Europe - Case Study - Air France-KLM

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AIR FRANCE–KLM: A STRATEGY FOR THE EUROPEAN SKIES1
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Benjamin Smith was appointed chief executive officer (CEO) of French air transport group Air France–
KLM SA (Air France–KLM) in September 2018, after Jean-Marc Janaillac, the incumbent CEO, resigned.
The group needed to end its losses, and in January 2019, work began to develop the firm’s new vision, to
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be presented at the forthcoming board of director’s meeting.2
Faced with several challenges, such as low profitability, falling prices, and increasing competition, Air
France–KLM had gone from leading the European market in 2004 to fourth position, as local low-cost
airlines and high-end emerging economy airlines joined the competition.3 Air France–KLM had created
several businesses to challenge the new competition but had yet to improve its financial results or increase
its market share.4 In this changing competitive context, what could Smith do to reassess the strategic role
of the group’s business units? What strategy could he propose to return the group to its leadership position?
THE AIR TRANSPORT INDUSTRY IN EUROPE
Airline passengers were divided into two categories: leisure and business.5 The former was typically price
sensitive, while the latter valued flight schedules and service quality. Consumers sought cheap fares using
Internet flight comparators such as Google Flights and Expedia. Through loyalty programs, airlines rewarded
repeat business with benefits such as lounge access, upgrades, free flights, and reduced fares. Although
business travellers represented only 12 per cent of the market, they accounted for up to 75 per cent of profits
on certain routes.6 By 2018, 802 million people travelled within the European Union (EU) annually.7
Core airline costs included fuel, aircraft, and wages (see Exhibit 1), with fuel costs varying substantially
over time (e.g., fuel costs increased 54 per cent from 2017 to 2018).8 Profitability in the wider airline
industry varied, with airlines themselves being the least profitable.9 In Europe, airlines earned an average
of US$6.65 (€5.64)10 per passenger, generating a margin of 3.37 per cent.11
Air transport was regulated by the EU. In 1997, the EU liberalized its air space,12 giving carriers the right
to fly anywhere and encouraging countries to negotiate bilateral agreements on the management of landing
and take-off slots and airport capacity.13 Deregulation had three consequences. First, legacy carriers14
formed hub-and-spoke networks to increase the number of destinations they served, fill their planes, and
reduce operating costs.15 Second, the creation of airline alliances made it possible for individual carriers to
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offer more destinations without increasing costs; by 2018, the three global alliances, Star Alliance,
Oneworld, and SkyTeam, had captured 53.5 per cent of the total market share.16 Third, low-cost airlines17
competed with traditional airlines, capturing an increasing percentage of the market.18
Price wars became commonplace; for example, from 1992 to 2017, the cost of a round-trip Paris–Rome
airfare decreased from €400 to €25.19 European airports reacted to industry changes by moving toward
privatization; by 2018, 59 per cent were public (down from 78 per cent in 201020), 25 per cent were private–
public partnerships, and 16 per cent were private. Consequently, airport charges at major European airports
doubled.21 By 2018, many European airports were on the verge of saturation; the EU estimated that there
would be an overcapacity of 1.9 million flights by 2035 if congestion issues were not resolved.22
Other industry events also increased competition between air and other forms of travel. Given that planes
were the most polluting mode of transport,23 approximately one in five travellers claimed to have reduced
their air travel out of concern for the environment.24 The EU’s 2009 Shift2Rail initiative, which aimed to

increase rail travel significantly,25 drove the development of Europe’s high-speed rail network, leading to a
fall in air ridership as train travel times decreased26—in some cases, by as much as 80 per cent.27

Within the EU, airline companies were exposed to tax systems, social systems, and regulations that varied
between countries. The taxation of airline activities, for example, led to decreases in passenger demand,
flights, and industry jobs.28 In 2017 and 2018, the industry experienced a wave of low-cost carrier
bankruptcies, while active carriers continued to experience significant financial difficulties.29

