The Air France - KLM Merger Story

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Case Details:

Case Code : BSTR124
Case Length : 22 Pages
Period : 1998-2004
Organization : Air France, KLM
Pub Date : 2004
Teaching Note :Not Available
Countries : Europe, France
Industry : Civil Aviation

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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The European Civil Aviation Industry

Europe was the second largest market for the civil aviation industry after the US. The industry provided millions of jobs in Europe, related to airport ground management activities, technical aspects, maintenance, customer service and air traffic control.

Prior to 1997, the European civil aviation industry was highly protected and national carriers enjoyed a monopoly (in some cases a duopoly) over routes between countries.

Air traffic movement among European countries was subject to various complex rules and bilateral agreements between nations, which hindered the industry's growth.

Though there was a high demand for air travel, travellers did not have much choice and had to accept the indifferent service and high fares. Airline companies operated in a restricted environment with high government influence in the management of national carriers.

Owing to high government interference, many airlines were run inefficiently, with low passenger load factors and low profitability.

The early-1990s were turbulent years - the slump caused by the Gulf War had a negative affect on the industry and acted as a precursor to many takeovers and acquisitions. Many airlines were in serious financial trouble because of depressed market conditions. High fuel costs and overcapacity also affected profitability.

The liberalization of the European civil aviation industry (started in January 1993, with the objective of creating a single market for civil aviation) was completed in April 1997. The aim was to make airline companies profitable, generate more business for them and increase facilities available to customers. The privatisation process was slow and gradual, as production improvements and reduction in staff had to be achieved through negotiations with workers. The strict licensing norms for new entrants also acted as a major barrier for effective and fast deregulation. Once the process of liberalization was completed and state intervention decreased, the market changed for the better and became more competitive.

After liberalization, airlines were free to decide in favor of improving products and services. This expanded the market and increased their profitability.

However, the opening up of the industry did not lead to any dramatic change in airfares. Also, it could not prevent the failure of major airline companies or induce higher foreign penetration into domestic markets...

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