Air France and KLM, Case study

Résumé du document

To be competitive in the airline industry, companies need to be in control of cost control and management. Companies need to reduce their exposition to risk (fuel management) and control the efficiency of each type of plane they operate. As the industry requires high fixed costs, companies have to be as efficient as possible. They need to adopt very fast technological innovation to improve their fleet (adopt new planes to reduce the fuel consumption, and to improve fleet capabilities). From a management point of view, they need to implement revolutions such as online booking and yield management that are ways to improve margins and to be more profitable. Size and flexibility are other drivers of success; because the bigger you are the better you can bargain against suppliers (planes maker but also fuel or maintenance services). Flexibility, especially in times of crisis, makes Airline companies capable of answering as fast as possible, to huge changes in Airline industry (decreasing passenger frequency, increasing oil price).

Extraits

[...] Air France and KLM: A Case study What are the main drivers of success in the airline industry? Critically analyze and comment on the evolution of the airline industry To be competitive in the airline industry, companies need to be in control of cost control and management. Companies need to reduce their exposition to risk (fuel management) and control the efficiency of each type of plane they operate. As the industry requires high fixed costs, companies have to be as efficient as possible. [...]

[...] - To have wider a range than a merger; more companies, and larger scope. One of the major problems of alliances is that there are multiple balance sheets and income statements for the alliance, as each company has one. Therefore companies do not make the same profits (or losses). In relatively similar goals, mergers allow: - Big economies of scale. For instance, with better route planning, costs efficiency, common sales and marketing efforts. The reduction of costs, especially fixed costs are significantly more important than for an alliance. [...]

[...] A bigger company would have better bargaining power with the suppliers. The companies both operated large, modern hubs. In addition to this the two companies' enjoyed a broad network which they managed well, both in the sense of optimizing routes as well as in the sense of avoiding cannibalization. Another advantage with the new and larger company is the ability to profit from the already strong partnerships KLM had with Northwest and Continental which enable them to attract other players such as the Russian air carrier Aeroflot to the alliance, which in turn opened up the interesting former soviet airspace. [...]

[...] - A better bargain power in the procurement phase. The potential difficulties in mergers are cultural differences that may be hard to overcome, problems within existing alliances and difficulties for the target firm. Finally, alliances are easier and less risky, but advantages, although similar, are more significant for mergers. How would you evaluate the AF-KLM merger proposal? In order to evaluate the AF-KLM merger we have decided to look at the compatibility of the two companies, which, if considerable, would lead to significant synergies. [...]

[...] This will not only reduce costs but also reduce the rivalry within the industry. The airline industry has been faced with many problems which have led to reduced demand in the last few years; the H1N1, increased risk of terrorist attacks, increased fuel costs and introduction of the low-cost-no frills actors have all resulted in intense competition. These factors along with deregulation of the international air space, strongly indicate a move towards more mergers and alliances. Recession also means financial distress for some of the industries actors, making them easier takeover targets. [...]