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


4 Responses to “Air France – KLM – Iberia: is merger the future of alliances?”

  1. 1 balint01 July 24, 2007 at 2:25 pm

    Very interesting news indeed!
    But I believe they are far from being a “newly wed threesome” as you put in your closing sentence. I believe that the BA led consortium would make much more business sense, but your argument stands firm about the control over the South and Central American, African and Caribbean area to be linked to Europe by one big merged airline conglomerate.
    About alliances: I don’t believe that if this merger would become a reality, oneworld would accept it as it is. I personally believe that in such a situation, Iberia would step out of oneworld and would join SkyTeam. Why this way and not the other? Because AF-KL are not just a simple member of SkyTeam, but the leading airlines there!
    And I think it would be a reality for an airline to leave an alliance after being sold, and joining another one. It would have happened in case of Varig not so long ago, just remember: they were kicked out of Star, when it looked like LAN would buy the troubled Brazilian carrier. It turned out in the end, that TAM bought it, and so Star approached TAM to join in, and continue the South-American coverage for that airline alliance. But if Varig would have been bought by LAN, it would have left Star and joined oneworld for sure.
    There is another example of Alitalia being sold to AirOne maybe (which is halt for the moment, buy may take place in the end), where AirOne is a Lufthansa associate, while Alitalia is a SkyTeam member…

  2. 2 balint01 July 26, 2007 at 7:28 pm

    Actually the logical step for AF-KL would be to acquire Alitalia as they are all members of SkyTeam. But Alitalia is in such a bad state, that they don’t want it, while Iberia is a profitable airline. After all: finances are more important than alliances. Remember: there’s no good business in friendships either, only in exceptional cases. Swiss became a Star member, after Lufthansa bought them, KL became a SkyTeam member after AF bought them, so there can be friendship if it makes business sense! 🙂

  1. 1 Lufthansa and TAP are interested in buying Spanair « Airline world Trackback on July 24, 2007 at 9:09 am
  2. 2 Air France KLM Adds Alitalia As Potential Merger Target « Airline world Trackback on September 18, 2007 at 1:33 pm

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