On December 14, 2012, French-Dutch airline, Air
France KLM SA (Air France-KLM), announced an addition of €500 million (USD654
million) to its savings target for 2013-14, in an effort to match the margins
of its competitors. Earlier in 2012, the airline had announced a plan for a
€1.4 billion investment in 2013, followed by a further €1.6 billion investment
in 2014 as part of its "Transform 2015" plan. However, with the new
savings target, investment would be cut by €500 million, out of which Air
France would contribute €300 million while the remaining €200 million would be
cut from KLM's budget.
After the changes, Air France-KLM's capital
expenditure would be €1.1 billion in 2013 and €1.4 billion in 2014. "This
is a necessary reduction, but given the group's younger fleet age versus
competitors they have the flexibility to do it. The Transform plan is gathering
pace and should be well on track to deliver," said analyst Donal O'Neill
at Goodbody Stockbrokers.
Air France-KLM was formed through a merger of
French and Dutch carriers in 2004. With sound financials in the initial years,
the merged entity became an example of how a cross border merger could prove a
success. However, from 2009, the company was struggling to remain competitive
in the changing global aviation industry. In 2011, the company's net debt was
at €6.5 billion, €2 billion more than it had been the previous year. The
company also incurred a substantial operating loss for the fourth consecutive
year in 2011. It attributed its deepening indebtedness to increasing fuel
costs, competition from low-cost airlines, and the aftereffects of the
financial crisis. "We have been incapable of financing our investments for
the past three years, as we don't generate enough cash flow," said
Alexandre de Juniac (Juniac), CEO of Air France.
The company had announced the "Transform
2015" plan in January 2012. This included reducing unit costs by 10
percent and slashing €2 billion fromits net debt by the end of 2014. The
company also planned to cut some 5,000 odd jobs to turn around its short- and
medium-haul business.
Aviation experts welcomed the restructuring
initiatives of Air France-KLM. However, they were worried about whether the
company would be able to achieve the targets mentioned in "Transform
2015". According to a Bank of America report published in March 2012,
"the core structural longer-term issue of value destruction in this
business remains unresolved".
On September 30, 2003, Air France and KLM announced
their intention to merge through a public exchange offer. In May 2004, the two
merged to formthe largest European airline group, Air France-KLM. On May 5,
2004, Air France-KLM shares were listed for trading on the Euronext Paris and
Amsterdam markets as well as on the New York Stock Exchange. Two days later,
Air France was privatized following a transfer of the majority of its shares to
the private sector, thus diluting the French government shareholding. On
September 15, 2004, the group's organizational structure was finalized with the
creation of the Air France-KLM holding company, regrouping the two airline
subsidiaries, Air France and KLM. The merger between Air France and KLM was a
unique example, not only because it was a cross border merger, but also because
two airlines with different cultures formed one company where both companies
kept their brands alive by flying their planes under their respective names. In
the initial years, the merger was considered a success story, because of early
anticipation of the needs of consolidation in the European aviation
industry.
In 2007, the company completed its first phase of
integration and became the best performing airline globally in terms of
profitability. It was a global leader covering 240 destinations in 105
countries with its 900 aircraft. In the financial year 2006-07 ended March 31,
2007, Air France-KLM generated revenues of € 23.1 billion, an increase of 7.6
percent year on year. However, the company started facing problems from 2008.
The global financial crisis of 2008-09 affected the airline industry very
badly. The industry responded by reducing capacity and cutting costs. In the financial
year 2008-09, Air France-KLM reported revenues of €23.97 billion and an
operating loss of €129 million. From then onward, the airline started
struggling to improve its financials. In the financial year 2009-10, Air
France-KLM reported a 15 percent decline in revenues to €21 billion, and an
operating loss of €1.28 billion.
In 2012, Air France-KLM continued to counter the
effects of downturns in its domestic market as well as in several of its
foreign markets: Japan, the Middle East, and North Africa. In France, the
company was grappling with high costs due to increasing fuel prices. Moreover,
weak economic growth due to Europe's financial crisis aggravated the problems
for the airline. On October 8, 2012, Air France-KLM and Etihad Airways signed
an agreement to codeshare on flights across the airlines' networks. The
codeshare agreement would allow both airlines to offer joint codes on
destinations in Europe, the Middle East, Asia, and Australia. At the same time,
Air France- KLM also announced another codeshare agreement with Air Berlin , in
which Etihad Airways held a 29.21 percent stake
1. Analyze the problems faced
by Air France-KLM 2. Evaluate the turnaround strategies adopted by the
airline
3. Analyze the issues and challenges in
transcontinental and cross-cultural alliances.
4. Analyze the future challenges of the airline and
how these can be overcome.
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