1. KLM Approach to Alliances
http://www.youtube.com/watch?v=TCipuJZM4
78&feature=related
2.
3. KLM Background
• First airline to start an alliance in 1989
• Since merger with Air France 2004 the world’s
largest airline
• Participated in over 100 alliances with airlines
and service partners
4. Airline Industry Environment
• European deregulation of airline industry
started in 1987, second step 1993, and 1997
• Development of low-cost carriers put pressure
on established airlines
5. KLM – Northwest
• Sustaining market share
• A partner was necessary to finance the
expansion of Schiphol
• KLM bought 20% of Northwest, provided
Amsterdam-Minneapolis, NW had own block of
seats for which it was responsible to sell
• NW in financial crisis
6. European Alliance: Alcazar 1993
• Pan-European alliance with SwissAir, SAS, and
Austrian Airlines was established after failed
merger talks with British Airlines
• Combined sales were $13 billion = 20%
European market share
7. 1996 Kenya Airways
• KLM purchased 26% of Kenya Airways
• Established joint-code route Amsterdam –
Nairobi
• Kenya Airways established KLMs check-in
system
• Revenues doubled within two years
8. KLM – NW 1997
• Rising tension despite successful and profitable joint
venture
• After a perceived takeover form KLM some NW board
members resigned
• KLM established a special alliance department
• They got rid of their financial investment in NW
• Negotiation of a water-tight joint-venture contract
• Each party gave up offices on the other side of the
ocean which were then operated by their partner
• A alliance steering committee was established
9. Failed Merger with Alitalia
• Establishing a “virtual merger” with shared
sales, administration etc.
• A gradual takeover was planned
• Broke up due to arising uncertain
developments at the Malpensa-Milan airport
• KLM wanted Alitalia to repay EUR100m
• Alitalia then sued KLM for EUR250million
• Aftermath = merged too quickly
10. Code sharing with China Southern
• First agreement of European and Chinese
airlines
• Code sharing on the important Beijing –
Amsterdam, Shanghai - Amsterdam routes
• Only a small team of alliance specialists from
KLM were negotiating the agreement
• Further joint opportunity development
11. The Air France – KLM Merger
• Down Turn – Sept 11, 2001
• 7 Billion Euros in 2001 Mar – 6.5 Billion in
2003
• Conversation with Air France
• Air France – Profitability
12. Air France – KLM Merger
• Air France (81%) – KLM (19%) Merger in May
2004
• Cost saving up to 75 M– 500 Million Euros
• Operating two brand names
• Government Regulations
• Analysts View
• Advantages of Consolidation
13. Air France – KLM Merger
• Overcoming Cultural Barriers France VS
Netherlands – “Understanding”
• Became the worlds largest Airline in terms of
revenue
• “Soft Pragmatic Merger”
• Frequent flyer/ Network Adjustments
• 521m Euros saving – March 2007
14. Effectiveness of Merger
Financial Year 2006-07 AEA Market Share
Offer in ASK (%) Traffic in RPK (%) 2004 2006
xx% Load factor
27.1%
26.2%
20.2%
81% 18.9%
16.9%
79% 16.0%
77%
76%
5.6
4.7 4.3 4.4 5.4
2.5 2.3 3.1
BA LH-LX AEA AF-KL
British Lufthansa
British Lufthansa AF-KLM AF-KLM
AEA Airways + Swiss
Airways + Swiss
ASK: Available Seat Kilometres measures RPK: Revenue Passenger Kilometres
available passenger capacity measures actual passenger traffic
15. Strategy Since Eighties
June 1989
1985 1999
?
1990
1992
? 1993
1995 2000
May 2004
• June 1989 : KLM investment in NW
• September 1997 : Global JV
• Begin 2002 : informal discussions
• Spring 2003 : discussions intensify
• September 2003 : public announcement
• May 04 : entry into force
• September 2004 : Joint holding Air France - KLM
16. KLM’s Approach to Negotiating
Alliances
Commercial or Joint Venture Cross Industry
Tactical
Feed Schiphol Long Term Cross Industry
Extension Marketing office Alliance
Integration 11 Full Time
14 Partners
2 Joint Ventures 4 Associates
18. Building & Managing Alliances
Negotiation Phase
• Possible Partners
Screening • Target and Research/ Choice of Partner
• MOU/Legal matters/Audit & Changes
Scoping • Target for Negotiations
• Commercial Agreement
Contracting • Action Plan
19. Day-to-Day Management
Phase
• Initiating Operations
Implementing • Setting up Infrastructure
• Business Result Reviews
Developing • Training – Cross Exposure
• Evaluation
Managing • Performance Improvement
20. Governance of Alliances
• Alliance Steering Committee (ASC)
• KLM’s Alliance Department
• Building Personal Relationships and Asian
Culture
• Take on Culture
• Corporate
Culture/Professionalism/International Outlook
