Behind the Air France-KLM merger

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Behind the Air France-KLM merger

Air France (www.airfrance.com) moved quickly to close a deal that creates Europe’s largest airline, taking just over two weeks to acquire Dutch airline KLM (www.klm.com) and combine both under a holding company, Air France-KLM. At press time, Italy’s Alitalia still hoped to be included in the deal.

Timing of the move recognizes changes in the regulatory climate and in the nature of the airline industry. For air cargo shippers, the operational implications are significant, in no small part because cargo integration is moving faster than the general combination.

Air France is the world’s sixth largest cargo airline based on tonnage. It operates a dozen freighters, nine 747-200s and three 474-400s. It is also a member of the SkyTeam Cargo joint venture which includes Alitalia, Delta Air Logistics, Korean Air Cargo, Aeroméxico Cargo and CSA Czech Airlines Cargo.
KLM has already begun to integrate its cargo network with that of Air France. The Dutch carrier is joining the SkyTeam Cargo joint venture.

analysis

The AF-KLM alliance will gain from plans to upgrade the cargo fleet at KLM. The airline announced in June it had begun the first phase of a fleet renewal that will replace its 747-300 aircraft with three 747-400ER extended range freighters and eight 777-200ERs. In addition, it will replace two MD-11 widebodies with 777-200ERs.

KLM has a strong marketing alliance with U.S.-based Northwest Airlines, and through Northwest’s code sharing and marketing agreements, with Continental Airlines. Both Northwest and Continental could join SkyTeam as a result.

KLM and Air France will continue to operate separately under the holding company, Air France-KLM. Combined revenues from the airlines’ recently completed fiscal years indicate the combination will derive 77% of revenues from passenger traffic, 14% from cargo operations and 4% from maintenance. However, as indicated by the cargo agreements and membership in the SkyTeam, cargo will be much more highly integrated.

Alitalia, which had hoped to be included in the initial combination, operates three 747-200 freighters and carries freight on its 186 passenger aircraft. The Franco-Dutch announcement goaded the Italian government into action on legislation that would privatize Alitalia, a necessary step for the Italian airline to become the third member of the alliance. Alitalia wanted to be part of the initial deal so it would not enter later negotiations from a weaker position.

Though the present agreement does not extend to integrating Alitalia, the Italian carrier has signed a cooperation agreement with KLM. Its cargo operations are already closely linked to Air France through the SkyTeam Cargo joint venture.

The combined long-haul network will have 101 destinations, 31 of which are common to both Air France and KLM. Most of those are in major metropolitan areas with high volumes of air traffic. LT

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November, 2003

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