The by regulators which had kept Mr. Spinetta

 

The Merger

 

Two airline
giants Air France and KLM agree to merger in 2004 under mutual agreements and after
series of negotiations.  It was an upshot
to the first cross border merger in European airline history. The majority of
KLM shares were offered to the French in the deal that took place. It was a long-awaited
event to happen. Both airlines keep their identity and each airline will retain
their important hubs in Amsterdam’s Schiphol airport and Paris’s Charles de
Gaulle. The people’s reaction to the merger was not easily accepted by the
general public as they have always seen both airlines as different entities as
well as two different components and entities. The merger was agreed upon and
accepted by regulators which had kept Mr. Spinetta as head of Air France and
the joint company while Mr. Van Wijk will remain as the head of KLM and become
his deputy. Jean-Cyril Spinetta,
chief executive of Air France, was the first to suggest the merger almost 3
years before it happened. The deal involved valuing KLM at 784
million euros. Air France government shares decreased to 17,6% by the end. The
rest of the capital was divided into floating at 74.4%, employees 6.6% and treasury
stock 1.4%. The merger happened after many attempts of each company trying to
merger or strategize with different companies around the world. Alitalia also
was hoping to get a piece of the pie but was not able to.

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The merger
also involved a change for the companies. The change included a mix of both
systems intervention system and an organizational development strategy. The
merger was looking for a change in the process of aviation and the capabilities
of it. For the organizational development strategy, the companies worked on
improving communications and management strategies and had to deal with the
work force at hand.

 

Why Merger?

 

Michael Porter Five Force Assessment

 

This assessment allows to call upon
analysis of competition. It consists of five forces that label the concentration
of competition in which it either should attract or not attract taking into
account the possible or current profitability opportunity. It is evident that
any firm would want to maximize profitability in any business occasion or
break. Therefore, having these five forces will allow them to fully understand
the capabilities and potentials of certain acquisitions or ventures. The five
forces include: Threat of new entrants, threats of substitutes, bargaining power
of buyers, bargaining power of suppliers, and industry rivalry.

 

Threat of New Entrants:

 

Industries with high profitability such as
airlines and aviation will attract firms. In such, there will be the creation
of new firms and more competition in the industry. At that time, the aviation
industry was experiencing dangerous competition from low cost airlines in
Europe that was a potential decrease in profits for major airlines.
Nonetheless, to enter the industry is tough in terms of starting the actual
firm and projects. There are many rules and obligations that a firm should
certainly have and abide with. Governments and aviation managements and administrators
impose rules on the airlines. Licensing and registration have to be made before
any action be taken by firms. The complexity in abiding by aviation rules,
airport regulations as well as logistics management and staff hiring and
training holds back many new entrants. In terms of actually entering the
industry is also a burden financially that takes years to prepare and finance.
There are certain minimum capital and investments must be taken as well as over
heads and costs from fuel, planes, staff, docking, repairs, investment in new
technologies and logistics. This hinders the excitement of many to enter the
industry and as such it keeps the competition to a certain level. Since the
size of the industry is massive this follows the firm with major variable
costs.

 

 

 

 

Threats of substitutes

 

Substitute product can be a huge threat to
existing once since they try to be more compelling and satisfactory to the economy
as well as customers. In these matters, final product price plays a key role in
the competition between the airlines. Although aviation is the fastest mean of
travel it still is just one of the many available options to means of transport.
Having inland transport and maritime transport is also an issue to aviation.
For example, trains and cars are a more reachable type of transport for many
since they are immediate and abundant. People don’t have to go ahead of time
and wait and go through long checkups and baggage issues as to flights. Flights
are also affected by windy conditions as well as climate. On the other hand, it
is the fastest most efficient way of traveling in our day and age. Having that
said, people are coming up with new ways of transportation as we have seen
recently with the Elon Musk’s idea of commercial rockets that can transport
people at sonic speeds which reduces time durations and as he has stated will
cost averagely as much as a normal airplane ticket. Moreover, with the
technological boom, people don’t need to travel as often as they did to meet
other individual thanks to new communication ways and better advancements that
allow information sharing and receiving a lot faster and cheaper.  This is a clear example for a substitute for
airlines.  

