Air France KLM Strategy

• Introduction
  
• I) Company profile
  
  • Air France: Background
    
  • KLM Royal Dutch Airline: Background
    
  • Air France - KLM Group: `Highways To Success'
    
  • Mission Statement
    
  • Vision 2010
    
• Together with KLM successfully develop the Group of tomorrow: The aim is to improve our economic efficiency by achieving €500 million-worth of additional cost-synergies over the next four years. The resulting changes in the Group's future modus operandi should provide us with more robust, more streamlined decision-making processes. A continued focus on building trust among teams will remain a priority.
  
  • A real vision or a dream?
    
  • SWOTStrengthsWeaknessActivities and turnover in progressSuccess of the mergerDynamism of successful SkyTeamHubs coverSupply networkWell-balanced networkJoint Venture with Delta Air LinesDebt raised by KLMDelay on the "e-services"Unstable social climateDomestic flights and medium-haul unprofitableOpportunitiesThreatensAgreement «  open sky » Europe/USALow -costsMarkets in strong growthDifferentiation by the reliabilityA380 in 2008Ecology/Sustainable DevelopmentDurable increase of the oil price External Shocks :» Economic situation» International disastersIntensification of the competition:» Low- cost» HST» US Companies
    
• Since the merger between Air France and KLM, Air France strengthened its position on the world market-place, by increasing its activities and results. Then, Air France tempts to develop loyalty among its customers thanks to the extension of its network of Hubs and to the dynamism of the SkyTeam alliance. In 2006, for the second consecutive year, SkyTeam was again elected " better alliance of the year " by the readers of the American monthly magazine Global Traveller Magazine. This allows Air France to have a well-balanced network. In spite of the promotion of Air France KLM, it is noticed that the KLM debt has still raised and short and medium-haul flights are not profitable.
  
• Air France considers remedied in these weaknesses by the implementation of Low cost and the project " vision 2010 ". The project vision 2010 articulates around four big challenges which the company has to raise:
  
• - Achieve best in class service for our customers
  - Strengthen our competitiveness through change management
  - Set the example in corporate social responsibility and sustainable development
  - Together with KLM successfully develop the Group of tomorrow
  
• At the level of the opportunities of the market, Air France cannot neglected the strong growth of the market and the evolution of low cost. Air France, since the end of year 2006 succumbs to Low cost. The airline company goes displayed the wings of its new strategy of flights cheap by 2/3 the years. She will be proposed via a new activity and a web site declined from a subsidiary of her Dutch partner KLM. KLM Air France has to seize the opportunities on the differentiation by the security and on the environment.
  
• KLM Air France is rapidly expanding and wants to become leader in all its domains, in spite of its strong evolution, the group has to pay attention on the durable increase of the oil, in possible economic situation, in the catrastrophe internation and especially in the strong competition of low cost, HST and US company.
  
• II) Successful merger through network management
  
  • New Business Model (course network strategy)
    
• In the late 90's it was said that 'The Network is the computer,' meaning that a single computing device, by virtue of its inclusion on the internal network or the Internet, increased its value by orders of magnitude. The computer's value proposition changed completely once it was part of the network.
  
• Today the same is happening with entire businesses. The idea of the network organization model is not new, but with the mature Internet, this business model has started to flourish.
  
• The key to managing the network is collaboration. Not collaboration as some touchy-feely new found way of doing business. But collaboration as the necessary quick, decisive, mostly automatic communications that must happen correctly in the network in order for orders to be filled, customers billed, service issues rectified, vendors notified of drop ships and of course the movement of cash from one end of network to the other.
  
  • The merger becomes a necessity
    
• INSIDE Europe, the regulatory system has radically changed in the last few years. In line with former EU President Jacques Delors' vision of Europe, backed by all the major European countries, Europe decided to dismantle all its regulatory barriers and create a huge single market among the European countries. This strategy - that of a Single Market - has now been applied to European air transport. For the last 10 years, there have been no regulatory barriers. Any European carrier benefits from total freedom to acquire traffic rights and establish itself in another European country. Contrary to preconceived ideas, there are no more protectionist barriers inside Europe.
  
