Airfrance Klm Merger Case

Topics: Air France, Northwest Airlines, Airline Pages: 6 (2238 words) Published: September 27, 2008
1. Introduction
In 2004 Europe’s largest airline group was formed after the European Commission had approved a merger between French Air France and Dutch KLM. A merger of this dimension certainly has major influences on the economy. This paper will give an insight on the incidents of this instance, the economic consequences and it will deal with the question whether the European Commission’s decision was reasonable.

First of all the two firms will be introduced and an overview about the merger will be provided. After that some basic economic concepts will be explained, followed by a merger’s consequences on the economy. The next part will then deal with the European Commission, in particular their investigation of the situation and its resulting decision. In the very end a conclusion about the whole case will be drawn.

2. The Merger
Air France is a Paris-based, French airline. It operates worldwide from its international main hub at Paris Charles de Gaulle International Airport and within France from its national hub at Paris Orly Airport. Furthermore, Air France is one of the founding members of the SkyTeam, which is an alliance of several airlines from all over the world. At this date SkyTeam was the third largest airline alliance in the world, following oneworld (British Airways, American Airlines, etc.) and the Star Alliance (Lufthansa, Singapore Airlines, United Airlines, etc.). Before the merger Air France was controlled by the French government, which owned 54.5 percent of the airline’s shares. During the merging-process, however, the state reduced its share to 18.6 percent and thus privatized Air France.

The object of acquisition, KLM, is a Dutch airline with its main hub at Amsterdam Schiphol Airport. Its most important business units are passenger and cargo transport within Northern Europe and to the Far East (EC, 2004a). Since 1989 KLM also operates in a joint venture on transatlantic routes with Northwest Airlines, one of the United States’ largest air carriers.

The plan of Air France and KLM to merge was publicly announced for the first time in September 2003 by Jean-Cyril Spinetta, Chief Executive of Air France. The final decision to go ahead with the union resulted from a ruling by the European Union to override its member states’ individual deals with non-member states and negotiate common European agreements with all of them. “It’s time for the airline industry to accept this European Dimension,” Spinetta said, indicating that it was time for Europe’s largest cross-border airline merger in history: The combined Air France-KLM airline group turnover in 2002-2003 was about 19.17 billion euros (BBC, 2004), which makes them the world’s largest air carrier by revenue. Measured by passenger-miles, 58.8 million passengers per year would rank them right after American Airlines and United Airlines as third worldwide (Tagliabue, 2003).

In December 2003 a framework agreement, which stated that Air France will acquire control of KLM, was signed by both parties. Air France will obtain 100 percent of KLM’s shares for 140 percent of what they were traded at, at the Amsterdam Stock Exchange, before. Although both companies will belong to a new holding corporation named Air France-KLM, they will continue operating independently under their individual brand names for at least three years because the deal included, that KLM will retain 51 percent of their voting power for an initial period (EC, 2004b, p.2). Additionally, the Dutch airline will also join the SkyTeam alliance.

Two firms of such immense size as Air France and KLM, though, cannot just decide to combine forces and go ahead with their plan. The process requires a detailed investigation by the European Commissions, whether the merger is consistent with its Competition Policy and only after legal approval of the EC the merger can be executed.

3. Economic Issues
Ensuring a sufficient level of competition in Europe’s markets is the main target...
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