Analysis of Air France KLM

Air France-KLM is an international airline company and a member of the Skyteam airline partnership. The Group was created on May 5, 2004, following Air France’s combination with KLM Royal Dutch Airlines (KLM), thereby forming the world’s largest airline group by turnover and second largest worldwide cargo operator in terms of revenue-tonne kilometers. The Group organizes its networks around two major hubs: Paris-CDG and Amsterdam-Schiphol. The Company’s three main businesses are passenger transportation, cargo operations and industrial maintenance. The Group counts more than 100,000 employees throughout the world. Passenger transport is the Group’s main business, with 74.8 million passengers carried (2007-08 financial year), a fleet in operation of 607 aircraft on 31 March 2008 and 258 destinations worldwide. The majority of the employees are based in France and the Netherlands. Both Air France and KLM continue to operate flights under their distinct brand names as subsidiaries of Air France-KLM.

Contents

CHAPTER 1 – Introduction

AIR FRANCE KLM

AIR FRANCE KLM is the combination of two big airlines such as Air France and KLM. Since their merger in 2004, KLM works closely with Air France within the AIR FRANCE KLM holding company. In terms of financial turnover, AIR FRANCE KLM is the world’s largest airline partnership; it also transports the most passengers and is the world’s second-largest cargo transporter. Air France and KLM carry more than 71 million passengers per year. They operate more than 594 aircraft enabling them to fly to 236 destinations worldwide with 2,500 daily flights. The two airlines’ world networks can be combined, forming a vast network organized around the two major hubs of Amsterdam-Schiphol and Paris-CDG. The head offices are located at Amstelveen and Paris.

Alitalia

In January 2009 AIR FRANCE KLM and Alitalia reached an agreement to strengthen their partnership cemented by AIR FRANCE KLM taking a minority stake in Alitalia. This agreement will give AIR FRANCE KLM greater access to the Italian market.

SkyTeam Alliance

Air France and KLM are members of the SkyTeam alliance. SkyTeam is a global airline alliance which includes Aeroflot, Aeroméxico, AirEuropa, Air France, Alitalia, China Southern Airlines, CSA Czech Airlines, Delta Air Lines, Kenya Airways, KLM, Korean Air (including Northwest Airlines), Tarom and Vietnam Airlines. Through one of the world’s most extensive hub networks, SkyTeam offers its 384 million annual passengers a worldwide system of more than 13,000 daily flights to all major destinations.

Income

Over the fiscal year 2009-2010 the turnover of Air France-KLM was 20.9 billion euros. Together, the two airlines have over 107.000 employees. For more information on AIRFRANCE – KLM Finance, please go to www.airfranceklm-finance.com.

Shares

The Air France-KLM shares are listed in Amsterdam, Paris and New York.

Aim

Air France-KLM comprises a holding company which controls two airlines, Air France and KLM, each of which retains its own separate identity and brands. The group is the world’s largest air transport group in terms of revenue, second largest in terms of air traffic (in passenger-km) and cargo (ton freight-km), and third largest in terms of maintenance revenue. Both airlines run their own operations from their respective hubs Paris-Charles de Gaulle and Amsterdam-Schiphol.

Passengers

Passenger transport is the largest of the group’s three core businesses, generating around 80%

of its revenues (as of 31 March 2008), with 74.8 million passengers carried.

Cargo

Cargo was the first fully-integrated commercial activity at Air France-KLM in 2005. Client companies now have a single point of entry, and a full, simplified offering with flights departing from both hubs and benefiting from both networks. Air France-KLM Cargo ranks first worldwide among air freight carriers (excluding integrators).

Maintenance

The combination of Air France Industries and KLM Engineering & Maintenance allows the group to offer a comprehensive range of aircraft maintenance and overhaul services with complementary areas of specialization. Maintaining the two fleets accounts for two-thirds of the group’s maintenance operations, further supplemented by maintenance repair and overall (MRO) operations for 150 third-party airlines.