COMPETITION
Deutsche Lufthansa
Founded in 1953 and based in Cologne, Germany, Deutsche Lufthansa AG (Lufthansa) had the largest
number of seats in the European market, at 12.5 per cent at the start of 2019 (see Exhibit 2). It was also a
member of the Star Alliance, which represented 21.7 per cent of the world’s air traffic.30 The firm owned
six companies: Lufthansa, Swiss International Airlines AG, and Austrian Airlines AG made up the high-
end network segment, while Brussels Airlines, Germanwings GmbH, and Eurowings GmbH (Eurowings)
formed the low-cost (point-to-point) segment.31 Lufthansa also operated three aeronautical service
subsidiaries: Lufthansa Cargo AG, Lufthansa Technik AG, and the LSG Sky Chefs. In 2018, the turnover
breakdown was as follows (see Exhibit 3): high-end business (63 per cent), low-cost segment (12 per cent),
maintenance services (11 per cent), logistics services (7 per cent), LSG Sky Chefs (7 per cent), and other
services (2 per cent).32
The company’s goal was to remain the first choice for shareholders, customers, and employees, based on
quality of service and strict cost control.33 In 2012, Lufthansa introduced its “Synergy, Cost, Organization,
Revenue, Execution” (SCORE) restructuring plan. As part of the plan, Lufthansa transferred all point-to-
point flights from Lufthansa to Eurowings and renegotiated its employee contracts. It reduced hierarchical
levels, promoted communication between subsidiaries, and reduced headcount. By 2014, it posted an
additional revenue of €2.3 billion and focused on upgrading its high-end businesses.34 From 2017 onward,
Lufthansa was one of the few companies worldwide—and the only European firm—to be certified with
five stars by the agency Skytrax.35
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International Consolidated Airlines Group
International Consolidated Airlines Group SA (IAG) was based in Madrid, Spain, and was formed through
the 2010 merger of British Airways (UK) and Iberia, Líneas Aéreas de España, SA Operadora, Sociedad
Unipersonal (Iberia) (Spain). IAG accounted for 9.2 per cent of the European market (see Exhibit 2) and
was part of the Oneworld alliance, which accounted for 15.6 per cent of world air traffic.36 IAG subsidiaries
included British Airways, Iberia, Aer Lingus, and two low-cost companies, Vueling Airlines SA and
OpenSkies SASU (operating as LEVEL). IAG provided its subsidiaries with several commercial services,
such as IAG GBS [global business services], which delivered digital and information technology (IT)
services; the Avios loyalty program, which had 8.7 million members; IAG MRO [maintenance, repair, and
overhaul] and Fleet, which provided maintenance services; and IAG Cargo, which transported goods. Its
main hubs were in London, Madrid, Rome, and Barcelona. The firm’s key activities were passenger
transport (88 per cent), commercial services (6.8 per cent), and freight transport (4.8 per cent).37

In 2018, IAG’s objective was to become the top company in the world by maximizing the creation of value
for its shareholders and customers (see Exhibit 3).38 It sought to extend its dominant position in its main

markets (London, Madrid, Barcelona, Dublin, and Rome) by offering new routes and establishing new
markets with the launch of LEVEL long haul in Paris and LEVEL medium haul39 in Vienna.40
After the merger, Iberia cut 3,800 jobs, reduced the size of its fleet, and renegotiated supplier contracts,
allowing it to compete with low-cost airlines in Spain and capture market share in the premium long-haul
segment.41 British Airways renegotiated employment contracts, reduced its workforce, and froze wages for
four years. It also continued to target higher-end segments with an investment of €7.4 billion.42
Ryanair
Ryanair DAC (Ryanair) was launched in 1984 in Dublin, Ireland, with the goal of creating the cheapest
airline in Europe. Between 1997 and 2019, Ryanair operated 2,100 routes across Europe.43 In 2018, the
firm’s average ticket price was €37 (down 6 per cent from 2017), and it accounted for 8.7 per cent of the
European market.44 It operated three low-cost subsidiaries: Buzz (Poland), Malta Air (Malta), and Lauda
Luftfahrt GmbH (Austria).45
Like other low-cost airlines, initially Ryanair offered only one class of travel to all its passengers, with
limited services (e.g., checked luggage cost extra). The company also stood out from its competitors by
operating out of secondary airports46 and regions that experienced lower air traffic, allowing passengers to
disembark and board quickly and increasing overall capacity.47
However, although Ryanair claimed it was the most punctual airline in Europe and experienced the lowest
percentage of lost baggage and flight cancellations,48 in 2014 it was ranked the second-worst brand in the
world.49 In response, in 2014, the firm launched its “Always Getting Better” plan, which focused on
additional services for business passengers, such as free checked luggage, priority boarding, flexible
booking, and better seats.50 The firm also allowed for a second piece of cabin baggage, reduced the price
of printing a boarding pass at the airport, and enabled seat reservations.51
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EasyJet
EasyJet PLC (easyJet) was founded in the United Kingdom in 1995 by Stelios Haji-Ioannou, a Greek-Cypriot
businessperson, and represented 6.3 per cent of the European market (see Exhibit 2).52 Unlike its rival Ryanair,
easyJet operated from major airports in major cities and competed head on with traditional airlines.
In 2008, it launched its annual easyJet Plus subscription, which allowed members to board first and benefit
from in-flight services.53 In 2018, it introduced a plan to improve customer experience and retention by
optimizing flight schedules for its business class passengers.54 The company also focused on providing
passengers with effortless trips and the “the warmest welcome in the sky.”55 It was the first low-cost airline
to offer a loyalty program.56
Gulf-Based Companies

