air france klm alitalia case

8/10/2019 Air France KLM Alitalia Case

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Air France-KLM & Alitalia Case

GROUP 1

COSSON Marina SEDBON Kevin

WEE Sabrina ZILLER Aljoscha

WU Xiaoyou


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AGENDA

230/11/2014 Air France-KLM & Alitalia Case

OVERVIEW

ASSESSMENT OF TODAYS AIRLINE INDUSTRY & FACTORS

OF GLOBALIZATION

CHANGING ROLE OF THE STATE DURING THE AVIATION

INDUSTRY EVOLUTIONS

WHAT IS THE ROLE OF A STATE?

THE AIR FRANCE-KLM MERGER

ANALYSIS OF ITALIAN GOVERNMENT NEUTRALITY

ALITALIAS COMPETITIVE ADVANTAGES

ITALIAN GOVERNMENTS INTERVENTIONS

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9 RECOMMENDATIONS

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OVERVIEW


THE BIRTH OF A GIANT

Merger of Air France-KLM in 2004

Air France-KLM realized revenue synergies of525 millions by 2007. These are expected to hit1 billion by 2011

Strong benefits : customer loyalty, global networks, Schipol and Charles de Gaulle hubs and

brand images

AN ATTEMPT TO EXPAND THE BUSINESS BUT

In January 2008, Spinetta expressed his willingness to start negotiations to acquire Alitalia

Alitaliastrade unions rejected the non-binding offers

In April 2008, Air France-KLMsplan was rejected which ended all negotiations

In October 2008, Alitalia was sold to Compagnia Aerea Italiana (CAI), a consortium of Italian

investors

After rejection from Alitalias trade unions, Air France-KLM withdrew its initial offer to repurchase 100% of

Alitalias stocks in April 2008.

Why did this operation fail?

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Rivalry

(High)

PotentialEntrants

(Medium)

Buyers

(High)

Substitutes

(Medium)

Suppliers

(High)

ASSESSMENT OF TODAYS AIRLINE INDUSTRY (1/2)

Bargaining Power of

Suppliers

Threat of

Substitute Products

Bargaining Power of

Buyers

Threat of NewEntrants


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ASSESSMENT OF TODAYS AIRLINE INDUSTRY (2/2)

The THREAT OF NEW ENTRANTS is seen as

medium since securing airport infrastructure &

facilities is difficult (a swarm of competitors

already exists). Existing firms also have acompetitive advantage due to huge amounts of

fixed costs. However, the deregulation of the

market facilitates the entry of new entrants (low-

cost, second-hand aircrafts, leasing)

The THREAT OF SUBSTITUTES can be seen asmedium with other transportation alternatives not

having the same speed, convenience and flexibility

as air travel. However, in domestic connections,trains, cars and long distance buses can be seen

as possible substitutes. The latter can be more

time-consuming but sometimes cheaper.

The BARGAINING POWER OF BUYERS could berated high as air passengers have a wide variety of

airlines to choose from. The internet enabled them

to compare for the best ticket prices online and

save money. There are low switching costs

between firms since most of the airlines and

destinations are the same.

The BARGAINING POWER OF SUPPLIERS ismedium/high. Regarding, aircraft suppliers there

is a duopoly Airbus and Boeing that controls

the market. Switching suppliers is difficult since

most airlines have long term contracts and

contracts need to be financed with a lot of money.

RIVALRYamong existing competitors is high as major airline companies compete closely and strongly forglobal market share and growth. The fixed costs are extremely high. The rivalry is intense (open-sky

agreement) though competition is lessened by global alliances (Frequent Flyer programs, shared airport

lounges, etc.)


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MAIN FACTORS ENHANCING GLOBALIZATION

DEREGULATION

Open-sky treatyIncreases internationalairlines competition

Arrival of low-cost competitors

Arrival of low-fares carriers

CONSEQUENCE OF A GLOBALIZEDWORLD

Expansion of tourism (eagerness to travel,

discover new countries, explore new

territories)

Business trips and expatriation are rising,

due to firms internationalization

ALLIANCES

Partnerships between airlines companies

Frequent flyer programs

Round the world tickets

MERGERS & ACQUISITIONS

Economies of scale, cost synergies

Better grasp of the market

Benefit of global network

Globalization of the airline industry is two-fold : it relies on internal factors (alliances and mergers &

acquisitions) and external factors that are the consequence of an ever-globalized mindset (deregulation,

tourism, business as usual)


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THE CHANGING ROLES OF THE STATE


1909-WW II: Majorfunder and strictregulator

Aviation business wasconsidered as strategicinvestment by states,initially for defensepurposes. States wereregulating transportationfees and/or the numberof air carriers allowed.

Post WW II: Negotiatorwith other states

Emerging airlines werefaced with problems onsky boundaries andrights. Most of theimportant nations in theaviation industry cameup with bilateralcontracts, and finally thenine freedoms of air.

Since 1970s: Supporterand supervisor

Deregulation took placein the worldwide aviationindustry. States loweredregulation and enhancedliberalization. Also the

shares of states inaviation companies wentdown.

The statesrole is becoming less dominant, both in terms of funding and regulations, during the evolution of

the worldwide aviation industry. The paradox is that the development of the aviation industry is making the

industry more complicated and yet the states are loosening control to it.

THE PARADOX

As technology innovates, market expands and more competitors emerge, the aviation industry has becomemore and more complex. However, instead of bringing in more regulations in response to this development,

governments are gradually giving away their control over the companies and the industry, which might seemto be a paradox in todays point of view, especially since the deregulation took place when the industry wasbooming.

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WHAT IS THE ROLE OF THE STATE?