Company Background

Air France

According to (KLM, 2010), ‘the company was set up on 7 October 1933. Its history has been marked by several major milestones, including the holding acquired in the capital of UTA in January 1990 and the merger with Air Inter in 1997. In June 2000, Air France and Delta Air Lines joined forces with Aeroméxico and Korean Air to launch the Sky Team alliance. Air France’s main hub at Paris-Charles de Gaulle is Europe’s number one in terms of connecting opportunities’.

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KLM

As cited in (KLM, 2010), ‘KLM was set up on 7 October 1919 and is the oldest airline still operating under its original name. Its recent history has been characterized by the creation of a joint venture with Northwest Airlines (NWA) in 1989 and its acquisition of the holding of Kenya Airways in 1996. KLM has Amsterdam Airport Schiphol as its home base.

Since May 2004, Air France and KLM Royal Dutch Airlines have become the largest European airline group: one group, two airlines, and three businesses. Each airline has retained its individual identity, trade name and brand

SWOT Analysis

Mullins (2007) explained that, in order to evaluate the nature of the business environment and its strategic capability an organization may undertake a SWOT analysis focuses on Strengths, Weaknesses, Opportunities and Threats facing the organization.

STRENGTHS

Strengths are those positive aspects or distinctive attributes or competencies which provide a significant market advantage or upon which the organization can build. Against a backdrop of increased

Liberalization which serves to intensify competition, the profitable growth strategy plays to the group’s strengths, the following are the air France KLM group strengths.

A modern fleet the groups chief asset

Guaranteeing energy and economic efficiency and greater safety levels, the group’s aircraft fleet is its chief asset when it comes to meeting the challenges of sustainable development.

The dual Roissy – Schiphol hub and a balanced network

The Air France and KLM route networks complement each other extremely well. The dual hub concept is central to group strategy and is designed to make the most of this.

The benefit of dual brand strategy

Air France and KLM took an original approach to the merger, choosing to retain the two brands while developing a unified strategy. Air France and KLM each enjoy strong brand identities and are extremely complementary.

Enhanced competitiveness thanks to cost control

To maintain its competitiveness, the group launched “Challenge 10”,designed to save 1.4 billion euros by 2009-10, through a 3% cut in unit costs. The plan is four-pronged:

Process optimization and productivity gains;

Fleet modernization, which will generate fuel and maintenance cost savings;

Purchasing, and optimizing group synergies;

External distribution costs.

The development of high growth areas

The group’s ambition is to seize growth opportunities in countries driving global economic growth, mainly Brazil, Russia, India and China. In the years ahead, the Air France-KLM group plans to grow by 4.7% per year in terms of available seat-km on its long-haul network.

WEAKNESSES

Weaknesses are those negative aspects or deficiencies in the present competencies or resources of the organization, or its image or reputation, which limit its effectiveness and needed to be corrected to minimize their effect.

International economic instability

Faced with soaring oil prices, international economic instability, and signs of waning demand, air transport has entered a period of great uncertainty. Our Group can count on its strategic assets, the quality of its fuel hedging and its resolute policy of cost control to meet this challenging period of turbulence and low visibility

OPPORTUNITIES

Opportunities are favorable conditions and usually arise from the nature of changes in the external environment. The organization needs to be sensitive to the problems of business strategy and responsive to changes.

Sustained demands

In an increasingly global society, the demand for mobility is also increasing. Air transport is a key factor in a country’s economy. Over the last 20 years, air transport has grown twice as quickly as gross domestic product (GDP). In 2008, the rapid development of emerging countries is stimulating growth in Latin America, the Middle East and Asia. This will compensate for the slowdown in the US economy. As for the future, IATA forecasts an increase in global capacity of around 5% per year by 2011.

A key contribution to the economy

Air transport carries over 2 billion passengers annually. Tons of cargo shipped by air each year represent 35% of the total value of export trade in manufactured goods. By connecting people, businesses and goods around the world, air transport makes an essential

contribution to global economic activity. Both directly and as a promoter of growth in other industries.