In the long-haul flight segment, Europe faced competition from Emirates, Qatar Airways Company QCSC,

and Etihad Airways, Persian Gulf–based carriers that provided a luxury experience for the same price as
flights with European-based companies. From 2004 to 2014, the number of routes between Europe and the
Gulf countries increased from 23 to 69.57 Between Europe and Asia, first-class travel on these three airlines
grew 67 per cent, while business class travel grew 47 per cent.58 In 2018, Qatar Airways was ranked the
second-best airline in the world while Emirates was ranked fourth (see Exhibit 4). Lufthansa was the only
European airline present in the top 10 (in seventh position).
THE AIR FRANCE–KLM MERGER
Prior to the Air France–KLM merger, Compagnie Nationale Air France (Air France) and Koninklijke
Luchtvaart Maatschappij NV (KLM) operated as two independent organizations, targeting business and
high-end leisure customers. Air France was launched as France’s national airline in 1933 and privatized in
1999.59 Throughout its long history, the company was considered a part of French heritage. From 1946
onward, the company offered luxurious in-flight services that included private cabins, meals cooked by top
chefs, and champagne and claimed to be the ambassador of French gastronomy.60 In 1995, the company
restructured its hub networks at Paris’s Charles de Gaulle (CDG) and Orly airports. In 2018, 51.4 million
passengers travelled on its airlines, which included Air France, Air France Hop (HOP!), Joon SAS, and
Transavia Airlines SAS (Transavia France).61 Total operating revenue was €166 million with an operating
margin of 1.7 per cent (see Exhibit 5).
KLM was launched as the Netherlands’ national airline in 1919 and was the oldest airline to continue using
its founding brand name.62 KLM’s main hub was located at Schiphol Airport in Amsterdam. It managed
four subsidiaries: KLM CityHopper, for short- and medium-haul flights; Transavia Airlines CV
(Transavia), in operation since 1966 for low-cost travel; and KLM Cargo and Martinair, for the transport
of goods. KLM was the leading airline in the Netherlands, with Transavia in second place.63 In 2018, KLM
posted an operating revenue of €1,073 million and an operating margin of 9.8 per cent (see Exhibit 5).
In May 2004, Air France and KLM merged, creating a joint venture based in Tremblay-en-France.64 The
Air France–KLM Group held 100 per cent of KLM’s economic rights but only 49 per cent of KLM’s voting
rights. The remaining 51 per cent of voting rights remained in the hands of two Dutch foundations (44.84
per cent), the State of the Netherlands (5.92 per cent), and other shareholders (0.30 per cent).65 Air France–
KLM was comprised of two divisions: Air France, with 51,707 employees, and KLM, with 29,818
employees. In 2018, through its 548 aircraft (see Exhibit 6), the group earned 93 per cent of its revenue
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from air passenger and freight transport and 7 per cent from maintenance activities, with a total revenue of
€26.5 billion (see Exhibit 7). The increase in the price of oil and strikes occurring in 2018 negatively
impacted the group’s revenue.66
Air France–KLM focused on three activities: passenger and freight transport, low-cost passenger transport,
and aircraft maintenance. The group’s head office managed several departments common to the two
divisions, including finance, sales and alliances, commercial strategy, engineering and maintenance, cargo,
IT, and the general secretariat. The group managed pricing, sales, and commercial alliances for all its
airlines. It also managed the tiered loyalty program, Flying Blue, which had 15 million members.67 The
program allowed members travelling with the group to accumulate points, which were exchangeable for
tickets, upgrades, or in-flight options. Platinum status benefits included priority boarding and access to
private airport lounges.68 In 2018, Air France–KLM carried 101.8 million passengers,69 of which 60 per
cent travelled for leisure and 40 per cent for business; 55 per cent were Flying Blue members.70

Air France was a founding member of the SkyTeam alliance, which accounted for 16.1 per cent of world
air traffic,71 allowing the group to increase its network to 1,150 destinations in 177 countries.72 Air France–

