reserves.

The partners have to be chosen wisely, as the group is been doing so far.

Also sometimes when a corporation has emerged in leading position, innovate internally in that market and build strong bases to sustain the position first before explore new lands is advisable.

Air France-KLM has Group has achieved leadership in the European market through their merger combined with the recent partnership with Alitalia in 2009, gave them a strategic market position in Europe to be maintained and explored further.

We recommend further investments, or a strong partnership, in marketing and focus on improve the image of a “seamless” long-haul flight to don’t lose value in brand as already occurred, raised from the changes on positioning of the medium-haul.

If the corporations is in a strong cash position, as they state in their website, we advise, conglomerate partnerships bringing market extension for the group.

Agreements with trains could put the group in a much stronger position, once they represent a big substitute for flights inside Europe.

They can use as improvement for the activity system, integrating train schedules to their already developed IT integrated system.

As Air France-KLM is targeting the business travellers market, maybe creating partnerships with a strategic firm in the communication industry, making possible to add value, connecting transport with communication to facilitate their consumers’ life as well as combine their IT system.

Even though the times are to “collect the marbles”, their leadership position in Europe is not permanent, therefore, innovation should always be perceived.

To generate competitive advantage front the other global alliances, we think that conglomerate partnerships could be a way to differentiate.