Merging strategy is used by various organizations. They do it for different reasons - to increase market share, to expand in different countries, to bring together great skills of different brands or for many other reasons. Merging strategy was, and is still, quiet popular in Airline Industry. There are three main alliances that are always merging different small or big Airlines into them - Sky Team, Star and One World.
Our report is about merging of Air France and KLM Dutch Airlines which became part of Sky Team. We will be concentrating on how and why these two airlines merged, and what strategies they used to make it a successful merger.
Air France and KLM merger was officially announced in 2003. Air France was as name suggests a French Airline and was making consolidating profits. It operated from one of Europe's busiest airport Paris- Charles de Gaulle. On other hand KLM Royal Dutch Airlines was Netherlands based airline doing a radical recovery plan. It operated from another major hub of Europe- Schiphol Airport- Amsterdam. The merging involved merging of shareholdings and sharing the same bottom line. The three activities in which Air France-KLM is involved are -
Passenger Transport
Cargo Transport
Aircraft maintenance
The two airlines became a single company but decided to operate under different brand names carrying their own flags for the emotional factor of their respective citizens and staff. They put it as - "one Group but two different airlines". The main strategy was integration of networks and run the merger on multi-hub system. The merger decided to have an offensive strategy of profitable growth and winning market share from competitors.
RATIONALE BEHIND MERGING DECISION
Due to liberalization within Europe market, small carriers did establish themselves and were growing in European market. The regulators encouraged the emergence of major players to compete and match the size of huge European market.
Air France needed to be a part of some alliance and they were part of Sky Team. But there was also the need to be big enough to be taken seriously and make an influence on the decisions.
Same Vision
The founders of both the airlines shared a common vision the future of airline industry. Both were European airlines. The idea was to create pan-European leaders and grow to the size of Single Market. This was more of an emotional side of the story.
Traffic Rights
Outside Europe each airline was considered as national (French or Dutch) airline rather than a European airline. So, each European Airline has to obtain traffic rights to enter into any country outside Europe. Traffic Rights are usually based on bilateral treaties. In 2004 when France reinforced air services to India, French Government obtained access to four major airports of India in exchange for increased number of flights to Paris for Indian operators.
Hub and Spoke system
The merger operated as integrated system. The merger decided a multi-hub strategy and operated from both Schiphol Airport and Paris Charles de Gaulle. They didn't cut down their over-lapped flights but gave customers more service. This helped them in connecting flights and also providing customers with alternatives if some flight is cancelled.
Skilled Workforce
Both companies had highly skilled workforces. KLM was the first airline to adopt Hub and Spoke system.
STRATEGY AND IMPLEMENTATION
MAIN FOCUS-PROFITABLE GROWTH STRATEGY
Air France-KLM merger was primarily focused on achieving profitable growth through growing market share and revenues. They however did not focus much on downsizing strategies(cut back on capacity and staff) which made their core strategy 'offensive' rather than 'defensive'. They implemented this strategy by improving and constantly working on both their competitiveness and productivity. Implementation was brought about by using the following underlying strategies:
1. COST STRATEGY
Both the airlines aimed to reduce their operating costs by integrating their international operations in each country. This was done by taking into consideration the specificities of each country and also the relative strengths of both Air France and KLM.
By coming together, both the airlines would increase their bargaining power for aircraft purchasing. Air France's fleet consists of Airbus aircraft whereas KLM's fleet consists of Boeing aircraft thereby resulting in provision of more leverage when negotiating to buy a new aircraft manufacturers.
In order to optimize the workload at each of their facilities and to reduce the inventory costs, they rationalized their maintenance costs with more effective allocation of all the resources.
Both the airlines also integrated their IT systems due to increased online sales and growing reliance on automated processes. They decided to align all their selling services and aimed to use the same IT systems in 5 years time.
2. INTEGRATED NETWORK STRATEGY
The best part of their merging strategy was that they will use the combined strengths of both the airlines and their market positions and will integrate their network around two hubs (Schiphol and Paris-Charles de Gaulle) while still using their two separate brands. This would help them provide a choice of more than 100 long haul destinations for their Europeans customers and best possible connections to more than 150 European destinations through their two hubs for their non-European customers.
In addition to this, they decided to introduce the concept of 'combinable fares', single frequent flyer program called 'Flying Blue' and also single corporate contract system for large accounts.
3. PASSENGER STRATEGY
Since passengers form the heart of their strategy , both the airlines stressed on the importance of providing excellent service by improving the irregularities and by enhancing the overall travel experience both on the ground and in the air.
Air France-KLM would also invest in research, marketing and commercial innovation in order to provide customized products and services as per the needs of all its customers.
4. CARGO STRATEGY
The second business in which Air France and KLM operates is Cargo Business. Together they had strategy to offer:
Customized Cargo services and diversified range of transport solutions as per the specific needs of the shipper.
Electronic freight i.e. they would provide 'paper free' solutions in cargo by replacing paper based invoicing with 'Track and Trace System' which will enable the customers to track the real time status of their shipment.
5. MAINTAINENCE STRATEGY
Aircraft maintenance was the Air France-KLM group's third business. They had a combined strategy
To be a leader in multiproduct aeronautics maintenance by combining their maintenance and engineering capabilities.
To pursue the development of their maintenance network through strategic partnerships with leading aeronautics in America and Asia.
To form a joint commercial division to integrate all the operations of Air France Industries and KLM E&M in order to ensure combined technological innovation.
SUCCESS OF AIR FRANCE-KLM MERGING STRATEGY
Air France KLM, a international leader in air transport
Merger of Air France and KLM gave birth to new group, the Air France KLM Group; this gave opportunity to two leading European airlines to become the world's leading airline in all aspects as follow:
104,721 Employees
71.4 million passengers/year carried in 2008 -2009
594 aircraft's in operation
244 destinations
21 Euros in turnover
Air France KLM, a international leader in three core businesses
Passenger transportation: Despite of unfavourable economic condition Air France KLM group leads all airline industries in terms of passenger transportation. It has the capacity to carry approx 71.4 million passengers.
Cargo transportation: The economic crisis and sky rocketing fuel price affected the cargo business. The merging of Air France and KLM not only helped in sustaining the growth of cargo business but it helped them to become the cargo leader in entire industry with a common division of sales, marketing, distribution and networks.
Maintenance business: Air France industry and KLM engineering together held up and sustained their growth in maintenance business. In fact they increased their capacity not only to meet the needs of their own fleets but of another 150 customer airlines.
Optimum utilization of existing resources:
The merger of two leading airlines of Europe helped them to utilize their existing resources at optimum level are as follow:
Optimum utilization of their networks based on two hubs Paris-CDG and Schiphol.
Air France KLM is in position to save cost on many of their activities such as purchasing, distributions, networks and maintenance service.