KLM alone had the largest long-haul network in Europe.73 The alliance also allowed member airlines to
co-coordinate flights, sales, ground operations, and loyalty programs.74 The group also formed ventures
with GOL Linhas Aéreas Inteligentes SA (GOL) (Brazil), Etihad (United Arab Emirates), and China
Eastern Airlines Corporation Limited (China). Their largest joint ventures included Delta Air Lines Inc.
(USA), Alitalia–Società Aerea Italiana SpA (Italy), and Virgin Atlantic Airlines Ltd. (UK), which
dominated the transatlantic market.75
The Air France–KLM Group’s ambition was to become the European aviation leader and one of the world’s
leading airlines through social and environmental responsibility.76 The group was recognized for making
its planes more energy efficient and for using biofuels. For 10 straight years, the group held the top spot in
the Dow Jones Sustainability Index Airlines category.77 Following the eurozone crisis (2009–2011), Air
France–KLM experienced an intensification of competition, facing price pressure from both low-cost
competitors and traditional competitors such as British Airways and Lufthansa. Emerging economy
organizations (e.g., Turkish Airlines, Singapore Airlines, and the Gulf-based companies) also exerted
pressure on long-haul flights through their premium services. In this increasingly complex market, new
strategies were required for each of the group’s subsidiaries.78
THE AIR FRANCE DIVISION
Air France
Until 2013, Air France operated under one brand, targeting the business and high-end leisure traveller. It
had the largest long-haul network in Europe. In response to the changing industry landscape, Alexandre de
Juniac, CEO of Air France from 2012 to 2016, launched two strategic plans: “Transform 2015” and
“Perform 2020.”79 In 2014, Perform 2020 was launched to target a greater share of the business and
premium economy markets by increasing the number of seats in business and premium economy classes,
which were respectively 1.5 and 3.0 times more profitable than economy class. The intent of “Transform
2015” was to enable the group’s companies, particularly Air France, to become competitive again in the
European market. The group cut 2,800 Air France jobs and increased the subcontracting of operations in
French airports, a practice usually done by low cost companies.80 Air France regional flights were
transferred to a new business, HOP! In 2014, Perform 2020 was launched to target a greater share of the
business and premium economy markets by increasing the number of seats in the business and premium
economy classes, respectively 1.5 and 3.0 times more profitable than economy class.81
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In 2016, the “Trust Together” program was launched to enhance customer experience.82 For example, Air
France spent €250 million to modernize its long-haul planes by installing better entertainment systems and
new seats and refining cabin design;83 Air France employees underwent new customer service training; and
gourmet chefs introduced new dishes for first- and business class travellers on main long-haul routes.84
In the first half of 2018, Air France employees launched a series of strikes, demanding wage increases. The
strikes caused flight delays and trip cancellations, leading to a loss of €335 million. 85 The Air France–KLM
CEO at the time, Janaillac, resigned.86 By the end of 2018, Air France’s Net Promoter Score87 was 18 out
of a possible 50 points and the airline was ranked 70th (of 87) on the list of most punctual airlines.88
According to Skytrax, Air France was the 25th best company in the world, down 10 spots from 2015.89
Despite 73 per cent of French citizens holding a positive opinion of the firm, 43 per cent felt that Air
France’s image had deteriorated and 83 per cent said that their fares were excessive.90

HOP!

In 2013, as part of Transform 2015, HOP! was created as a separately managed, single-class airline
dedicated to regional flights. HOP! flew Air France passengers from regional airports into the CDG hub,
enabling long-haul connections from across France. The airline also flew point to point between French
cities,91 focusing on the busier airports and adapting to the schedule needs of business customers.92 HOP!
also offered customers low prices, particularly with flexible price grids,93 along with a self-service website.
The logo included Air France in small print. All flights qualified for Flying Blue miles.94
In addition to HOP!’s offerings, Air France offered several short-haul options. For example, passengers
could book both plane and train travel on the Air France website by choosing from 13 possible rail routes
to and from CDG.95 First-class and business travellers who were provided the equivalent rail travel class,
could earn Flying Blue points, and were entitled to free taxi transfers between the airport and rail station.96
Despite the desire to provide lower prices to its customers, HOP! was often criticized for its high prices.97
In 2018, the short-haul network recorded losses of about €170 million.98
Joon
In 2017, as part of the Trust Together program, Air France–KLM created Joon, also independently managed
within the Air France division, to operate 18 medium- and long-haul routes where Air France was
experiencing losses.99 Joon’s crews were paid less than Air France crews, and operating costs were 13 per
cent lower.100 The airline targeted the 18- to 35-year-old segment, which was price sensitive but also in search
of comfort.101 It offered several travel classes and on-board services such as Wi-Fi and in-flight entertainment.
It also offered a menu that included detox drinks, craft beer, organic products, and tapas.102 When Joon was
launched, Air France–KLM’s CEO defined it as a “long-haul company with lower costs” that stood for
“comfort, business class travel, flexibility, attractive offers, modern chic, relaxed, eco responsible, digital.”103
Business class passengers experienced the same level of service as on Air France, while economy class
services came at an additional cost. Within a year of service, Joon flew at 90 per cent capacity.104
THE KLM DIVISION
As one of the oldest traditional airlines, KLM, like Air France, also targeted the business and high-end leisure
traveller. In 2014, a veteran KLM employee of 21 years, Pieter Elbers, was appointed as chair of the KLM
management board. The focus was on reducing costs, investing in the future, and transforming the organization
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with the intention of increasing profitability and flexibility while becoming more customer-centric.105 KLM’s
chief operating officer, René de Groot (also a veteran employee of 24 years) stated, “We have determined that
we will never be the cheapest or the most luxurious airline. We have the ambition to become the most focused
European airline to customers, most innovative and most effective.”106 As part of the plan, the firm launched
“KLM Compass,” a program aimed at retaining employees and raising their awareness of the company’s mission
and values, employee responsibilities, client expectations, and the principles of leadership.107 In an effort to
increase productivity, in partnership with employees and with the support of new technologies, organizational
hierarchy levels were reduced and employees were given more responsibility.108
In 2016, KLM launched “Digital Studio” to improve customer service and operational efficiency.109 The firm
used technology to track baggage locations, decrease losses, and enable faster baggage offloading in the event
of a passenger’s absence. In addition, to provide competitive customer service, 9,500 cabin crew and ground
staff were given tablets and access to “Appy2Help,” which provided access to customer profiles (e.g., birthday
information). Appy2Help also provided information on connecting flights and allowed passengers to be

