air france klm alitalia case
TRANSCRIPT
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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
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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
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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
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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?
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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
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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.
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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
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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.
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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
Q&A