Air France †KLM: Changing the Rules of the Game Essay

IntroductionAir France-KLM Case (Som 2009) provides the background for airlines diligence and factors impacting companies positions, details about the memorial of air-carrier alliances and their challenges. The main focus of the Case is on two companies Air France and KLM and their decision to merge despite predictions of failure. The period covered by the case ends in 2006. As most aviation companies worldwide were struggling and losing profits, Air France-KLM was confidently gaining merchandise shares, improving growth and financial performance. The purpose of this report is to identify and analyze the chance upon challenges of the aviation industry and Air France-KLM merger evaluate options and leave recommendation on how to achieve inexpugnableer position and withstand economical pitfalls (oil prices, political pressure, and competitors rivalry). Information presented in the Case will be analyzed using PESTEL Analysis (Yksel 2012), Porters Five Forces Analysis (Porter 2008) , organizational and financial performance, prepare analysis (Bernroider 2002). Options and recommendations will be provided based on Hubbards (1996) recommendations.Macro-environmental/PESTEL AnalysisPolitic Sub-factors Governments of most countries have a strong influence over air-carrier business. For example, cultured Aeronautics Board modulate airlines prices until 1977. Most of the companies were government owned or subsidized without regard to the profitability of the carrier. Countries air space was restricted for use by the national air-carriers and access by foreign carriers was restricted. Changes came with the trend of privatization of national carriers. Ratification of the Deregulation Act in1978 by the US Congress had changed the airline industry market landscape painting. According to Spinetta (2006), the European market became a Single Market removing restriction to all carriers. Economic factors The airline industry is heavily dependent on the cost of fuel, numbe r of travelers and economical factors such as unemployment and household disposable income. Introduction of alliances provided a solution to overcome these restrictions and regulations, widen access to the restricted markets and offer cost reduction to the member companies achieved through combined codes, reduced number of flights, simplified transfers and ticketing, reduced fixed costs. Offering combined frequent flyer programs withdraw more passengers.Reduction of service centers and reducing employment is a very unpopular measure in Europe and difficult due to the unions activities. Social-cultural factors Improvement of lifestyle, growth of tourism, additional free household income and simplified travel within European Union affect the airline industry. Traditionally, each European artless has its own airline even though some of them are heavily subsidized by the government and not profitable. Since 1997 global alliances became standard practice for the industry, solely not th e mergers similar to Air France-KLM. Technological factors The aviation industry is highly dependent on technological improvements. Development of fuel efficient aircrafts improves fuel consumption and reduces fixed costs. Expending the aircraft capacity improves performance of airlines core business of the number of passengers and cargo, thus increasing revenue and cash flow.Environmental factors Public wellness, food and health and regulations, traffic safety, sustainable way of doing business are important factors impacting airlines strategies. Legal factors There are many factors affecting the airlines, for example access to the American market was closed until 1978 when the Deregulation Act was approved by Congress. European Union countries share the laws and regulations. Summary of Findings PESTEL analysis allows evaluating the environment in which the company operates and the industry landscape projection on the future. Yksel (2012) discusses use of weighted measures of eac h PESTEL factor which improves accuracy of the results and it is recommended to use for more detailed analysis.Buyer Power Frequent flyers programs light buyers power. Ups and downs of the economy influence household income available for leisure travel. Low-cost companies regulate the cost.Supplier Power Boeing and Airbus are the two main companies that submit global aviation companies. The fleet is usually renewed once a decade and every aircraft is very expensive. In 2006 Air France-KLM had 565 aircrafts in operation with 225 destinations. spick-and-span Entrants The barrier for new entrants is high due to high competition, government regulations, high fixed and start-up costs complicated exit strategy due to unionized live on force.Substitutes A number of large and discounted airlines are available for passengers to choose. Other transport options are available however, airlines provide the fastest way of long and medium exceed travel. They are usually substituted by the alt ernatives for short distances. Cargo services, warehouses, training and maintenance programs are also core businesses for airlines in addition to carrying passengers.Industry Rivalry in 2007, 249 airlines were registered globally, with 100 airlines spread mingled with 30 European countries. This creates a high rivalry between the airlines.Analysis Summary Aviation industry is highly regulated with strong and increasing buyer power. The barrier for new entrants is high. The supplier power is strong but weakening as AirFrance-KLM benefit from the economy of scale and strong bargaining power. The company protects oil prices by purchasing cost fixing insurance. There are substitutes available but air travel remains the prefer option for business travelers and fast cargo delivery.SWOT AnalysisSTRENGTH Both CEOs share company and industry futurevision and offensive strategy. (De mood & Meyer2010, p. 397-400) Use of non-discriminating policies and promotionof stronger branding. Synergy in IT systems. Guarantees given to the stakeholders. Strongfinancial position.OPPORTUNITIESWEAKNESS Geographical distance between Paris andAmsterdam hubs is 400 km Different cultural backgrounds (De Wit &Meyer 2010, p. 415-419) High fixed costs Union actions and political interference playa significant role in the industry.THREATS confederacy attracted such companies as Aeroflot Dependency on fuel cost and economicalwhich opens huge Russian market.fluctuation. More companies may be acquired or enter the European countries do not increase thepartnership with the merged Air France-KLM.runway capacity. Improved routs offering achieved by reduction of Possible threat of integration between redundant flights. Expenditure of network.Northwest and Delta which may create ahigh rivalry in North America. Economy of scale in bargaining with the suppliersRecommendationsThe recommendations would be to detain investment in the latest technologies, including IT renew the fleet to reduce fuel co nsumption and improve defect-free customers experience secure locked fuel prices, build partnerships to contribute long distance flights options balance the network offerings between the continents focus on stakeholders, employees and customers needs consider strategic partnerships with other airlines continue increasing market share and improvement of free cash flow and strengthening of financial position.ReferencesBernroider E. 2002, Factors in SWOT Analysis Applied to Micro, Small-to-Medium, and Large software program Enterprises an Austrian Study, European Management Journal, Volume 20, Issue 5, October 2002, Pages 562-573, viewed 16 March 2014,De Wit, B and Meyer, R 2010, Strategy Process, Content, Context An International Perspective, Cengage Learning, Andover, UK.Hubbard, G 1996, Analysing a case, in Cases in Strategic Management Australia and New Zealand, G. Lewis, A. Morkel, G. Hubard, G. Stockport, andS.Davenport (eds), 2nd ed., pp viiixvi. Prentice Hall, Sydney. Porter M. 2008, THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY, Harvard vocation Review, 86, 1, pp. 78-93, Business Source Complete, EBSCOhost, viewed 16 March 2014,Som A. 2009, Air France-KLM Changing the rules of the game. In Strategy Process, content, context An International Perspective. Hampshire (United Kingdom) Cengage Learning EMEA, 2010, p. 823-836Spinetta J 2006, Cross Border Mergers & Acquisitions The AIR FRANCE KLM romance Speech by Jean-Cyril Spinetta at the Nyenrode European Business Forum on 23 February 2006, viewed 17 March 2014,Yksel I. 2012, Developing a multi-criteria decision reservation model for PESTEL analysis. International Journal of Business and Management, 7(24), 52-66, viewed 16 March 2014, .BUSM3922 Case StudyAir France KLM Changing the Rules of the Game