• Tomorrow, Lufthansa or British Airways can launch a new service between Paris and Rome and AF can do the same between any two European cities. And it is because of this liberalization of the European market that low-cost carriers have been able to establish themselves and grow in the European market.
  
• Ever since the 1st of January 1993, all European carriers have known that the days when European air transport was organized around national champions are over.
  
• This is because the regulators themselves encouraged the emergence of major
  
• European players to match the size of today's European market, by creating a competitive environment.
  
• So why did Air France have to wait 10 years - that is to say, from 1993, when the new principles of the European regulatory system were designed - to 2003, date of the announcement of the first cross-border merger with KLM ?
  
• This gap is certainly due to three major factors: the first is very human - the force of habit. After decades of operating in a highly regulated framework, it took the prestigious European flag carriers a long time to realize that things had changed, and that they would have to change with it. It was a painful process for all but KLM, who immediately understood the need for change.
  
• The second factor is rather more legal. Today Europe only recognizes one reality- a European air carrier. Whether the operator is Spanish, German or British is irrelevant. It's a European carrier.
  
• However, all the non-European countries (for example Brazil, USA, Chile, etc.) refuse to recognize the European status and only take into account the nationality of the carrier. Consequently, if, for example, British Airways were to take over Iberia, a non-European country could say that they will withdraw the traffic rights they gave to Spain, because they will now be exploited by a British and not a Spanish carrier. This major contradiction between European and international law, which still exists, continues to hamper mergers and groupings.
  
• The third factor is of a more emotional nature. These flag carriers embody the spirit and pride of a nation. They are often an integral part of the history of their country and the people remain extremely attached to them. The extraordinary adventure started by Albert Plesman in 1919 is part and parcel of Dutch history - as is that of Didier Daurat, Mermoz and Saint Exupéry in France. The Chairmen of these airlines have always feared - and quite rightly so - the negative reactions of the nation's citizens or the airline's staff. They would no doubt have considered these mergers as a form of betrayal of the vital interests of their country.
  
• All these factors explain the very specific form of merger decided by Air France and KLM. Leo van Wijk and Jean Cyril Spinetta decided that, given the changing situation in air traffic relations, it was very unlikely that a non-European State would use the merger as a pretext to withdraw the traffic rights that it had granted to KLM. It was still legally possible, but the risk was low. Air France and KLM considered that they could take the risk of merging. And so far they have been proved right, as no non-European State has made signs of wishing to withdraw its traffic rights.
  
• One reason for this changing trend dates back to March 2000. At this time, the European Union Heads of States and Governments met in Lisbon and agreed to make the EU «the most competitive and dynamic knowledge-driven economy in the world» by 2010. This was a very ambitious goal and gave rise to a lot of initiatives. The aim was to create a pan-European innovation system. The idea was to shift from the creation of national champions to more pan-European enterprises. So Air France and KLM combination spearheaded this trend.
  
• The two companies quickly realized that theyshared exactly the same vision of the future of our business:
  
• v Firstly that consolidation was necessary, particularly in Europe. This was because they needed to create pan-European leaders to match the size of the huge Single Market.
  
• v Secondly, for the sake of economic efficiency, they had to have a common bottom line.
  
• They also had to take into account the emotional factor. This is why they quickly realized that the only possible organization was to create a new concept of one group - AF-KLM - which involved merging shareholdings and sharing the same bottom line - and two companies, which implied coordination rather than integration. That covered the emotional side.
  
• Air France and KLM were two efficient airlines - KLM was reaping the benefits of a radical recovery plan, and Air France was consistently posting profits - but they were at risk.
  
• This might seem contradictory, but in fact it's not. They were at risk because they were middleweight champions in a heavyweight contest. In an increasingly global industry, they needed to gain critical size.
  
• The consensus view is that world air transport will ultimately be organized around three major alliances - Star, SkyTeam and Oneworld.
  
