KLM's Alliances

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KLM's Alliance

Text of KLM's Alliances

KLM history of Strategic Alliances

The KLM Approach to Alliances BYTeam No : 10 1. Meka Manga Rao 5. Sushant RoyAPSL 01 , IIM Lucknow 2. G.Satyanarayana 6. Ankur SharmaMumbai 3. Sandeep Mahimkar 7. Harmeet Singh28.09.2013 4. Prashant Thakur

1A Case Analysis

1The Global Airline Industry at Glance The Global Airline Industry has always attracted attension from Governments, Businesses, the Media and Citizens as it is primary mode of long-distance travel.In 2006, Airlines Carried 2 billion Passengers and 2/3 took Domestic Flights and 1/3 took International Flights.Despite of downturn due to Sept 11, 2001 Attacks in US , Industry posted Compound Annual Growth of 6.5 % in Passengers and 8.7% in total Market Value since 2002.As 2006, the Industry is valued at $ 345.7 billion, half of it attributed to Americas and 28.4 % and 21.1% was in Europe and Asia Pacific Respectively.In 1997, five major Airlines United, Lufthansa , Scandinavian Airlines Systems ( SAS) , Air Canada and Thai Airways International- came together to form Start Alliance.Oneworld and Skyteam Alliances followed in 1998 and 2000 respectively.The aim of each Alliances was to strengthen each airlines position, allowing passengers to benefit from the expanded network and to receive benefits ( Such as collecting points for Frequent Flier Program ) .In Europe, load factor was 69%, though Airlines Breaks Even at 75 % Load Factor as a Thumb Rule.

KLMs History of Alliances19191946 - 50Late 1980sMain objective during 1980s: Creating hub & Spoke system in SchipholIncrease mkt. share to sustain competition against big competitorsOffering services from secondary cities to Schipol

KLMs History of Alliances contd198919921993Virtual JV between KLM & NW Airline Enhanced code sharing. Assets owned separately.Objective: To overcome antitrust competition law and push for deregulation to allow flights between US & Netherlands

KLMs History of Alliances contd19961994-971997Resignations of 3 KLM executives and 2 lawsuits filed by KLM on NWA. Negotiation process startedContribution margins was splitted 50:50. Exit clause included in contract

Virtual JV Model

1997-200020002001April 2000: KLM pulled out of alliance as Malpensa-Milan airport being developed as major hub and delay in privatization process.KLM paid 250m Euro to Alitalia

KLMs History of Alliances contd

The Northwest Alliance (1994-1997) The KLM-NorthWest North Atlantic joint venture had produced a doubling of trans-atlantic traffic for both carriers and an additional contribution of $150 m per year for KLM and $50m per year for NorthWest.The alliance provided an estimated 30% of KLMs profit.In 1997, the alliance operated 16 routes producing revenues of $1.7 billion.But the relationship hit a number of dramatic tension points as NorthWest board members adopted a Poison Pill Strategy to make the purchase price unattractive.To help in the negotiation process and facilitate KLMs alliances with other airlines, KLM Alliances was formed.The negotiations were centered on formulating a long term commitment, resolving KLMs ownership in NorthWest and further integrating both airlines.The key negotiating teams were made up of six key managers from each side led by the commercial directors.The negotiations went on for several months and the executives resolved a buy back plan of NorthWest stock at $40.125 per share in a deal valued $1.2 billion over a four year period.In coordination with the share buy back, the airlines cemented a 10-year joint venture agreement. The joint venture was based on a 50/50 capacity split for balanced governance, and to avoid objections from the pilots unions.Costs were deducted from each airlines revenues to derive a contribution margin.

The Northwest Alliance - Virtual Joint Venture ModelSuccess factors for the virtual Joint Venture Model.

