M&a air france

Executive summary
• AF-KLM merger was concluded in 2004. As we will see through our presentation, the Airline industry characteristics make connections between companies common. However usually, firms choose alliances over mergers. • So why AF-KLM decided to go with the merger structure? Why do they choose each other? • How did the merger process go? Was it a success at that time? • Can we saynow, 7 years after, that this strategic choice was the right one to overcome the new challenges AF-KLM is facing?
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The Air France – KLM merger
1. Context for the AF-KLM merger 2. Analysis of the Rationale for merging 3. Steps of the merger process 4. Short and Long-term results of the AF-KLM group 5. Future for AF-KLM

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Two players with different sizes
2003 figures Revenues (M€)Operating result (M€) Market position Nber of passengers Nber of destinations Main shareholders Air France 12,098 69 4th 37 million 184 54%: French State 32%: Ordinary shareholders 13%: Employees KLM 6,485 -133 7th 24 million 142 74%: Ordinary shareholders 15%: Dutch State 12%: The Stichting Luchtvaartbelangen Nederland and Rabobank Northwest Airlines (1989) and Continental
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Alliances

DeltaAirlines, Aeromexico & Korean Airlines (2000)

The Competitive environment leads to a low level of profitability
Threat of substitutes MODERATE
For national travels trains or cars are usually preferred but it is not a threat on international scale

Internal Competition HIGH
• Slow growth since 2001 • Low marginal costs • Websites to compare prices quickly

Barriers to Entry HIGH
•Capital intensive industry • Barriers to land an airport or to use the routes

Power of Suppliers MODERATE

Power of Buyers LOW
• Major buyers (travel agencies) have lost power with Internet • Other buyers are individual so have few bargaining power

• Aircrafts producers and airports (through fees): moderate power • Oil producers: strong power

High costs & Seasonal Demand have strong impacton profitability

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The Airline industry context encourages strategic alliances
High costs & Seasonal Demand have strong impact on profitability

Inter-firms arrangements as a solution
Decrease fixed costs
* Scale economies by sharing services and rationalizing activities * Share routes to increase number of destinations

Increase occupancy rate
* Share customers to maximize occupancyof the aircraft
* Global yield management to overcome the cyclicality of demand * Reach a better allocation

* Increase bargaining power towards suppliers (buy high quantities)

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AF-KLM: Same prices, largest offer
AK-KLM WITHIN THE COMPETITIVE MAP: SIMILAR BRAND IMAGE FOR CUSTOMERS & COMPLEMENTARITIES IN OFFERS LOW COST HUB

SHORT HAUL

LONG HAUL

The Air France – KLM merger
1.Context for the AF-KLM merger 2. Analysis of the Rationale for merging 3. Steps of the merger process 4. Short and Long-term results of the AF-KLM group 5. Future for AF-KLM

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Skyteam: An attractive alliance
1st Cargo Alliance (September 2000)

Frequent flyers programs Cooperation in scheduling Easier flight transfert operations

1st Airline Privileged Partner of Coca Cola (April2002)

1st in obtaining the Antitrust Immunity (January 2002)

Code sharing to optimize occupancy

Unique office for ticketing
Shared airport lounges

1st Airline Company in Global Finance (November 2002)

…Which alone appears insufficient
AN AIR FRANCE–KLM COMPANY TO BRIDGE STRUCTURAL GAPS AIR France needs to: Increase its market share & to enlarge its portfolio (partners, fleet,activities)
Looking for a ‘‘Mid-size Player’’ to realize sustainable synergies in line with the E.U. laws

KLM needs to stop its financial losses: Cut 2000 jobs in 2000 and the Cargo activity loss reaches 5% in 2003 Focus on cost savings & increase occupancy rates

AIR FRANCE needs a broader access to the transatlantic market: The Delta Airlines partnership within Skyteam is no longer enough

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