The Air France - KLM Merger Story

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...

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...