The airline industry is a capital-intensive industry that has stiff competition. Some of the avenues that airlines use to compete include convenience of flights, inflight comfort, capacity, and ticket prices (Inderwildi & King, 2012). Stiff competition necessitates airlines to form collaborations to improve their profitability. National flag carriers are the major airlines that dominate the market.
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The national carriers may use their vast resources to acquire small airlines. This reduces competition in the industry. KLM is a Dutch national carrier. On the other hand, Air France is a French national carrier. Problems that the two airlines faced necessitated the merger of the airlines. The merger would lead to the formation of Air France-KLM holding company.
This would make Air France-KLM the largest airline in the world in terms of revenue. The European Union (EU) is a powerful body that can negotiate on behalf of its members. The EU has the right to enter into open-skies agreements with non-member states. In so doing, the EU ensures that it safeguards the interests of member states. Therefore, the EU plays a critical role in shaping the future of the airline industry.
The EU kicked off negotiations with the US on behalf of the member states (Tagliabue, 2003). It was vital for the merger of Air France and KLM to get the approval of the EU. The merger would lead to the formation of Air France-KLM holding company. However, the individual airlines would continue operating as independent companies to preserve their distinct identities (Tagliabue, 2003).
The holding company would have three major operations. These included passengers, freight, and aircraft maintenance. The merger would be greatly beneficial to both airlines. The merger would lead to financial stability of the Air France, which was on the verge of bankruptcy in the mid-1990s. On the other hand, the merger would inject capital into KLM.
The merger of Air France and KLM would lead to significant changes in the market. In the long-term, the merger would help in reducing the number of the carriers that compete in the European airline market. The merger would help in the formation of a small number of large carriers. This would make the European airline market resemble the American airline market, which has a small number of large airlines.
American Airlines and United Airlines are the dominant players in the American airline industry (Ireland, Hoskisson & Hitt, 2008) Focus of the large airlines on the long-haul routes would help in the growth of small airlines, which focus on short-haul flights. Growth of the short-haul flights would increase competition in the short-haul routes. This would put pressure on the traditionally high fares of European carriers.
However, certain analysts believe that the merger would limit competition in the airline industry. According the analysts mergers of large airlines would lead to reduced capacity and higher ticket prices. In addition, large carriers may use their resources to push small airlines out of the market.
Mergers should take into the consideration the interests of shareholders of the respective companies. Most mergers offer shareholders a premium price on their shares (Peng, 2011). Shareholders of KLM received 11 shares of the holding company for every 10 KLM shares. In addition, the shareholders had warrants of additional shares until 2008.
On the other hand, shareholders of Air France received one share of the holding company for every Air France share. Therefore, the merger was more beneficial to the shareholders of KLM. This led to an increase of the price of KLM’s shares and a fall in the share price of Air France in the stock markets.
The merger of Air France and KLM would lead to significant changes in the European airline industry. The merger threatened the position of the British Airways and Lufthansa, which were the two largest airlines in Europe. However, it was vital for both companies to formulate strategies that would enable them combine their strengths to improve their competitiveness (Ireland, Hoskisson & Hitt, 2012). Otherwise, the merger would be ineffective.
Inderwildi, O. & King, D. (2012). Energy, transport, & the environment: Addressing the sustainable mobility paradigm. London: Springer.
Ireland, R.D., Hoskisson, R.E. & Hitt, M.A. (2008). Understanding business strategy: Concepts and cases. Mason, OH: Cengage Learning.
Ireland, R.D., Hoskisson, R.E. & Hitt, M.A. (2012). Strategic management cases: Competitiveness and globalization. Mason, OH: Cengage Learning.
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Peng, M.W. (2011). Global business. Mason, OH: South Western Cengage.
Tagliabue, J. (2003, October 1). Air France and KLM to merge, Europe’s no. 1 airline. The New York Times. Web.