• Obviously Air France and KLM had to belong to an alliance but that's not enough. They also need to make themselves heard and to influence the decisions to come. In the long-term, Air France would not have been able to do this alone. Air France-KLM guarantees that a European carrier will play a leading role in SkyTeam. This common ambition that Air France and
  
• KLM share did not come from a desire to dominate. It came from a legitimate wish to ensure profitability for both airlines and to play a global role in the air transport industry.
  
• But governments and public opinion would most certainly have refused the merger, if they hadn't respected national identities and interests.
  
• This is what prompted them to build a project that surprised the financial community at the beginning, but which was the only acceptable solution in today's Europe: one group but two different airlines, each with its own brand, products and flag. They have a sort of «control tower» to define the guidelines for the overall strategy - the Strategic Management Committee - but each airline is responsible for the day-to-day running of its own business.
  
• So what is Air France-KLM Strategy and how are they implementing it?
  
• The new Air France-KLM Group ranks first worldwide in terms of revenue (with a combined turnover of 21 billion euros in the IATA year 2005/2006). It carries over 70 million passengers a year, has a combined workforce of some 100,000 employees, and operates 558 aircraft.
  
• In designing the merger, Leo van Wijk and Jean-Cyril Spinetta focused on profitable growth. They would partly achieve this by winning market share from competitors, especially from European carriers. In the past, many mergers have failed because they have concentrated too much on cost-cutting and downsizing and not enough on growing market share and revenues. Right from the beginning, they decided on an offensive rather than defensive strategy. Some industry analysts were disappointed when the Group decided NOT to cut back on capacity and staff. They work in a service industry, where human resources are critical to the delivery of their joint products. If they had cut back on staff, they would have lost the cooperation and support they needed to implement the merger. And they would not have achieved the growth they have today.
  
• They are implementing this strategy by constantly working to improve their competitiveness and productivity. This will ensure that their growth is as profitable as possible, and will enable them to adapt to the changing business climate. The first thing they did, was to identify synergies in every possible area.
  
• On the cost side, for example:
  
• v They have increased their bargaining power. Take aircraft purchasing: KLM's medium-haul fleet consists of Boeing aircraft and Air France's medium-haul haul fleet of Airbus aircraft. This gives them more leverage when negotiating to buy new aircraft from the two aircraft manufacturers.
  
• v They have reduced their operating costs at outstations by integrating their international operations in each country. This is done country by country, taking into account the specificities of each region and the relative strengths of both airlines.
  
• v They have rationalized their maintenance and overhaul costs with a more costeffective allocation of resources. This optimizes the workload at their facilities and reduces inventory costs.
  
• v ·Another extremely important source of synergies is KLM systems. Air France and KLM have already aligned processes and aim to use the same systems in five years time. With the rise of the internet and online sales and Air France growing reliance on automated processes, it is essential for Air France to join up KLM systems. Merger synergies can easily be wasted through technical incompatibility. So this issue has to be addressed right from the start. In the airline industry, they need to align the way they package and sell their services to customers, and the way they serve their customers.
  
• On the revenue side, they have identified synergies in a number of areas.
  
• First and foremost they have taken advantage of the combined strengths of their two airlines, their market position and, above all, their respective hubs, Schiphol and Paris-Charles de Gaulle.
  
• Their strategic priority should be to simultaneously reinforce the potential of Paris and AMS and not to develop one at the expense of the other. In their agreement, they made a contractual commitment to ensure fair development between the two hubs. Not because they wanted to reassure people, but because it was the smartest solution from a strategic viewpoint.
  
• Air France and KLM have built it strategy on an integrated network around their two hubs using their two separate brands. This means they can offer their European customers a choice of over 100 long-haul destinations and, for their non-European customers, the best possible connections through their two hubs to more than 150 European destinations.
  
  • Results and next major challenges
    
• The year 2006-07 took place in an economic context favorable to the air transport.
  
• 
  It was marked by:
  
• v a growth of the world economy which amounts to 4,9 %;
  
• v a better discipline of airline companies in capacity;
  
• v steady exchanges which generated an increase of 6 % traffic
  
• This economic dynamism should go on in the years to come.
  