checked in and assigned seats, compensated in the event of a broken-down plane, and rebooked in the case of
a schedule disruption.110 Other applications that focused on improving operational efficiency included

Bax@Risk, which could predict which passengers were in danger of missing a flight, and PLUG, which
optimized aircraft parking. Digital Studio apps reduced delays and maximized aircraft use.111
KLM was present on all social networking platforms, supported by the largest digital team in the industry (300
employees).112 The platforms used artificial intelligence to provide customer service including packing
instructions and information on checking luggage size in 10 languages.113 KLM was also the first company to
sell tickets on Facebook Messenger (2016) and the first non-Chinese company to authorize payments via WeChat
(2018).114 Through social media, customers could upgrade their seats or buy in-flight services. KLM also moved
upmarket with “World Business Class,” which provided more services and access to the Schiphol Airport
lounge.115 KLM was considered to be one of the best companies, globally, with a Net Promoter Score of 42.116
THE TRANSAVIA BUSINESS
In service in the Netherlands since 1966, and in France since 2007, Transavia operated 225 lines in Europe
and North Africa.117 As the group’s low-cost carrier, it maximized capacity while offering simplicity in
service and pricing through a light management model and significant outsourcing of activities.118 In 2014,
Air France–KLM launched Transavia Europe to open new hubs in Portugal and Germany and attempted to
renegotiate pilot and crew contracts to save on costs. In response, Air France pilots launched a strike,
leading to €330 million in losses.119 The group abandoned the project, deciding instead to further develop
Transavia France. The unions supported a maximum increase of 40 aircraft on Air France routes.120
Transavia specialized in customer relations with its slogan “Make Low Cost Feel Good.”121 The firm had
1.2 million Facebook followers and managed customer service with the help of artificial intelligence. It was
also the first airline to offer reservations through WhatsApp and Google Home. The firm managed over
500 conversations through the social networking platforms per day.122 In 2018, it transported 15 million
people, who could earn Flying Blue miles, to France and the Netherlands; was awarded for its reservation
service; and was ranked first as the most punctual company in Europe. It was also recognized for its climate-
related commitments, which included promising to ban plastic from its planes by 2020, and it had a
customer satisfaction rate of 86 per cent.123
NEXT STEPS
Smith was scheduled to present his strategy to the board on February 22, 2019. What should he propose to
make Air France–KLM a leader, once again, in the European air transport industry?
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EXHIBIT 1: MAIN COSTS OF AIRLINES
Salary
Deprecia Maintenance Operating Roads and
Companies Costs Fuel (%)
tion (%) (%) Costs * (%) Charges (%)
(%)
Air France–KLM SA 30.0 11.1 9.3 23.0 7.3 19.2
Deutsche Lufthansa AG 24.9 6.2 5.2 33.8 12.6 17.2
International Airlines
22.7 10.1 8.6 23.3 10.3 24.9
Group
Ryanair 14.7 9.6 2.9 25.3 11.2 36.3
easyJet plc 14.7 4.2 6.1 44.4 7.8 22.9
Note: *Operating costs included commercial charges, airport services, aeronautical services, and other unspecified expenses.
Sources: Air France–KLM, Document de référence 2018 (n.p.: Air France KLM Group, 2019),

https://www.airfranceklm.com/fr/system/files/document_de_reference_air_france-klm_2018_vf.pdf; Lufthansa Group, Annual

