At long last, Europe's largest airlines have selected their dance partners. Air France and KLM Royal Dutch Airlines last week announced details of their much-anticipated, cross-border merger, and subsequent growth of the SkyTeam alliance. Swiss International Air Lines a week earlier struck a deal with British Airways and the Oneworld alliance. With those developments, the region's alliance tango, at least for now, appears to be over as large-scale industry consolidation slowly takes hold.
Each of the two new alliances will be, if regulators approve, much more than marketing and codeshare arrangements. In the case of Swiss and BA, currently a memorandum of understanding, the latter has agreed to support a CHF50 million (US$37 million) credit facility for Swiss in return for eight of Swiss' 14 daily slot pairs at London Heathrow Airport. A joint venture, including codesharing flights between London and Basel, Geneva and Zurich, is scheduled to take effect Oct. 26. BA ultimately may decide to take an ownership position in the struggling Swiss carrier, which, since its reformation in early 2002, has said participation in a global airline alliance is key to ensuring its competitiveness in a volatile industry
(BTN, Jan. 31, 2002).The Air France-KLM relationship goes even deeper. Their plan to integrate operations would result in Europe's largest airline group. If a share exchange is completed as designed, the new Air France-KLM Group would be owned by the French government (44 percent), Air France shareholders (37 percent) and KLM shareholders (19 percent). It would represent roughly $23 billion in total annual revenues, field 540 aircraft and serve 226 destinations worldwide. The carriers said they expect to officially sign the transaction agreement in the next few weeks. In a joint statement, the two carriers said: "If commercial alliances have contributed over the past years to initiate the first steps toward consolidation, deeper cooperation is now needed to generate significant and sustainable synergies."
The European Commission and the U.S. Department of Justice first need to approve the merger, which has not yet officially been submitted for review. Should the tie-up receive all necessary green lights, the group's shares and warrants will be listed on major exchanges in Amsterdam, New York and Paris.
Integration of the two airlines also means KLM will join the SkyTeam alliance, led by Air France and Delta Air Lines. Continental and Northwest airlines, mutual partners of both Delta and KLM, also are likely to join SkyTeam, giving the alliance a huge boost in its competition against Oneworld and the Star Alliance. Alitalia, also a SkyTeam member, "in the medium term" may join the Air France-KLM Group.
"In the short term, it is business as usual for corporate accounts," said Lee Macenczak, Delta senior vice president of sales and distribution. "Over time, as regulatory approvals come through, this will be a huge benefit for corporate travel managers who want to participate in an alliance that offers them the world. For now, SkyTeam will continue with joint agreements, and Delta separately will continue working with Continental and Northwest."
Air France brings 93 new destinations to the KLM network, while KLM will provide Air France customers with access to 48 new destinations.
Macenczak said salesforces at Delta and KLM have not yet begun cooperative discussions, but noted that Delta and its alliance partners "don't enter these kinds of agreements lightly. Corporate agreements need to be simple, with one contract and one voice."
KLM, meanwhile, sought and received numerous assurances related to stakeholder voting rights—51 percent of voting interest will remain in Dutch hands during a three-year transition—international traffic rights and brand identity.
"From our past talks with the Dutch, how the deal is structured and how the entity is incorporated will be absolutely critical," said David Noyes BA executive vice president of sales and marketing for North America. BA and KLM ditched efforts at a virtual merger in 2000 after running into regulatory obstacles.
This time, because majority voting rights for now stay Dutch, KLM presumably will maintain its landing rights and transatlantic operations. "Our valuable Schiphol hub will be an integral part of the dual hub strategy of the new airline group," said KLM CEO Leo van Wijk. Van Wijk will serve as vice chairman of the Air France-KLM board. The Air France CEO, currently Jean-Cyril Spinetta, will serve as group chairman and CEO.
Northwest welcomed the agreement between Air France and partner KLM, reaffirmed the Northwest-KLM joint venture and insisted Northwest-KLM will continue to compete against the Air France-Delta alliance.
In a statement, the SkyTeam governing board welcomed KLM's decision to apply for alliance membership. Though no timetable has been set for KLM participation, SkyTeam said customers could start seeing alliance benefits within six to nine months.
Similarly, Swiss also will work toward Oneworld participation, expected early next year, by linking information technology systems and aligning customer service elements. It plans to integrate frequent flyer and airport lounge programs with Oneworld members, while Oneworld builds Zurich as its primary central European transfer hub.
Swiss already has antitrust immunity with Oneworld co-founder American Airlines
(BTN, Nov. 25, 2002). In selecting BA and Oneworld, Swiss rejected overtures from Lufthansa that likely would have included at least a partial acquisition by the German carrier and Swiss participation in the Star Alliance.
Swiss and BA had discussed a possible alliance for 18 months. "What has been at issue is the size of Swiss' business and how it can strategically grow that business," Noyes explained. "Some of that strategy has been at conflict with our own. What has changed is that Swiss is looking to be more of a regional player in central Europe that now complements other carriers in Oneworld."
Noyes added that BA and Swiss eventually plan to apply for antitrust immunity. Until then, he said, the immediate benefits for corporate clients will be generated by codeshare services and a broader network.