Air France\'s alliance with KLM reveals a new industry pattern PDF

Preview

Summary

Air France's alliance with KLM reveals a new industry pattern article summary of the 2003 incident that ocured...

Description

Air France's alliance with KLM reveals a new industry pattern Sep 18th 2003 | from the print edition

Love birds AIR FRANCE is in advanced negotiations with KLM Royal Dutch Airlines with a view to “intensive co-operation”, although “critical points” were still under discussion, the two airlines confirmed on September 17th. Shares of KLM have been soaring in expectation of the two carriers announcing some sort of marriage. Most countries ban cross-border airline mergers. International traffic rights are tied to designated domestically-owned carriers under bilateral government deals. So a full merger is hard to do. Ideally, the carriers would form a jointly-owned company with the KLM brand kept alive as a Dutch subsidiary exercising the international traffic rights from the Netherlands. But the Dutch carrier tried twice to tie up with British Airways, in 1991 and in 2000, only for talks to break down over British Airways's refusal to pay what KLM asked for a non-controlling stake. The same concerns may well rule out a full merger of KLM and Air France. More likely is a looser tie-up. KLM will join the global SkyTeam alliance of airlines, based around Air France and America's Delta Air Lines. Under that umbrella, KLM and Air France will pool flights, co-ordinating schedules and prices as much as is allowed by European Union (EU) competition authorities. There may even be symbolic exchanges of equity stakes. British Airways and Lufthansa are watching closely, and can be expected to complain if integration goes too far. Air France has also recruited Alitalia to the SkyTeam group, which will now rival the other two global alliances, Star (Lufthansa, United Airlines, Singapore) and oneworld (British Airways, American Airlines, Cathay Pacific) in terms of traffic. Alitalia and KLM had no choice but to seek salvation as junior partners in big alliances: both are weak, indebted and have been hurt by the recent aviation slump. KLM had held talks with Alitalia about joining forces, and for the past year had been weighing up whether to throw in its lot with oneworld or with SkyTeam. The now-receding possibility of America's United

being liquidated, thereby destabilising all three big alliances, delayed the decision for much of this summer. Since 1989 KLM has had an increasingly close alliance with America's Northwest Airlines. This is a deeper integration than in any other alliance: for instance, KLM does all the marketing for pooled transatlantic flights in Europe, while Northwest markets them in America. Separately, Northwest has a marketing alliance with both Continental and Delta for domestic American flights. Northwest bosses have been very supportive of KLM's bid to team up with Air France and SkyTeam, and want to join SkyTeam, too. Then, probably, Continental will follow suit. Airline mergers within America are also hard to do because of the intense antitrust scrutiny they draw (largely because airlines have dominant shares of traffic at their big hubs). But the tightening web of alliances, as seen in the KLM-Air France deal, is drawing together three American carriers (Delta, Continental and Northwest) at home and abroad. Talks start next month to open up aviation between America and the EU by, for instance, loosening national ownership rules—though no one expects the rapid removal of barriers to cross-border mergers. Yet global airline consolidation is already under way. Source: http://www.economist.com/node/2072980?story_id=E1_NDSNJRD...