 

Bargaining power of buyers

 

Buyers have can create pressure and weight
on the airlines to change prices and come with better standards and customer
services. In a competitive market buyers have more power, since they are able
to change firms by liberty of choice, and this is caused by a large number of
firms competing to attract the same customers. Buyers have a massive impact on
company decisions and therefore pushes the companies to create new flight
routes, better management, more subsidies and compensations. Having the ability
to purchase online is a great way to eliminate third parties and thus cut
costs. Buyers tend to use different platforms to find the ideal and/or cheapest
deals on flights. Thus, customers are no longer mandated to choose specific
airlines or routes and the power is now shifted into the liberties of choice of
the customers. They are also provided with different options that are related
to their tickets that can affect prices of the ticket as well as its accessibility.

 

Bargaining power of suppliers

 

Suppliers also have a strong stand on the
costs expended. They can allocate resources and raw materials efficiently and
create an influence on the airlines. Since Boeing and Airbus are the only two
suppliers and manufactures of commercial airlines they have a direct implementation
on prices of their products. Therefore, airlines are subjected to buy the
airplanes from these two manufactures at a less competitive price. Next, oil
prices and jet fuel suppliers have dominant power over the airlines since they control
prices and quantities. Thirdly, airport fares are also a major issue for
airlines since they demand fees for landing and docking planes as well as they
demand baggage and cargo transport payments in their airports. Major hubs are
more likely to have increased fees on each plane that lands in the airport, and
since they are a major hub it will only attract more customers to fly this
route and thus forces majority of the airlines to land their planes in more
expensive airports.

 

 

Industry rivalry

 

Knowing industry rivalries is vital in any
industry and hence knowing the strong point and weak point of the rivals allows
better judgement of the competition and allows firms to go further with cost
reductions as well as better service. There is always a constant search to innovation
and breakthroughs in the industries that could put the companies ahead of the
others. Companies tackle expenses by reducing them as much as possible to
create this gap between the competitors. Strategic planning from companies dive
in the works of marketing, customer services, management, ownership,
expansions, and global dominance. Companies tend to differentiate themselves by
creating the ideal images of aviation through these means to overcome
competitors.

 

 

Having that said, KLM and Air France were
subjected to these external reasons which helped create the merger between
them. Now, for internal causes, the firms are assessed on their managerial and administrative
efficiency and work.

 

Why Merger 2

 

The merger came to place to create the largest
European airline. At that time, with the entrance of 10 new countries to the
European union, it was ideal to expand in the European market. The companies
wanted to remove the stereotype of having airlines based on country and flag
and more rather be an international brand. The major issues the pushed the French
to merger was the long hard years in the 1990’s that almost got the company to bankruptcy,
and thus they started to look for a merger or solutions to that in KLM which
was at the time a strong company. That meant the capital will increase in the
company and finally push things forward for the French. In the early 1990’s
airlines suffered a crisis which resulted in many mergers before the KLM and Air
France merger. French also had many alliances as well as agreements with North American
airlines and Asian and African.

 

 

Internal
Factors

 

KLM,
the pioneer and risk taker, wanted to expand globally and most importantly in Europe
and America. KLM found that partnering up with Air France, that had alliances
with big airline companies all over the world, could be a strategic opportunity
to take the company to the next level.

 

Now
a larger number of people wanted to travel more at a greater and more ideal
price. It was the boom of technology and globalization. Customers needed easier
and more accessible flights to old and new destinations. By creating this
merger both companies can reduce significant cost and then this will allow them
to provide the prices that the public was asking for. Alliances created the
exchange of passengers between the airlines alliance. Moreover, KLM needed
better catering which the French specialize in and they were efficient which
also attracted KLM. The factors that contribute to taking such decisions are
based on price, place, promotion, people, process, power and. KLM and Air
France took everything into consideration of each aspect and then created the
merger based on the necessities. They needed better prices which was demanded,
bigger outreach, better promotion and marketing, more people to fly, a better
process with increased efficiency and a European and global dominance.

 

 

 

 

 

 

 

Results of the merger

 

The merger resulted in a decrease of four percent in Air France’s stocks
prices. While KLM shares increased by twelve percent. The merger created one of
the biggest aviation companies in the world and the largest competitor in
Europe. Now Air France aircrafts can fly from Schiphol airport to other parts
of the world according to the ASA. This allowed more flights and created new
destinations. Both major hubs attracted many flyers as well. It brought in
traffic and passengers that used KLM and Air France have increased majorly.
Customer satisfaction also was above ninety percent.  Air France and KLM had over 80 million
passengers that flew to over 200 destinations in over 100 countries. Costs were
cut down by about 600 million euros. Revenues also increased to whopping 19
billion euros. Now KLM entered a new era for the company and had better
connections with the airlines Air France collaborated with previously. The
airlines both found to have new destinations and routes for their customers
using the new hub. The restrictions airlines had been diminished and both
airlines had advantages over other ones.

