Air France KLM Alitalia Case

Air France-KLM & Alitalia Case
GROUP 1
COSSON Marina
WEE Sabrina
WU Xiaoyou
SEDBON Kevin
ZILLER Aljoscha
AGENDA
1
2
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
RECOMMENDATIONS
30/11/2014
OVERVIEW
THE BIRTH OF A GIANT

Merger of Air France-KLM in 2004
Air France-KLM realized revenue synergies of 525 millions by 2007. These are expected to hit
1 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
Alitalias trade unions rejected the non-binding offers
In April 2008, Air France-KLMs plan 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?
30/11/2014
ASSESSMENT OF TODAYS AIRLINE INDUSTRY (1/2)
Threat of New
Entrants
Potential
Entrants
(Medium)
Bargaining Power of
Suppliers
Suppliers
(High)
Rivalry
(High)
Buyers
(High)
Bargaining Power of
Buyers
Substitutes
(Medium)
Threat of
Substitute Products
30/11/2014
ASSESSMENT OF TODAYS AIRLINE INDUSTRY (2/2)
RIVALRY among existing competitors is high as major airline companies compete closely and strongly for
global 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.)
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 a
competitive advantage due to huge amounts of
fixed costs. However, the deregulation of the
market facilitates the entry of new entrants (lowcost, second-hand aircrafts, leasing)
The THREAT OF SUBSTITUTES can be seen as

medium 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 be

rated 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 is

medium/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.
30/11/2014
MAIN FACTORS ENHANCING GLOBALIZATION
DEREGULATION
Open-sky treaty Increases international
airlines competition
Arrival of low-cost competitors
Arrival of low-fares carriers
CONSEQUENCE OF A GLOBALIZED
WORLD
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)
11/30/2014
THE CHANGING ROLES OF THE STATE
1909-WW II: Major

funder and strict
regulator
Aviation business was
considered as strategic
investment by states,
initially for defense
purposes. States were
regulating transportation
fees and/or the number
of air carriers allowed.
Post WW II: Negotiator

with other states
Emerging airlines were
faced with problems on
sky boundaries and
rights. Most of the
important nations in the
aviation industry came
up with bilateral
contracts, and finally the
nine freedoms of air.
Since 1970s: Supporter

and supervisor
Deregulation took place
in the worldwide aviation
industry. States lowered
regulation and enhanced
liberalization. Also the
shares of states in
aviation companies went
down.
THE PARADOX
As technology innovates, market expands and more competitors emerge, the aviation industry has become
more 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 seem
to be a paradox in todays point of view, especially since the deregulation took place when the industry was
booming.
The states role 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.
30/11/2014
WHAT IS THE ROLE OF THE STATE?
CATALYST AND
CHALLENGER
Increase investments
to promote competition
Participate in the
economic potential of the
country
ROYAL PREROGATIVES
Ensure citizens security via
diplomatic agreements,
territory security and defense
Maintain order
Define what is right and
make justice
SOCIAL ROLE
Provide infrastructure
and public institutions
to the benefit of society
Protect jobs/welfare
Give a future to the
next generations
STATE
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.
30/11/2014
FUNDAMENTAL DIFFERENCES BETWEEN BOTH

MERGERS
Merger
Air France KLM
Air France KLM Alitalia
Type of Merger
Merger of Equals (Preservation/

Symbiosis)
More Acquisition-like (Absorption)
Post-merger Structure
Remain independently managed

and 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
Structural differences have a high impact on merger decision. The states high 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.
30/11/2014
ALITALIA: APPROPRIATE MERGER CANDIDATE?
BENEFITS
Strengthens Air France-KLM's
dominance worldwide, notably in
Continental Europe
Immediate market power and access

(Italians loyalty to Alitalia)
Build strong economies of scale and
scope
In tune with the strategy of building
a global group with a global
presence
CHALLENGES
Alitalia is riddled with inefficiency
and the cost of remedying those
problems is likely to wipe out
benefits
Risk of labor unrest
Absence of clear vision mission and
objectives for combined entity due to
mismatched expectations
Possible
lack
of
strategic,
organizational and cultural fit
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. AirFrance KLM could leverage on the merger to strengthen its leadership position as a European Giant.
30/11/2014
10
LACK OF NEUTRALITY OF THE ITALIAN

GOVERNMENT IN THE NEGOTIATION PROCESS
National heirloom
Negotiation
process
Unions pressure
Political stake
Privatization
Airline companies are considered a key element in the sovereignty of a state, and
Italia is the national pride (national champion)
Italian government keeps injecting billions of euro into an unprofitable business =>
resiliency
The government plays a key role
Discussions between Prodi government, unions and Spinetta took place in the
beginning of 2008
Influence of the unions on government
Improving satisfaction to foster the governments image and public approval
Upcoming Italian presidential election

Alitalias future became a hot topic and a political instrument to gain votes
A succession of aborted takeovers in the last decade

Alitalia is sold to CAI (Italian consortium) in 2008, as requested by the government
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.
30/11/2014
11
ALITALIA: A COMPETITIVE ADVANTAGE?
STRENGTHS
Symbol of travel and self-fulfillment (good
image and visibility)
Strong Italian loyalty
Significant and historically growing
market = 20M of passengers/year
Diversification of activities: passengers,
cargo, IT infrastructures, maintenance.
International flights represent 44% of total
revenues
Members of sky team alliance
COMPETITIVE ADVANTAGE
Positive image as a marketing
communication tool
Limits opportunity for competitors to enter
this market
High international exposure in tune with an
ever globalized world
WEAKNESSES
Only one year of profit (1998) since its
founding.
Unsolved problems with pilots and crew
members
Lack of management control due to high
participation of the state
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
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.
30/11/2014
12
INTERVENTION OF THE STATE LIMITS NATIONAL

COMPETITIVENESS
LAST RESULT BANK
INEFFICIENCY OF THE INTERVENTIONS
Multiple injections of capital prevent

Alitalias management from
an active reforming mindset
Alitalias business model does not evolve

despite injection of more capital
2008: illegal injection as the only strategy to
stay competitive
STATE
INTERVENTIONS
COUNTER-PRODUCTIVE
NOT PRO ACTIVE
Injection of national bridge loan that makes

the debt heavier and therefore limits
profitability and competitiveness
Keeps on injecting capital to avoid

bankruptcy but does not anticipate or
find any solutions
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.
30/11/2014
13
NEW BID FOR AIR FRANCE-KLM ON ALITALIA?
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, which
made 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.
30/11/2014
14
THANK YOU
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Air France KLM Alitalia Case

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Air France-KLM & Alitalia Case

WHAT IS THE ROLE OF A STATE?

THE AIR FRANCE-KLM MERGER

ANALYSIS OF ITALIAN GOVERNMENT NEUTRALITY

ALITALIAS COMPETITIVE ADVANTAGES

ITALIAN GOVERNMENTS INTERVENTIONS