Archive for July 17th, 2007

Air France – KLM – Iberia: is merger the future of alliances?

Air France KLM confirmed yesterday that it is looking at Iberia as a possible merger target as it revealed its aspiration to participate in Europe’s continuing airline consolidation.

“Air France KLM, the world’s leading airline group in terms of turnover, once again confirms its intention to take an active part in the consolidation process in the air transport industry,” it said in a statement. “In Europe, Spain is a one of the major markets and Iberia an important player in air transport. Taken in the perspective of much-needed consolidation for the efficiency and profitability of the air transport sector, it is therefore quite normal for it to be examined among others.”

AF KLM’s announcement followed a report in the Spanish business paper El Economista saying the Franco-Dutch group will take part as an industrial partner in a consortium led by Apax Partners to launch a bid for IB. The consortium would be willing to offer €4 ($5.51) per share, valuing the Spanish carrier at about €3.81 billion.

US investment firm TPG has approached IB with a preliminary offer of €3.60 per share. Several other investment funds and British Airways, which holds 10% of IB, joined the TPG-led consortium in May, when AF KLM denied it was in talks with the Spanish carrier. The IB board only last week agreed to “make the delivery of all the information requested” by that consortium available as long as a “formal and binding offer” resulted.

See full story on ATW Online.

Air France KLM Iberia merger

What is behind this story? Why is it important for the Air France KLM consortium to be stong on the Spanish market? Of course it is not about the Spanish market. Madrid is a hub of both passenger and air cargo traffic between Europe and South-America. KLM is strong in the former Dutch empire, Air France is strong in Africa and the ex-French colonies, while noone can be strong in the former Spanish empire countries, but Iberia. Thus the 3 airlines can dominate the whole Middle and South American, Caribbean and African market and deliver passengers between Europe and these territories. KLM and Air France are members of the Sky Team alliance. Iberia is not. But it could be even if it is the founder of oneworld. So why do they need to tie their bonds even tighter? Again the good strategy of network carriers against low costs is to strengthen the network effect and gain more revenue on long haul flights. This merger is about that strategy behind the curtains. When airlines participate in an alliance, they stil need to worry about the profit on each segment of a journey. But if the profit goes to the same company, they can loose money on one segment, while gain profit on another one. I think it is a smart step, the only part where I see high risk in these mergers is fitting the internal procedures, regulations, IT backgrounds to each other. I could see how hard it was (and still it is) for KLM and Air France. Especially due to the difference between cultures in the Netherlands and France. Spain will not be any easier.

We could see mergers in Star Allaince as well, when Lufthansa bought Swiss. I am wondering though whether allainces should go to this direction. Another question is will Iberia remain the member of oneworld after the merger? If yes, this is a hidden alliance between alliances. Anyway, good luck for the newly wed threesome! 🙂

By Szafi


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