STATE

CATALYST ANDCHALLENGER

Increase investmentsto promote competition

Participate in theeconomic potential of thecountry

ROYAL PREROGATIVESEnsure citizens security viadiplomatic agreements,territory security and defense

Maintain order

Define what is right andmake justice

SOCIAL ROLE

Provide infrastructureand public institutionsto the benefit of society

Protect jobs/welfare

Give a future to thenext generations

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The role of a state is very comprehensive and diversified. Historically bound to protect its citizens and make

justice, its role has evolved as time went by to have deeper responsibilities in the economical and social

fields.


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FUNDAMENTAL DIFFERENCES BETWEEN BOTH

MERGERS

Merger Air FranceKLM Air France KLM -

Alitalia

Type of Merger Merger of Equals (Preservation/

Symbiosis)

More Acquisition-like (Absorption)

Post-merger Structure Remain independently managedand preserve their respective

identities

Major restructuring plans

Level of Government

Intervention and Support

Limited government intervention

Support from many fronts

High level of government intervention

due to pressure from labor unions

and upcoming elections


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Structural differences have a high impact on merger decision. The stateshigh intervention and Alitalias

current restructuring plans have been important factors in the negotiations failure between Air France-KLM

and Alitalia. The weights of the two sides of a merger (a merger of equals or not) can also change the game.


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BENEFITS

Strengthens Air France-KLM'sdominance worldwide, notably inContinental Europe

Immediate market power and access(Italians loyalty to Alitalia)

Build strong economies of scale andscope

In tune with the strategy of buildinga global group with a globalpresence

CHALLENGES

Alitalia is riddled with inefficiencyand the cost of remedying thoseproblems is likely to wipe outbenefits

Risk of labor unrest

Absence of clear vision mission andobjectives for combined entity due tomismatched expectations

Possible lack of strategic,organizational and cultural fit

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Despite its downsides and considering the state of the market and the objective of air companies back in the

2000s, Alitalia is a relevant merger candidate due to its international presence and market power. Air-

France KLM could leverage on the merger to strengthen its leadership position as a European Giant.

ALITALIA: APPROPRIATE MERGER CANDIDATE?


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LACK OF NEUTRALITY OF THE ITALIAN

GOVERNMENT IN THE NEGOTIATION PROCESS


Airline companies are considered a key element in the sovereignty of a state,andItalia is the national pride (national champion)

Italian government keeps injecting billions of euro into an unprofitable business =>resiliency

National heirloom

The government plays a key role

Discussions between Prodi government, unions and Spinetta took place in thebeginning of 2008

Negotiationprocess

Influence of the unions on government

Improving satisfaction to foster the governments image and public approvalUnions pressure

Upcoming Italian presidential election

Alitalias future became a hot topic and apolitical instrument to gain votesPolitical stake

A succession of aborted takeovers in the last decade

Alitalia is sold to CAI (Italian consortium) in 2008, as requested by the governmentPrivatization

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Government do not keep its promise on its neutrality. The political stake, the fact that Alitalia is a national

symbol and the key voice of the unions pushed the government to break its promise and take active

participation in the negotiation process.



STRENGTHS

Symbol of travel and self-fulfillment (good

image and visibility)

Strong Italian loyalty

Significant and historically growingmarket = 20M of passengers/year

Diversification of activities: passengers,

cargo, IT infrastructures, maintenance.

International flights represent 44% of totalrevenues

Members of sky team alliance

WEAKNESSES

Only one year of profit (1998) since itsfounding.

Unsolved problems with pilots and crew

members Lack of management control due to high

participation of the state

COMPETITIVE ADVANTAGE

Positive image as a marketing

communication tool

Limits opportunity for competitors to enterthis market

High international exposure in tune with anever globalized world

No signs of recovery no matter the injection

of capital made

Alitalia has lost money for years due to []political and government and political

interference

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Alitalia suffers from management issues but has the potential to be among the leaders of the airline

industry due to its international presence and its attractive markets. Despite its poor results, Alitalia is a

competitive advantage of Italia.

ALITALIA: A COMPETITIVE ADVANTAGE?


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INTERVENTION OF THE STATE LIMITS NATIONAL

COMPETITIVENESS


LAST RESULT BANK

Multiple injections of capital prevent

Alitalias management from

an active reforming mindset

INEFFICIENCY OF THE INTERVENTIONS

Alitalias business model does not evolvedespite injection of more capital

2008: illegal injection as the only strategy tostay competitive

COUNTER-PRODUCTIVE

Injection of national bridge loan that makes

the debt heavier and therefore limitsprofitability and competitiveness

NOT PRO ACTIVE

Keeps on injecting capital to avoid

bankruptcy but does not anticipate or

find any solutions

STATE

INTERVENTIONS

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The states intervention is limited to repeated capital injections or loans that seem inefficient and hinder

Alitalias national competitiveness due to a lack of active role and reforms.



RECOMMENDATIONS

Despite the negotiation failure, Alitalia is still attractive (Italian market, international presence, brand

image) and is interesting to competitors such as Lufthansa or Russian airlines.

Solution : Wait for the division of Alitalia into its profitable and unprofitable business and make the

most of the necessity of an established air carrier to facilitate the merger between Alitalia and AirOne

A two-steps process :

Joining the CAI consortium through the 20% non voting stake

Completely integrate Alitalia into the Air-France KLM Group

WHAT HAPPENED

Alitalia joined Air France-KLM group and Delta airlines in a Joint Venture partnership in 2010, whichmade it a member of the trans-Atlantic network.

Due to Alitalias bad financial position, Air France-KLM wrote off its 25% shares and was not willing to

inject more capital.

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NEW BID FOR AIR FRANCE-KLM ON ALITALIA?


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THANK YOU

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air france klm alitalia case

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