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Air France and KLM, Case study

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  1. What are the main drivers of success in the airline industry ? Critically analyze and comment on the evolution of the airline industry
  2. Which is better for an Airline company : an alliance or a merger ?
  3. How would you evaluate the AF-KLM merger proposal ?
  4. What are the critical success factors for such a mega-merger ?
  5. Would you predict that there will be more mergers and alliances in the airline industry?

To be competitive in the airline industry, companies need to be in control of cost control and management. Companies need to reduce their exposition to risk (fuel management) and control the efficiency of each type of plane they operate. As the industry requires high fixed costs, companies have to be as efficient as possible. They need to adopt very fast technological innovation to improve their fleet (adopt new planes to reduce the fuel consumption, and to improve fleet capabilities). From a management point of view, they need to implement revolutions such as online booking and yield management that are ways to improve margins and to be more profitable. Size and flexibility are other drivers of success; because the bigger you are the better you can bargain against suppliers (planes maker but also fuel or maintenance services). Flexibility, especially in times of crisis, makes Airline companies capable of answering as fast as possible, to huge changes in Airline industry (decreasing passenger frequency, increasing oil price).

[...] In order to compare alliances and mergers, we need to analyze the characteristics and differences between both of them. Firstly, alliances permit: - A geographical expansion. - A more efficient route planning which involves a decrease of fixed costs. - A more efficient use of hubs, especially because carriers are focusing more on geographical proximity. Companies could also obtain access to new hubs and thus to new markets. - The sharing of qualities between the different brands but also a common effort in sales and marketing. [...]

[...] Another advantage with the new and larger company is the ability to profit from the already strong partnerships KLM had with Northwest and Continental which enable them to attract other players such as the Russian air carrier Aeroflot to the alliance, which in turn opened up the interesting former soviet airspace. One of the most important success factors of this merger was the synergies from the integration of the two companies' IT systems. The development of one common IT system, combining the two companies' route scheduling and yield management, in addition to a common booking system and frequent flyer program was a significant benefit. [...]

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