AIR FRANCE–KLM: A STRATEGY FOR THE EUROPEAN SKIES

Name: Sonakshi Kashyap

Register no: 2227455

Date: 05-12-22

Submitted to: Dr./Prof. Ramanatha H R

Case Summary

In January 2019, the chief executive officer (CEO) of the French air transport group Air France-
KLM SA (Air France-KLM) was tasked with developing the firm's vision for the upcoming
meeting of the board of directors. 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 in 2019. At the same time, the European air
transport industry had been affected by the rise of local low-cost airlines and the entry of high-
end airlines from emerging economies. In response, Air France-KLM created several
businesses to challenge the new competition, but it had yet to improve performance. In this
changing competitive context, what strategy should the CEO propose?

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. 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.

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.
Problem Statement

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?

Criteria

 Revenue
 Technology
 Customer satisfaction
 Cost to company

Alternatives and evaluation

 How would you describe the company’s business model? What

are its customer value proposition and profit formula?
AFK’s business model is about offering air transport services. The company is
organised into four segments:
Network (>90% of sales); this includes both the passenger and cargo operations of
its two big brands, Air France and KLM, as well as some other brands;
Maintenance; aircraft maintenance for external and internal customers;
Transavia; a low-cost airline that offers passenger flights in Europe;
The above mix shows that the vast majority of AFK’s business is about offering air
transport, mainly to individual travellers. So, for the remainder of the analysis, we’ll
focus on that part of the business. There, the customer value proposition is to
offer fast, safe, reliable, convenient and affordable transport over medium to long
distances.

 How strong do you rate the company’s competitive position?

AFK claims to derive a competitive advantage from its brands (Air France, KLM) and its hubs
(Paris Charles de Gaulle and Amsterdam Schiphol). Capacity constraints at its hubs effectively
shut out new entrants. However, its competitive position does not look very strong as the airline
industry is highly competitive and faces serious issues such as high and fluctuating fuel costs,
and problematic labour relations. In addition, legacy airlines like AFK typically have higher
labour costs than low-cost airlines like Ryanair or EasyJet. Moreover, there is increasing
competition from aggressive Middle Eastern airlines with deep pockets. And in short-haul,
airlines also compete with cars and trains, which typically offer more seating space and fewer
safety hassles.

 Sustainability

Frankly, this seems more like a marketing slogan than an authentic purpose. More
credible would be something about moving and connecting people. The
company creates value by bringing people to other places, and gets paid for doing
so, but insufficiently to cover its cost of capital. At the same time, the company
(like any airline) also destroys a lot of value with its carbon emissions. On balance,
the company is probably value destructive, and the same applies to most of its
peers

SWOT ANALYSIS
Strengths:
• Brands

• Capacity-constrained airports
Weaknesses:
• Strong labour unions

• High-personnel cost base

• Weak balance sheet

• Oil price sensitivity

Opportunities:
Transavia growth
•
Restructuring
•
More integration of group brands
•
Threats:
Low-cost competition
•
Aggressive Middle East carriers
•