The Air France-KLM proposal to buy troubled Alitalia could present new opportunities and new challenges for global travel programs by creating a far-reaching airline bloc with a unified sales force unencumbered by regulatory limitations. It also could end the Italian flag carrier's ongoing financial woes and provide investment for product and service improvements, while advancing European cross-border airline mergers.
Before offering corporate clients larger, joint deals including Alitalia's services, Air France-KLM first must gain approval from various authorities and labor groups, and effectively execute another massive, dual-country consolidation. First announced in 2003, the initial merger between Air France and KLM has been seen as a success.
The conditional proposal includes a primary Alitalia hub in Rome for domestic, intra-European and intercontinental services, and a point-to-point operation in Milan for certain European and intercontinental flights targeted at business customers. Those operations would complement Air France-KLM's hubs in Amsterdam and Paris.
In addition to remaining in the SkyTeam alliance--co-founded by Air France--Alitalia expects ownership by a global grouping to provide cost and revenue economies of scale; synergies in the areas of sales, distribution, network, revenue management, frequent flyer program, IT, fleet and procurement; and minimized exposure "to the high cyclicality and volatility that characterize the industry. ... Alitalia is going through a highly critical situation, causing a progressive erosion of its liquidity position worsened by" economic weakness.
At the same time, Alitalia would retain its "national identity" and branding, as KLM Royal Dutch Airlines did after its merger with Air France. The merger and a concurrent restructuring plan would enable Alitalia to produce an operating profit "as early as 2009, and to rapidly move to operating margin levels in line with those of other major European airline companies."
Italy's prominent place in the world travel market requires an efficient and financially sound commercial aviation sector. According to Global Insight, Italy ranks fifth in international arrivals. A recent World Travel and Tourism Council report placed Italy seventh on the list of top business travel spending countries, with $40.3 billion projected for 2008. WTTC predicted Italy in 2018 would still rank seventh in total business travel spending at $47.8 billion.
In terms of corporate travel, Alitalia said integration with Air France-KLM would "enable a complete offer of services for Italian corporate clients [and] the possibility of access for every Alitalia client to a single fare structure for all the group's airlines."
HRG group industry affairs director Mike Platt said the proposed merger is a positive development for managed travel programs. "There is a huge desire for corporations via their travel management companies to negotiate with suppliers globally but the problem is there are no real global air suppliers," he wrote in an email to The Transnational. "The more an airline buys others up the greater the potential of a workable global air deal."
On the other hand, corporate discounts often are reduced when partner carriers combine contracts, noted Peter Klebanow, president of Ultramar Travel Management, which has a number of fashion industry clients with Italian operations. "Alitalia tended to be fairly aggressive in the extent of the discount and the reason for that is they were looking to attract clients that also had lots of lift in other places," he explained. "Alitalia had to give those customers a reason to break from their global programs and give the Italy business to them. So if Alitalia provides a 10-point better deal, then that allows for them to be in the mix. Our expectation is--because we have seen it happen with Air France and Delta, and have seen it happen with Lufthansa and United--when these guys start working together and sharing revenues, the intent is to try to bring those deals under alignment so they are not competing against each other."
Like Alitalia, Air France and Delta are part of the SkyTeam alliance. Lufthansa and United anchor Star Alliance. European and U.S. regulators this week announced new scrutiny of airline alliances, which are seen as a proxy for mergers.
BCD Travel senior vice president of industry relations Rose Stratford said Air France/KLM and Alitalia would "probably rationalize some of the discounting. Alitalia may be more aggressive today than they would be under a normal, healthy financial situation. But overall, there is not that much overlap, with Alitalia primarily serving Italy, Air France primarily serving France and KLM primarily serving the Netherlands."
Next Steps
The Alitalia board of directors and the Italian Ministry of Economy and Finance already gave their approval for the deal. Air France-KLM expects "relevant competition authorities" to authorize the merger "by the end of the first half of 2008." In the meantime, Air France-KLM and Alitalia are discussing the deal with Italian trade unions. Those talks, which according to Air France "will have to be concluded by 31 March," may be difficult, especially since Air France-KLM projects 1,600 job cuts.
"Labor unions in Italy have stymied every single thing that Alitalia has tried to do for the past 10 years," said Unisys Corporation transportation vice president Ron Kuhlman. "The ability of the French and Dutch to affect that mindset will test all of the people skills they may have. The [Italian] government has come to the point of understanding that something has to be done. E.U. won't allow it to put any more money into [Alitalia]. The airline is hemorrhaging money. It has an old fleet. The government is up against the wall, saying they have to do something. Everything Alitalia needs, they need in a big way and it all costs money."
Should the transaction and restructuring plan move forward, Alitalia by 2010 would operate 10 percent less capacity than it did last year, including a 19 percent cut in its international network. The overall network would consist of 24 domestic Italian destinations, 45 "international" destinations and 17 "intercontinental" ones (including Los Angeles, set to launch in June).
Also, the group would consider restarting Alitalia's services to India and China, "renew" the Rome-Milan shuttle and improve various premium products, including dedicated check-in, airport lounges and lie-flat inflight seating.
Elsewhere around the globe, it remains unclear when and how the Air France-KLM-Alitalia integration would trigger additional cross-border mergers.
"By buying the near-moribund Italian flag carrier, Air France-KLM will create an aviation axis across Western Europe," according to a report by the Centre for Asia Pacific Aviation. "The Europeans have always been more internationally conscious and the process of colonizing global aviation is now in their sights, with weakened U.S. airlines and a currency differential that makes buying into the U.S. market a bargain at almost any price. ... This does not spell a happy long-term outlook for Asia's flag airlines. Unless they move soon, the game will be irreversibly changed and they will be soft targets for takeover, as the Euro-American combinations eventually spread east."