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"The deal marked a defining moment in the evolution of the European airline industry." 1
- Jean-Cyril Spinetta, CEO, Air France.
"Through this innovative partnership with Air France and our extended participation in the Sky team alliance, we are confident we have secured a sustainable future." 2
- Leo Van Wijk, President & CEO, KLM.
Introduction
On September 30, 2003, Air France3 and KLM Royal Dutch Airlines (KLM)4 announced their merger plans pending the necessary approvals to be granted by the European commission and the US Department of Justice.
Soon after receiving the approvals, in April 2004, Air France launched a public offer to exchange all the existing ordinary equity shares of KLM. The offer was successful as 89.2% of the shares were tendered by KLM shareholders. The merger gave birth to the world's largest airline company,5 called Air France-KLM. Analysts termed the merger 'unique.' Despite the union, both companies would keep their brands alive by flying their planes in their respective names.As per the new organizational structure, the shares of Air France-KLM would be listed on stock exchanges. The merged entity would hold 100% stake in both the operating companies - Air France and KLM (Refer Exhibit I). | |
Jean-Cyril Spinetta (Spinetta), the CEO of Air France since 1997, became the CEO of Air France-KLM and Leo Van Wijk (Wijk), the President & CEO of KLM became the Vice-Chairman of the Board of Directors of the merged entity. Though the managements of both companies were optimistic about the potential synergies that could result from the merger, a few analysts pointed out possible pitfalls.
They commented that significant cultural differences existed between the two companies because of their different nationalities. They also felt that Air France's estimate of the synergies from the merger and the acquisition price paid by the company was on the higher side. Analysts also recalled that earlier, merger talks between British Airways6 and KLM had not materialized.7 Moreover, KLM's strategic alliance with Alitalia (Italy's leading airline) had fallen apart in 2000. They raised doubts about the success of the merger. However, Spinetta was confident that the merger would be a success. In a meeting with industry analysts on November 21, 2003, he said, "In June 2005, we will publish the first Air France-KLM joint results and I am convinced they will demonstrate the appropriateness of our strategy."8 |
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1] 'Major European Merger,' Media Report, http://www.hothousemedia.com, December 2003.
2] 'Major European Merger,' Media Report, http://www.hothousemedia.com, December 2003.
3] Air France is a leading airline of Europe with flights to major destinations in Asia, South America and the US. The French government owns 44% equity stake in the company.
4] Koninklijke Luchtvaart Maatschappij NV, commonly known by its trade name - KLM, was incorporated in 1919 as a public limited liability stock corporation in the Netherlands. By January 2004, KLM had four core activities - passenger transport, cargo transport, engineering & maintenance and the operation of charters and low-cost/low-fare scheduled flights.
5] The merged entity became the largest airline company in the world in terms of revenues in 2002-03. That year, Air France-KLM combined revenues were €19.2 bn, more than any other airline's revenues. In the fiscal year 2003-04, the combined earnings of the duo were €18.21 bn.
6] UK's largest airline - British Airways operates international, domestic and charter air services for carrying passengers, freight and mail and the provision of ancillary services. The company's main business is providing scheduled passenger services, which accounted for approximately 85% of revenues in the fiscal year ended March 31, 2004. British Airways flies about 330 aircraft to nearly 220 destinations in 94 countries. For the fiscal year ended 2002-03, the company reported revenues of £7.688 bn and net income of £72 mn.
7]In June 2000, British Airways and KLM revealed that were contemplating a possible merger. However, the talks did not materialize. Analysts felt the main cause of failure of the merger talks was the issue of control. According to them, KLM's management was not ready to give away the control of the company to the extent to which British Airways wanted.
8]Press Release - Analyst Meet, www.airfrance.com, November 21, 2003.
