The deregulation of the skies European Law as opened interesting scenario not imaginable few years back. This new laws allowed companies to compete more widely and allowed the European companies to compete in the world market dominated by the massive US companies. The US as been the first country where the nationalistic laws have been lifted. In Europe the approach has been a bit more gradual, but had the same results. The European market experienced the entrance in the market by a new type of companies, the low cost not frill companies. Those started gaining big market shares and the other companies had to do something to deal with that. A company like Air-France, that has always delivered high standard has decided to merger with another company that at that moment was in a precarious economic conditions, KLM. Jean-Cyril Spinetta, CEO of Air France and is counterpart Leo van Wijk have seen a new opportunity in the aviation market, and they decided follow it. In the 2004 there is the beginning of a new company called Air France-KLM.
The merger between Air France-KLM created the largest airline company by passengers and the third in terms of turnover. Most of the people in the beginning, specially KLM stakeholders, were really sceptical about this merger. The fact that Air France was a company twice the size of the KLM, and that it was a profitable company, compare to KLM that was in dept, made a lot of people think about this move, as a first step of a full take over. For the many the idea behind it was the complete takeover and move everything to Paris after the end of the three years transaction period. But so far both companies have beneficiated from the merger. After the first year from the merger the companies were much ahead of their forecasted results. As most of the other companies, Air France-KLM went through though times in the biennium 2008-09, due to the international crisis. But they got back to profit in the second semester of this year, with a net profit of around 1billion Euros.
The merger between Air France-KLM has brought great results. Thanks to a new way of thinking. The merger as been done in a market considered in its mature life cycle, that should be not offering any potential opportunities. Usually a mature market is a steady market, where the changes, if there are any, are really slow, and marketers do not address it as a market of a great opportunity. In some case a mature market could be more profitable than the one in a growth rate. The fact that a mature market is not entered by new competitors and the competitors that are already in the market do not tend to invest in it, may result in an opportunity to gain competitive advantage bringing in a new idea. Air France and KLM have seen the merger as a great opportunity, being something unusual in the aviation market in Europe. Moved by the idea that a market in its maturity life cycle would had offered great opportunities of profit to companies that would had brought in the market something new. They decided to merger. As been a big shock for the European aviation market, due to the fact that no any other company in EU has done it before. But Air France-KLM has shown that even in a mature market there are great opportunity of growth.
The management of the Dutch company has been under severe judgement by the public opinion during their talks about the merge with Air France. Many critics did not approve the merger, considering it a first step from a decentralization of the company that eventually would had been bolt down and disappeared within the Air France and move everything to Paris. Has been an hard job from both CEO of the two companies, particularly for Van Wijk, CEO of the KLM. The perception of the stakeholders was that they were going to lose their company. Things moved in the right way once the result have started coming out. The company has made new business and it was growing, something new in the company seeing the past few years. The strategy from this point of view was to coordinate at the best the two teams, and do not put them in competitions to each other. That has been a critical step and enable them to create a nice atmosphere among the companies.
Air France-KLM has faced many problems, but they come out stronger than ever. Probably the first problem that they had to face was the entrance in the market by new competitors. Easy jet and particularly Ryanair were in competitions with Air France-KLM in the short haul flights. Being a low cost/no frill companies they were able to offer to their customers much cheaper flights than their competitors, that specially in a period of crisis has attracted many customers. Air France-KLM to compete with them, has had to start cutting their costs. One big step in reducing costs, and saving time for traveller as been done thanks to technology. The introduction of services like e-tickets and tickets via SMS or MMS as just made easier for traveller with just the hand bag. Air France-KLM have been able to save some money especially along their operations. They made the company much more efficient. For example they have cut some route where KLM was losing money, leaving only Air France flights or vice versa. They have made possible book a flight with KLM and come back with an Air France flight. That enabled them to save some money, without reducing their high quality services. And in 2008 they have introduced, in some of their flight, a premium economic class. That is addressed to people that looking for a bit of more leisure in their flights, but cannot afford business or first class flights. In this categories there are small and medium companies as well.
The Ansoff's market matrix as been used by Air France-KLM. The Ansoff's matrix is a tool that the strategist uses to see in which market they should be competing. It is dived in new or existing markets and new or existing products. Air-France-KLM has decided to compete in the new market with their existing products. Merging the two companies have brought new markets for both carriers, and recently they have signed a partnership deal with Alitalia, that has a deal with Air One, opening new markets to Air France-KLM, as the Italian market is one of the biggest in EU.