Report 2018 (Cologne: Deutsche Lufthansa AG, 2019), https://www.lufthansagroup.com/en/themes/annual-report-
2018.html; International Airlines Group, Annual Report 2018 (Harmondsworth, UK: International Airlines Group, 2019),

https://www.iairgroup.com/~/media/Files/I/IAG/documents/annual-report-and-accounts-2018-interactive.pdf; Ryanair DAC,
Annual Report 2019 (Dublin: Ryanair, 2020), https://investor.ryanair.com/wp-content/uploads/2019/07/Ryanair-2019-Annual-
Report.pdf; EasyJet Plc, The Warmest Welcome in the Sky: Annual Report and Accounts 2018 (Bedfordshire, UK: EasyJet
Plc, 2019), http://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/results-centre/2018/2018-annual-report-and-
accounts.pdf.
EXHIBIT 2: MARKET SHARE OF THE TOP 10 AIRLINES IN EUROPE (IN SEATS)
Ranking Companies Share of Seats in Europe (%)

1 Deutsche Lufthansa AG 12.5
2 International Airlines Group 9.2
3 Ryanair 8.7
4 Air France–KLM SA 7.4
5 easyJet plc 6.3
6 Turkish Airlines Group 6.0
7 Aeroflot Group 4.5
8 Norwegian Group 3.1
9 SAS Group 2.8
10 Pegasus Airlines Group 2.2
Source: CAPA Centre for Aviation, “Europe Airline Outlook 2019: The Haves vs the Have-Nots,” February 1, 2019, CAPA,
https://centreforaviation.com/analysis/airline-leader/europe-airline-outlook-2019-the-haves-vs-the-have-nots-457915.
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EXHIBIT 3: FINANCIAL RESULTS OF THE MAIN AIRLINE COMPETITORS (IN € MILLIONS)
Competitor Results 2018 2017 2016 2015 2014

Income 35,844 35,579 31,660 32,056 30,011
Operating Revenue 2,800 3,140 2,190 1,555 1,171
Lufthansa Group
Operating Margin 7.8% 8.8% 6.9% 4.8% 3.9%
Net Profit 2,163 2,340 1,776 1,698 55
Income 24,406 22,880 22,567 22,858 20,170
International Operating Revenue 3,230 2,950 2,535 2,335 1,390

Airlines Group Operating Margin 13.4% 12.9% 11.2% 10.2% 6.9%
Net Profit 2,481 2,231 1,990 1,.539 1,003

Income 7,697 7,151 6,647 6,535 5,654

Operating Revenue 1,016 1,667 1,543 1,460 1,042
Ryanair

Operating Margin 13.1% 23.3% 23.2% 22.3% 18.4%
Net Profit 885 1,450 1,315 1,559 867
Income 6,542 5,598 5,178 5,197 5,021
Operating Revenue 510 448 552 763 644
easyJet
Operating Margin 7.7% 8% 10.6% 14.7% 12.8%

Net Profit 397 338 236 482 470
Sources: Lufthansa Group, Annual Report 2018 (Cologne: Deutsche Lufthansa AG, 2019),
https://www.lufthansagroup.com/en/themes/annual-report-2018.html; Lufthansa Group, Annual Report 2016 (Cologne:
Deutsche Lufthansa AG, 2017), https://investor-relations.lufthansagroup.com/fileadmin/downloads/en/financial-
reports/annual-reports/LH-AR-2016-e.pdf; Lufthansa Group, Annual Report 2014 (Cologne: Deutsche Lufthansa AG, 2015),
https://investor-relations.lufthansagroup.com/fileadmin/downloads/en/financial-reports/annual-reports/LH-AR-2014-e.pdf;
International Airlines Group, Annual Report 2018 (Harmondsworth, UK: International Airlines Group, 2019),
https://www.iairgroup.com/~/media/Files/I/IAG/documents/annual-report-and-accounts-2018-interactive.pdf; International
Airlines Group, Annual Report 2016 (Harmondsworth, UK: International Airlines Group, 2017),
https://www.iairgroup.com/~/media/Files/I/IAG/annual-reports/iag-annual-reports/en/annual-report-and-accounts-2016-
iag.pdf; International Airlines Group, Report and Accounts (Madrid: International Airlines Group, 2015),
https://www.iairgroup.com/~/media/Files/I/IAG/annual-reports/iag-annual-reports/en/annual-report-and-accounts-2014-
iag.pdf; Ryanair DAC, Annual Report 2019 (Dublin: Ryanair, 2020), https://investor.ryanair.com/wp-
content/uploads/2019/07/Ryanair-2019-Annual-Report.pdf; Ryanair DAC, Annual Report 2016 (Dublin: Ryanair, 2017),
https://investor.ryanair.com/wp-content/uploads/2016/07/Ryanair-Annual-Report-FY16.pdf; Ryanair DAC, Annual Report
2014 (Dublin: Ryanair, 2015), https://investor.ryanair.com/wp-content/uploads/2015/04/2014-Annual-Reports-Annual-
Report.pdf; EasyJet Plc, The Warmest Welcome in the Sky: Annual Report and Accounts 2018 (Bedfordshire, UK: EasyJet
Plc, 2019), http://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/results-centre/2018/2018-annual-report-and-
accounts.pdf; EasyJet Plc, Investing in Our Strengths: Annual Report and Accounts 2016 (Bedfordshire, UK: EasyJet Plc,
2017), http://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/result-center-investor/annual-report-2016.pdf;
EasyJet Plc, Making Travel Easy and Affordable: Annual Report and Accounts 2014 (Bedfordshire, UK: EasyJet Plc, 2015),
http://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/result-center-investor/annual-report-2014.pdf.
Page 10 W25116
EXHIBIT 4: SKYTRAX RANKING OF THE 10 BEST AIRLINES IN THE WORLD
Companies 2018 Ranking Ranking Change (from 2017)