Split based on a 50/50 capacity makes it much easier.Both airlines can sell each others flights without having to worry about who will benefit.Splitting it based on capacity makes it fair, quick and straightforward.An exit clause was included in the contract, which required that either side give three years notice before winding up the venture.The notion was to expand the network from 16 to 23 routes and take revenues from $1.7 billion to $2.2 billion in 1998.The joint venture called for the combination of sales, administration and reservations offices.Sharing of Passenger Name Record (PNR) data detailing a passengers reservations , fares and payments in order to improve the integration of service for a traveller.Due to long term nature of the contract the fears of the employees were addressed.To govern the Joint venture, an Alliance steering Committee (ASC) was formed with a total of 12 top executives from NorthWest and KLM from Alliance , Network, Marketing, Sales, Operations , Cargo and Finance Depts . The ASC met every quarter to review strategic, financial and operational details.In addition to the ASC, there were initially between 10 and 12 coordinating groups for specific tasks

The Northwest Alliance-Cultural DifferencesSome observers commented on the cultural differences. Though the US and Dutch cultures are not as far apart as many others, differences still exist.NorthWests executive force averages between 5-6 years in position while KLMs managers have between 15 -18 years experience.Management styles differ as managers are born in KLM and die in KLM

KLM- The failed merger with AlitaliaDuring the successful launch of KLMs long-term commitment with Northwest, KLM management was eager to merge with another major European airline.In 1977, KLM began talks with Alitalia to step up collaboration.Together, the airlines embarked on joint scheduling, sales offices and a standardization of policies and procedures in anticipation of future hook-up.In November 1999,KLM and Alitalia kicked off a joint venture with a Master Cooperation Agreement for both passenger and cargo operations.The plan Was to eventually merge completely upon the Italian governments divestiture of 53% of the airline .However , in April2000, KLM pulled out of the alliance citing unacceptable business risk arising from doubts over the development of the Malpensa-Milan airport as a major hub and the delay in the privatization process.KLM asked that Alitalia repay 100 million that it had invested in Malpensa airport.Alitalia refused to repay the amount and sued KLM for 250 million for pulling out of the agreement.Through arbitration ,KLM paid the 250 million to Alitalia.

Withdrawing from the agreement was what KLM CEO said was the most difficult decision of his career.Another executive commented on the learning garnered from the failed merger: We tried to do the integration as a big bang. We merged very quickly, in fact too quickly.We learned thats not the way to do it because there were many issues with Malpensa and other local airports.Some of the problems were naturally outside of the control of Alitalia, but perhaps at that time , KLM misjudged its ability to implement such a quick integration.However on a positive note ,KLM was able to restore its operations after the de-merger. Within a month things were pretty much back to normal.

KLM- The failed merger with Alitalia

Strategic Alliance with Kenya Airways in 1996Salient Features :

In 1996, The Kenyan Government short-listed three foreign Airlines to take over 26 % stake in National Carrier , Kenya Airways.KLM was selected as the Winner having bid $ 26 m for Ownership and Additional $ 3 Million in services and training.Final Capital Structure the Kenya Airways as follows : * KLM 26 %, Govt.-23 % , Foreign Investors -14 % , * Employees 3 % and Domestic Investors 34 %.Ownership in Kenya Airways facilitated the negotiation process to set up joint code-sharing routes and operational integration.De Graauw commented on the negotiations : After the shareholding deal , the commercial agreement negotiations were quite fast-probably five or six meetings over a period of a few months . The scope of the relationship was smaller so it was a more straightforward negotiation

Success Story:

The agreement called for Kenya Airways to add three flights per week between Nairobi and Amsterdam.KLM had four flights per week from Amsterdam to Nairobi and as part of the accord, all seven flights were operated as joint code-sharing flights.As a part of coordinarion, Kenya Airways restuctured its European routes by eliminating routes to Copenhagen , Stockholm , Zurich and Frankfurt and adding a route to Amsterdam.Kenya Airways implemented KLMs check-in and revenue management systems as well as its Flying Dutchman, Frequent Flyer Program and for its part KLM Implemented Training Programs for Kenya Airways.The joint code-sharing flights proved immediately beneficial to both airlines : revenues more than doubled within two years.

Strategic Alliance with Kenya Airways in 1996Salient Features :

Like Most airlines , KLM passed through a difficult period after general downturn following September 11, 2001.The Companys revenue fell from high of 7 billion in its 2001 ( year ending with March 20112 ) to 6.5 billion in 2003.It began conversations with Air France, one of the few airlines which had maintained profitability during the downturn on a possible merger.After a year and half, on Sept 30, 2003, the two carriers formally announced their plans to merge to create Worlds largest airline in terms of revenues ( 19.2 billion ).Air France-KLM would keep both brands and their respective hubs and operations.Air France would won 81% and KLM 19% of the new group.Air Frances CEO , Jean-Cyril