The Mintzberg's flexible approach has been followed by the company. Mintzeberg has developed different ideas of organizations but the main idea is that the best structure of organization is the one that has been developed according to the external factors and their own strength. A successful module can be imitated but is not guaranteed that is going to succeed in a different company. Air France-KLM has adapt to the external changes and the changes in their competitors. They have to compete even with a different form of transport, like the High Speed Trains. They have done that, for example withdrawing some of the flights in the central hours of the day, where people for commodity, due to the fact that the main stations are in the centre of the cities and usually airports are situated outside it, tend to use the trains instead of flying.
The aviation market even if is in its mature stage has a very high competitive market. Many companies has gone busts or saved by their own government that did not want to lose their flag ship company. Following the Porter's five forces shows us that Air France-KLM are competing in a market that has many factors to be taken in consideration to be able to succeed. The power of buyers in the market is quite low, especially in the long haul flights. There could be problems with the ageing of the populations making the number of customers available inferior. The power of supplier is quite high in the other hand, because there are just two companies at the moment that are providing Aircraft (Boeing and Airbus). Air France-KLM being one of the biggest company in the world may have a bit of bargain power over those two companies, considering that they are in partnership with Alitalia as well. The entrance of new competitors are very unlikely due to the fact that the costs are really high and there are not great margin of profit, but seeing company like Ryanair being so successful, may attract some new competitor. The threat of substitutes is quite high in the short haul flights. Trains and bus stations have the biggest advantage of being in really centralized in the city, making them really easy to be reached. The oil price, terrorisms, ageing of populations, the future tax on gas emissions and the recent failure of the Boeing engine does not really help the market.
Air France-KLM has made another big step on the field of acquisitions, purchasing a 25% of Alitalia. That opened another big market, the fourth biggest one in Europe, to the biggest airline company in the world. But the market that the company as a particular eye for is the Asian market. The Asian market is a really complicated market. There are a lot of new competitors coming for this market and the rules of the game are different. Air France-KLM has asked the EU to control those company and to open the market up just to the companies that are competing with the same rules. The Air France-KLM is arguing that those new Asian company have advantages over the other companies due to the fact that they are not fully paying for their costs. But on the mean time, because the Asian market is one of the newest one, and the opportunities of growth are higher, Air France-KLM is seeking some deal to seal with some of the Asian companies. They have launched a joint ventures with China Southern Airline. That helps both companies to be more competitive in a growing market like the Chinese one. They are code sharing some of the route between Paris and Guangzhou and the looking to extend this to other routes like Shanghai-Amsterdam and Shanghai-Paris. They are looking on launching a joint venture cargo airline with the same company. That suppose to be done in the 2008, but has been postponed due to the sharp fall of the cargo market over that period of crises.
Air France-KLM have not been looking only for direct horizontal relations, but they have been looking for relationship at 360 degree. They have managed to get an Upstream vertical relations with suppliers, signing up contracts with maintenance, repair and overhaul with the Chile's LAN airline. That unsure Air France-KLM the maintenance of their aircraft in America, and they have sealed the same deal with Malaysia Airline maintenance arm, for the Asian sites, and Royal Air Maroc, for the Africans sites. The deal with Chile's Lan has been a big deal for the company either due to the proportion of it, around $140 million, but specially because has been the first contract that has been sealed together by the Air France and KLM team. They have signed a deal with Amadeus, that is one of the leading company in the travel agent markets, giving it the full access to the fares, scheduling and inventories on over 90.000 flights operated by the company.
The airline market is in its mature stage, especially in Europe and USA. That means that the entrance of new competitors is really low, but does not have to be excluded has happened with the entrance of the no frill/low fare companies in the European market. A big problem for the industry is the high sensitivity to the external factors, like rising of oil price, terrorism threat and the ageing of population that can be a problem especially in Europe, where the flight can be substitute with the trains. It is a really particular market, few years ago it was dominated by the rules imposed by the countries that owned a flagship airline. Now the market is going to open up and that can be change for many companies. Air France and KLM have pursuit a new way of understanding the market merging together. That has been labelled has a mistake, but after few years the results are on their side. Many other companies now are looking for mergers, company such as British Airways and Iberia or Lufthansa and Swiss. Air France-KLM have widen up their partnerships buying 25% stakes of Alitalia, sealing partnerships with Delta and some other companies even in the Asian market. This is probably the future of the European aviation market and probably, in a long term future, of the global market. In Europe at the moment is much easier to seal partnerships deals between companies due to the stability of the region. Same situation we can find in the US. Company in the Asian market and south America, they may have to wait few more years. Those merger have to be done keeping the customer in mind at all the time. The companies have to look on lowering the costs, investing in new technologies, that will help the costumer enjoy their flight at a reasonable price, and if it will be possible, cutting the boarding time at the least for the loyalty customers.