Singapore Airlines 1 +1
Qatar Airways 2 −1
ANA All Nippon Airways 3 =
Emirates 4 =
EVA Air 5 +1
Cathay Pacific Airways 6 −1
Lufthansa 7 =
Hainan Airways 8 +1
Garuda Indonesia 9 +1
Thai Airways 10 +1
Source: “Airline of the Year Winners,” Skytrax World Airline Awards, accessed June 11, 2021,
https://www.worldairlineawards.com/airline-of-the-year-winners.

EXHIBIT 5: FINANCIAL RESULTS FOR AIR FRANCE AND KLM

Operating Costs
(€ millions) and 2013 2014 2015 2016 2017 2018
Margin (%)
Air France Division −174 (−1.0%) −314 (−2.0%) 426 (2.6%) 372 (2.4%) 588 (3.7%) 266 (1.7%)
KLM Division 301 (3.0%) 175 (1.8%) 384 (3.9%) 681 (6.9%) 910 (8.8%) 1,073 (9.8%)
Sources: Air France KLM Group, “Full Year 2018 Results,” press release, Air France–KLM, February 20, 2019,
https://www.airfranceklm.com/sites/default/files/q4_2018_press_release_en_vdef_0.pdf; Air France KLM Group, “Full Year
2016 Results,” press release, Air France–KLM, February 16, 2017,
https://www.airfranceklm.com/sites/default/files/communiques/fy_2016_press_release_en.pdf; Air France KLM Group, “Full
Year 2014 Results,” press release, Air France–KLM, February 19, 2015,
https://www.airfranceklm.com/sites/default/files/communiques/2014-q4_press_release_en_def.pdf.
EXHIBIT 6: AIR FRANCE–KLM FLEET—NUMBER OF AIRCRAFT, 2018
Air Transavia Transavia Finance Operating

Aircraft KLM Owned Total
France* France NL Lease Lease
Long Haul 106 66 - - 69 32 71 172
Medium Haul 115 50 34 40 77 28 134 239
Regional 82 49 - - 60 33 38 131
Cargo 2 4 - - 6 - - 6
Total 305 169 34 40 212 93 243 548
Note: * Includes HOP! and Joon.

Source: Air France–KLM, Registration Document 2018, Air France KLM Group, 2019,
https://www.airfranceklm.com/en/system/files/registration_document_air_france-klm_2018_va_def.pdf.
Page 11 W25116
EXHIBIT 7: CONSOLIDATED FINANCIAL RESULTS FOR AIR FRANCE–KLM
(in € millions) 2018 2017 2016 2015 2014
Turnover 26,515 25,864  24,844  25,689  24,912 
Other Activity Income 3 3 2 2 18

Product Activity Ordinary 26,515 25,867 24,846  25,691 24,930
External Charges (15,224) (14,188) (14,243) (15,768) (15,791)

Staff Costs (7,759) (7,620) (7,474) (7,464) (7,316)
Taxes and Duties (166) (158) (164) (155) (169)
Other Income and Expenses 851 862 842 1,110 (65)
EBITDA* 4,217 4,763 3,787 3,414 1,589
Operational Rents (Aircraft) - - (1,073)  (1,027)  -

EBITDA 2,714  2,387 

Depreciation, Impairment, and Provisions (2,885) (2,840) (1,665)  (1,607) (1,718)
Current Operating Results 1,332 1,923  1,049  780 (129)

Disposal of Aeronautical Equipment 4 18 21 (5) -
Other Income and Expenses Non-Current (16) (1,925) 46 305 880
Results of Operational Activities 1,320 16 1,116 1,080 751
Cost of Gross Financial Debt (465) (570) (309) (372) (446)

Cash Income and Cash Equivalents 39 34 49 62 76
Cost of Net Financial Debt (426) (536) (260) (310) (370)
Other Financial Income and Expenses (271) 649 (33) (604) (318)
Pre-Tax Profit of Integrated Companies 623 129 823 166 63
Taxes (227) 21 (294) (30) (209)
Net Income from Discontinued Operations - (8) 270 26 (4)

Net Profit 411 163 792 127 (189)
Note: *EBITDA = earnings before interest, taxes, depreciation, and amortization.

