The Air France - KLM Merger Story
Case Code: BSTR124 Case Length: 22 Pages Period: 1998-2004 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.500 Organization: Air France, KLM Industry: Civil Aviation Countries: Europe, France Themes: Mergers Acquisition and Takeovers |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Air France
Air France came into existence in 1933 after five French private airlines operating on European routes merged. In its early years, Air France incurred heavy losses. The French government had to come to its rescue. During World War II, the global airline industry was hit very badly. This led Air France to substantially reduce its operations. After World War II, the civil aviation industry in France was nationalized and Air France became a state owned company. During the mid 1960s, Air France extensively tapped international markets. In 1972, the company established its cargo division. However, it faced severe financial problems during the oil crises in 1973 and 1979. Air France established the Paris-Charles de Gaulle (CDG) Terminal one and Terminal two in 1974 and 1982 respectively. In the early 1990s, Air France acquired the two leading French airlines - Union de Transports Aeriens (UTA) and Air Inter, to fight the downturn. The company then entered into an alliance with Delta Airlines in 1999 and set up Sky team (Refer Exhibit III) in 2000.In 2003, Air France's core businesses included passenger transport, cargo transport and aircraft maintenance services...
KLM
Founded on October 07, 1919, KLM was the world's oldest airline. The company started flying planes to international destinations in 1924. During World War II, the company had to temporarily suspend its operations. After the end of the war, the operations were begun again and were never discontinued since. The company kept improving its services and launched several quality programs to face competition. KLM entered into an important alliance with Northwest Airlines to tap the US market. KLM faced tough competition from low cost airlines during the late 1990s, with the company's margins coming under pressure. Its financial problems were aggravated in the early years of the new millennium. Following the September 11 attacks, the demand for airline travel decreased drastically. Since KLM was badly debt-ridden and had large fixed costs, the recession in the aviation industry hit the company hard. In the year 2002-03, KLM had four core aspects to its business...
The Merger and its Rationale
After evaluating the benefits, Air France's management decided to immediately go ahead with the merger talks with KLM. In its first public announcement of the proposed merger, Spinetta said there were only three obstacles and that every other issue was sorted out. He said, "There are only three things that could make us fall apart. The first would, of course, be for KLM shareholders not to subscribe to the offering. The second and third would be for the European and American authorities not to give us the green light." After getting approval from the authorities, Air France announced the public exchange offer for all equity shares of KLM (Refer Exhibit IV for French public offer regulations). The success of the public offer was important. Air France not only had to secure majority equity in KLM, but had to acquire 95% of the shares so that it could get KLM shares de-listed from the Euronext Amsterdam stock exchange. KLM shareholders were offered 11 shares of Air France and 10 Air France warrants for every set of 10 ordinary shares held by them...
The Pitfalls
Notwithstanding the synergies identified by Air France and KLM, a few analysts raised doubts about the long term success of the merger. They pointed out several factors that could derail the merger, citing cultural differences as the major one. Experts said the French corporate culture was more prone towards authoritarianism and corporates had a very strong hierarchy. This was not the case in Dutch companies. The Dutch considered the French as lazy with a showy behavior, especially in the way they communicated. On the other hand, the French felt the Dutch were too rigid on every single term and condition and were tough to negotiate with. Apart from culture, there were major differences in terms of organizational structure, management style and mentality. Eric Blanc, who headed the Franco-Dutch Chamber of Commerce in Amsterdam warned, "The Dutch and the French psyche simply do not work in exactly the same way." However, to streamline the merger process of two culturally distinct companies, KLM hired an intercultural consultant...
The Aftermath
After the success of the public offer in May 2004, Spinetta started efforts to achieve the identified synergies. Since both companies had few overlapping destinations, it was possible for them to offer more destinations and flights (Refer Exhibit VI for the combined network of Air France-KLM). For destinations served by both airlines, customers were offered services at a lower price. For example, a customer who wanted to go to Hong Kong from Madrid and return to Madrid, could travel with KLM via Amsterdam-Schiphol and return with Air France via Paris-CDG, or vice versa...
Exhibits
Exhibit I: Organizational Structure of Air France-Klm
Exhibit II: Statistics of Passenger Load for Top Ten Carriers (2001)
Exhibit III: The Sky Team Network
Exhibit IV: French Public Tender Offer Regulations
Exhibit V: Air France Stock Price Chart
Exhibit VI: Air France - KLM Combined Network
Exhibit VII: Air France - Consolidated Statements Of Income
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