Air France – KLM: Changing the Rules of the Game

Introduction
Air France-KLM Case (Som 2009) supplies the background for airways trade and factors impacting companies’ positions, details concerning the history of air-carrier alliances and their challenges. The main focus of the Case is on two companies: Air France and KLM and their determination to merge despite predictions of failure. The period lined by the case ends in 2006. As most aviation companies worldwide were struggling and losing earnings, Air France-KLM was confidently gaining market shares, improving growth and monetary performance. The purpose of this report is to determine and analyze the necessary thing challenges of the aviation business and Air France-KLM merger; consider choices and offer advice on tips on how to obtain stronger place and face up to economical pitfalls (oil prices, political stress, and competitor’s rivalry).

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Information introduced in the Case shall be analyzed using: PESTEL Analysis (Yüksel 2012), Porter’s Five Forces Analysis (Porter 2008), organizational and financial performance, SWOT analysis (Bernroider 2002). Options and proposals might be provided primarily based on Hubbard’s (1996) recommendations.

Macro-environmental/PESTEL Analysis

Politic Sub-factors: Governments of most countries have a powerful influence over air-carrier enterprise.

For instance, Civil Aeronautics Board regulated airways costs till 1977. Most of the companies have been government owned or subsidized without regard to the profitability of the carrier. Countries’ air area was restricted for use by the national air-carriers and entry by foreign carriers was restricted. Changes came with the pattern of privatization of nationwide carriers. Ratification of the Deregulation Act in 1978 by the US Congress had modified the airline trade market panorama. According to Spinetta (2006), the European market grew to become a Single Market removing restriction to all carriers.

 Economic components: The airline industry is heavily dependent on the cost of fuel, variety of vacationers and economical elements corresponding to unemployment and family disposable revenue. Introduction of alliances offered an answer to overcome these restrictions and regulations, widen entry to the restricted markets and supply price discount to the member companies achieved through combined codes, decreased variety of flights, simplified transfers and ticketing, reduced fastened costs. Offering combined frequent flyer programs attract extra passengers.

Reduction of service centers and lowering employment is a really unpopular measure in Europe and difficult because of the union’s activities. Social-cultural components: Improvement of lifestyle, progress of tourism, additional free family income and simplified travel within European Union have an effect on the airline industry. Traditionally, each European nation has its personal airline although a few of them are closely subsidized by the government and not profitable. Since 1997 global alliances turned normal apply for the industry, but not the mergers just like Air France-KLM.  Technological factors: The aviation trade is highly depending on technological improvements. Development of gasoline efficient aircrafts improves fuel consumption and reduces fastened costs. Expending the aircraft capability improves efficiency of airways core enterprise of the variety of passengers and cargo, thus rising income and cash flow.

Environmental elements: Public well being, food and well being and rules, traffic security, sustainable means of doing enterprise are essential elements impacting airlines strategies. Legal components: There are many components affecting the airways, for instance access to the American market was closed until 1978 when the Deregulation Act was accredited by Congress. European Union countries share the legal guidelines and laws. Summary of Findings: PESTEL analysis allows evaluating the surroundings in which the company operates and the trade landscape projection on the longer term. Yüksel (2012) discusses use of weighted measures of every PESTEL issue which improves accuracy of the results and it is suggested to use for more detailed analysis.

Buyer Power: Frequent flyers programs lower buyer’s energy. Ups and downs of the economic system influence household income available for leisure travel. Low-cost firms regulate the fee.
Supplier Power: Boeing and Airbus are the 2 main firms that provide world aviation companies. The fleet is usually renewed as soon as a decade and every plane is very costly. In 2006 Air France-KLM had 565 aircrafts in operation with 225 locations. New Entrants: The barrier for brand spanking new entrants is high as a result of high competitors, authorities regulations, excessive fastened and start-up prices; complicated exit technique due to unionized work pressure.

Substitutes: A number of massive and discounted airlines can be found for passengers to choose on. Other transport options are available; however, airways present the fastest way of long and medium distance journey. They are often substituted by the options for short distances. Cargo providers, warehouses, training and upkeep programs are additionally core companies for airways in addition to carrying passengers.

Industry Rivalry: in 2007, 249 airlines were registered globally, with a hundred airlines spread between 30 European countries. This creates a high rivalry between the airways.

Analysis Summary: Aviation business is extremely regulated with sturdy and increasing buyer power. The barrier for brand spanking new entrants is excessive. The supplier energy is strong however weakening as AirFrance-KLM benefit from the financial system of scale and strong bargaining power. The company protects oil prices by buying cost fixing insurance. There are substitutes out there but air journey stays the preferred choice for business travelers and quick cargo supply.

SWOT Analysis
STRENGTH

 Both CEOs share company and industry future imaginative and prescient and offensive technique. (De Wit & Meyer 2010, p. 397-400)
 Use of non-discriminating insurance policies and promotion of stronger branding. Synergy in IT techniques.
 Guarantees given to the stakeholders. Strong financial place.

OPPORTUNITIES

WEAKNESS

 Geographical distance between Paris and Amsterdam hubs is four hundred km
 Different cultural backgrounds (De Wit & Meyer 2010, p. 415-419)
 High fixed costs
 Union actions and political interference play a major role in the trade.

THREATS

 Alliance attracted such corporations as Aeroflot
 Dependency on gasoline cost and economical which opens huge Russian market. fluctuation.
 More firms could also be acquired or enter the
 European nations don’t improve the partnership with the merged Air France-KLM. runway capacity.
 Improved routs offering achieved by reduction of  Possible threat of integration between redundant flights. Expenditure of network. Northwest and Delta which may create a excessive rivalry in North America.
 Economy of scale in bargaining with the suppliers

Recommendations
The recommendations could be to proceed investment within the newest applied sciences, including IT; renew the fleet to scale back gas consumption and enhance defect-free clients experience; safe locked gasoline prices, construct partnerships to increase lengthy distance flights choices; balance the community choices between the continents; concentrate on stakeholder’s, employee’s and customer’s wants; contemplate strategic partnerships with different airways; proceed increasing market share and improvement of free money flow and strengthening of monetary place.

References
Bernroider E. 2002, ‘Factors in SWOT Analysis Applied to Micro, Small-to-Medium, and Large Software Enterprises:: an Austrian Study’, European Management Journal, Volume 20, Issue 5, October 2002, Pages 562-573, seen 16 March 2014,

De Wit, B and Meyer, R 2010, Strategy Process, Content, Context An International Perspective, Cengage Learning, Andover, UK.
Hubbard, G 1996, “Analysing a case’, in Cases in Strategic Management: Australia and New Zealand, G. Lewis, A. Morkel, G. Hubard, G. Stockport, and
S.Davenport (eds), 2nd ed., pp viiixvi. Prentice Hall, Sydney. Porter M. 2008, ‘THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY’, Harvard Business Review, 86, 1, pp. 78-93, Business Source Complete, EBSCOhost, seen sixteen March 2014,

Som A. 2009, Air France-KLM : Changing the rules of the game. In: Strategy – Process, content, context – An International Perspective. Hampshire (United Kingdom): Cengage Learning EMEA, 2010, p. 823-836

Spinetta J 2006, Cross – Border Mergers & Acquisitions The AIR FRANCE KLM Story Speech by Jean-Cyril Spinetta at the Nyenrode European Business Forum on 23 February 2006, viewed 17 March 2014,

Yüksel I. 2012, Developing a multi-criteria determination making mannequin for PESTEL analysis. International Journal of Business and Management, 7(24), 52-66, seen sixteen March 2014, .

BUSM3922 Case Study:
Air France – KLM: Changing the Rules of the Game