Sources: Air France–KLM, Document de référence 2018, Air France KLM Group, 2019,
https://www.airfranceklm.com/fr/system/files/document_de_reference_air_france-klm_2018_vf.pdf; Air France–KLM,
Reference Document 2016 [in French], Air France KLM Group, 2017,
https://www.airfranceklm.com/sites/default/files/publications/afk_amf.pdf; and Air France–KLM, Reference Document 2014 [in
French], Air France KLM Group, 2015,
https://www.airfranceklm.com/sites/default/files/publications/afklm_doc_de_reference_2014_fr.pdf.
Page 12 W25116
ENDNOTES
1
This case has been written based on published sources only. Consequently, the interpretation and perspectives presented
in this case are not necessarily those of Air France–KLM SA or any of its employees.
2
Fabrice Gliszczynski, “Air France-KLM or Ben Smith’s Mission Impossible?” [in French], La Tribune, September 17, 2018,
https://www.latribune.fr/entreprises-finance/services/transport-logistique/air-france-klm-ou-l-impossible-mission-de-ben-
smith-790726.html.
3
“Low cost” referred to those airlines that offered attractive prices on targeted routes.
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10
All dollar amounts are in USD unless otherwise specified; US$1 = €0.8475 as of December 2018; € = EUR = euro.
11
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122
123

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Europe - Case Study - Air France-KLM

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W25116

AIR FRANCE–KLM: A STRATEGY FOR THE EUROPEAN SKIES1

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be presented at the forthcoming board of director’s meeting.2

THE AIR TRANSPORT INDUSTRY IN EUROPE

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Purchased for use on the European markets, at Brest Business School.

bankruptcies, while active carriers continued to experience significant financial difficulties.29

International Consolidated Airlines Group

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Purchased for use on the European markets, at Brest Business School.

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Purchased for use on the European markets, at Brest Business School.

European airline present in the top 10 (in seventh position).

THE AIR FRANCE–KLM MERGER

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dominated the transatlantic market.75

THE AIR FRANCE DIVISION

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THE KLM DIVISION

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THE TRANSAVIA BUSINESS

EXHIBIT 1: MAIN COSTS OF AIRLINES

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Taught by Dominique Maze, from 11-Feb-2022 to 16-Feb-2022. Order ref F436038.

Purchased for use on the European markets, at Brest Business School.

EXHIBIT 2: MARKET SHARE OF THE TOP 10 AIRLINES IN EUROPE (IN SEATS)

Ranking Companies Share of Seats in Europe (%)

EXHIBIT 3: FINANCIAL RESULTS OF THE MAIN AIRLINE COMPETITORS (IN € MILLIONS)

Competitor Results 2018 2017 2016 2015 2014

International Operating Revenue 3,230 2,950 2,535 2,335 1,390

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Taught by Dominique Maze, from 11-Feb-2022 to 16-Feb-2022. Order ref F436038.

Purchased for use on the European markets, at Brest Business School.

Operating Margin 7.7% 8% 10.6% 14.7% 12.8%

EXHIBIT 4: SKYTRAX RANKING OF THE 10 BEST AIRLINES IN THE WORLD

Companies 2018 Ranking Ranking Change (from 2017)

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EXHIBIT 6: AIR FRANCE–KLM FLEET—NUMBER OF AIRCRAFT, 2018

Air Transavia Transavia Finance Operating

Total 305 169 34 40 212 93 243 548

Note: * Includes HOP! and Joon.

EXHIBIT 7: CONSOLIDATED FINANCIAL RESULTS FOR AIR FRANCE–KLM

(in € millions) 2018 2017 2016 2015 2014

Turnover 26,515 25,864 24,844 25,689 24,912

Other Activity Income 3 3 2 2 18

External Charges (15,224) (14,188) (14,243) (15,768) (15,791)

Operational Rents (Aircraft) - - (1,073) (1,027) -

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Cost of Gross Financial Debt (465) (570) (309) (372) (446)

Cash Income and Cash Equivalents 39 34 49 62 76

Cost of Net Financial Debt (426) (536) (260) (310) (370)

Taxes (227) 21 (294) (30) (209)

Net Income from Discontinued Operations - (8) 270 26 (4)

Note: *EBITDA = earnings before interest, taxes, depreciation, and amortization.

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Turnover 26,515 25,864  24,844  25,689  24,912 

Operational Rents (Aircraft) - - (1,073)  (1,027)  -