• 
  In this environment, the group Air(Sight) France KLM realized again a very good exercise with:
  
• v a turnover in increase of 7,6 % in 23,07 billion euro,
  
• v an operating profit in increase of 32,5 % in 1,24 billion euro,
  
• v a clear(net) 891 million euro result.
  
• It knew how to take advantage of the world growth for:
  
• v develop on all the big markets,
  
• v strengthen its profitability by the control of the costs,
  
• v and continue to invest to prepare the future.
  
• This exercise also encloses the first stage in the merger of both companies AIR FRANCE and KLM. Today, a new step opens aiming at an integration strengthened by the strategic functions for the group. It will allow the group to improve still its profitability.
  
• All the activities generated a 23,07 billion euro turnover, in 7,6 % growth. This result places the group in the first world rank of airline companies.
  
• The group loosens one of the best margins among the classic companies. These results were able to be obtained grace to the control of the costs and a significant decline of the financial debts.Fiscal year (M€)Accumulation on March 31st  2007Variation   Turnover currentOperating expenses23 073
  (21 833)   +7,6 %
  +6,4 %  Operating profit Sets the margins operational adjusted *1 240
  6,3%+32,5% +0,9 pt  Result of the operational activities1 233  ns  Cost of the net financial endettemet(140)  (37,5%)  Net Result leaves the group
  Net Result leaves the group (except exceptional operation Amadeus)891891  (2,4%)+80,4%
  
• *Current operating profit adjusted on behalf of the interest charges of the operational rents (34 %).
  
• III) Sky Team Alliance: «Miles» your flight
  
  • Skyteam : Mile's your flight !
    
  • Connecting strategy to relationship
    
• IV) Air France - KLM: new leader of low cost airlines?
  
  • Low cost traffic isn't marginal!
    
• The two main low-costs European Easy Jet and Ryan Air, access to the forefront on traffic intra-European and domestic. Their growth over the period 2000-2004 was respectively +31% to +46% per year!
  
• During the same period, the traffic of normal remained relatively stable. Easy Jet and Ryan Air, therefore, do not establish their current positions by a massive transfer of traffic, but by the combination of two phenomena:
  
• On the one hand, induction of traffic, creating a new kind of application (the trip "low-costs" attracting new customers, which so far does not traveled, the voyage by substituting "pulse" of other forms of entertainment consumption type);
  
• On the other hand, confiscating a large part of the natural growth in traffic linked to economic growth (including classic customer and the business customer segment Affairs sensitive to the price).
  
• "But the trees do not rise up to heaven ..." And despite the exponential growth rate posted by the low-cost in recent years, it would seem that there is a limit to this expansion: While EasyJet and Ryanair may become No. 1 and 2 in terms of traffic intra and domestic, but the characteristics of their model bear inherently limits their growth and the risk of weakening profitability. Offering low prices, completely out of touch with reality, induces a new leisure traffic, which is not prompted by a purchase corresponding to a "need" but to drive a purchase. The bouquet of destinations offered at the beginning of a market suffer the same economic rules as those governing the fashion industry: while reflecting new product trends ephemeral détrône the previous ... For a low-cost, supply creates demand and the offer must be renewed promptly and regularly. The market is artificially stimulated, and once the mature market issuer reached, the development of each new destination is necessarily at the expense of existing destinations, as the market has reached its size limit: some destinations have the potential to retain their visitors, and constitute a substantive trade-for example Ryanair Bergerac or Carcassonne- they are in other words the "basics" of the permanent collection. Other destinations, not having these natural assets, may at the discretion of modes and opportunities for the development of low-cost airlines that operate, to be replaced today by cities on the Spanish coast, by tomorrow cities in Eastern Europe ...
  
  • A record low cost
    
  • The customers' business' interest in the low cost
    
  • Outlook: groupings in perspective
    
  • Transavia: Air France-KLM strikes back (Netherlands low cost airline company)
    
• About transavia.com in France
  
• Air France / KLM Launches Low Cost: Transavia.com