 

 

What went wrong

 

 

 The merger was experiencing some setbacks
after some period of time. Through 2009-2010 revenues decreased by fifteen
percent and company faced over one billion dollars in losses. Things started to
get rocky inside the company. The company faces a problem with expensive
employees and politicized management. Employees have strikes ever since the
merger happened because of a result of bad management. The major issue in that
faces the merger is the culture difference and communication. To elaborate,
both are based in different countries in which external socio-economic factors
affect the balance in the merger. There is a gap between classes in France   much
more than in the Netherlands in which there is more equality and this affects
the number of passengers the travel. Furthermore, in France there is a higher
level of masculinity and thus creates problems between managers and staff
members and the administrations. Thus, the labor force is affected by simple
mean sociological differences that trembles the common grounds for both
companies. KLM wanted fair staffing and their staff had a different viewpoint
on the merger than the Air France staff. The managing systems were different
and strategies from each party were coinciding with one another. For KLM, it is
less hierarchical than Air France, in which the French see this as a form of dysfunction.
In addition to that, the Dutch wanted to plan ahead and have everything foreseen
and strategized for. The French were only working and looking at what is
currently happening. They improvised and manipulated the situations, which they
are good at, that helped them solve problems. Not only were the planning
strategies different, Air France was really dominant in the decisions taken,
meanwhile KLM wanted their voice heard and taken in to consideration. KLM can’t
fully trust the French economy yet and anytime soon. It could be a ticking time
bomb in their eyes. Air France also state that KLM members only think about KLM
and then accuse them of being of them over valuing themselves. Each party
accuses the other with the many reasons that the culture barrier possesses.

 

 

How to Enhance it

 

KLM and Air France needed a new business model. It is evident that a
failing merger needs that change. Now, this merger that wanted to reduce costs
and expand end up not benefiting from anything. Air France need to come up with
new ideas to be implemented in order to move forward and decrease barriers.
Both companies need to be on the same page to function. The culture difference
is very important to why the merger is failing. To start off, the companies
need to do some evaluations of the staff to see and check their satisfaction in
working there and how they can improve. The employees have been doing strikes
and they must be heard out. There should a cultural bridge between the
companies and not a confrontation. As European companies, each side has to come
half way in the dealings. The staff members know that the companies they work
for need the significant partners to function at a larger more efficient scale.
Having a global treaty between both firms on the staff will improve
communication on both ends. Communication is key. Hiring staff members with
strong English backgrounds is imperative to overcoming the language obstacle.
Hence, the companies should be providing language courses to keep the staff in
check when it comes to means of communicating. Everything that implies
communication is truly a necessity to be looked upon. E-mails have to be
answered as soon as possible and in a maximum of one day time. Moreover, they
both should create one explicit form of communication technique in order to be acknowledge
by both parties. Without this the French and Dutch will be misinterpreted and
this could lead to chaos for both. Problems have to tackled jointly by both
parties. No entity should be left behind or put in the dark about anything.
Unison is a vital asset to a merger. The parties have to find and base decisions
on more evident causes. The companies have to have a transparency. The merger
needs dedication and pain stake as well as a positive collective vision for the
future.

 

 

Will it continue?

 

I do not personally think the merger will continue to
exist. The culture barriers to immense to overcome for these two companies. KLM
wants to be treated fair and equal to Air France while Air France needs
definitive power in the decisions. Although the company still does great profit
and speculations are high, there were some issues that still can’t explain why
the company took decisions that might put everything at stake. Air France still
does large amounts of investments which is partly unbeneficial for the firm.
Taking into account the recent oil price decrease, many thought that this will
decrease prices of airplane tickets and Air France would decrease pricing. This
didn’t not take place for the customers. This only shows the greedy aspects of
aviation in general. The manipulation of certain events has to always go in
favor of the company instead of giving back and promoting their airlines. They
should have attracted more people with attractive prices. Each of the side’s
managers accuses the other and will keep feeling threated by the second party.
Cases that surface up about the company hinders the company merger image. It
shows dissolution and chaos within the mangers, owners and staff members. It is
better off for each company to have full rights on its own. Each company wants
the ideal benefit for itself and will never take into consideration the other.
Especially in this case, where the companies in merger are two long lasting
companies that have acted on their own for decades. The merger could be a great
solution to the problems both were facing back when it happened. Now, with the
advancement in technology and laws the merger is not as necessary as it was 14
years ago. It was a great breakthrough at the time then but for now and the
future it is just a temporary change.