THREATS

Threats are the converse of opportunities and refer to unfavorable situations that arise from external developments likely to endanger the operations and effectiveness of the organization. Air France KLM like any other organizations is faced with a number of threats, these includes

Increased pressure

Growth in European low-cost carriers has been strong for some years and Middle Eastern carriers are planning considerable expansion: Gulf carriers plan 20% seat growth per year for the next three years. This represents stiff competition for European airlines on traffic between Europe and Asia or Australia.

Development limited by infrastructures

Europe is experiencing air traffic congestion, leading to significant delays, increased costs and CO2 emissions. This is partly a result of the fragmentation of airspace and of the air traffic control process. There is considerable room for improvement. For 10 million flights a year, it is estimated that the actual route flown is 5% longer than ideal. For some routes, such as Amsterdam-Zürich, it is even 20%. The annual cost of fragmented European skies is estimated at 3.4 billion euros.

A sector subject to heavier taxation

Air transport is subject to strict regulation, mainly regarding security, safety and infrastructure. The sector is also subject to high charges, among them airport or navigation charges, plus dedicated fees to finance security. Moreover, air transport is the only means of transport to finance soundproofing measures, as it does in numerous European countries.

Climate change awareness

General awareness of the reality of climate change continued to increase in 2007. This was coupled with local environmental constraints that have always affected air transport activities. Air transport accounts for between 2 and 3% of all man-made CO2 emissions. In Europe, its relative contribution will increase due to growth in traffic and the expected reduction of emissions in other industries. In the past 40 years, the sector has made considerable progress, reducing CO2 emissions per passenger by more than 70%.

Summary

In spite of its merger Air France KLM is still operating under its identity and brand name with their home bases located at Amsterdam airport Schiphol for KLM and Paris-Charles de Gaulle for Air France. The main core duties of the airline are to transport passengers, cargo and engineering and maintenance. As any other organization Air France KLM has the opportunities to grow much bigger and become the first largest airline company in the world. One group, two airlines, three businesses.

CHAPTER 2 – Organisational structure

The pattern of relationship between various positions in the organization and among members of the organization is referred as structure. Organization is essentially a group of people with a common objective or goal to archive. The structure can either be formal i.e. documented or informal i.e. unofficial.

Mullins (2007) defined, Organization Structure as the division of work among members of the organization, and the co – ordination of their activities so they are directed towards the goals and objectives of the organization. It is the relationships among positions in the organization and among members of the organization. It makes possible the application of process of management and creates a framework of order and command through which the activities of the organization can be planned, organized, directed, and controlled. It defines tasks and responsibilities, work role and relationships, and channels of communication.

Essentially there are various types of organizational structures depending on the nature of organization, such as centralized, complex, stratified and formalized structures. An effective structure is the one that coordinates various parts of the organization and different work areas. Meanwhile the structure of the organization can either be tall i.e. with a long hierarchical chain of command where the freedom and responsibility of the subordinates is restricted or flat i.e. with a short chain of command, there is more effective between management and workers but employees may have more than one manager. However both of two structures above are highly affected by the number of employees who reports direct to a certain manager that is Span of Control. Hellriegel et al (1998) explained that span of control refers to the number of employees reporting directly to one manager. When the span of control is broad, relatively few levels exists between the top and bottom of the organization. Conversely when the span of control is narrow, more levels are required for the same number of employees. Although there is no correct number of subordinates that a manager can supervise effectively, the competencies of both the manager and employees, the similarity of tasks being supervised and the extent of rules and operating standards all influence a manager’s span of control.

Consider the Air France and KLM corporate and social responsibility (SCR) organization structure

CHAPTER 3 – Organisational culture

According to Hellriegel et al (1998), the organization itself has an invisible quality – a certain style, a character, a way of doing things that may be more powerful than the dictates of any one person or any formal system. To understand the soul of the organization requires that we travel below the charts, rule books, machines, and buildings into the underground world of corporate cultures. Indeed there are several ways in which organizational cultures are formed, maintained and changed. Meanwhile there is a very possible relationship between organizational culture and performance, the relationship between organizational culture and ethical behavior, the challenge of managing a culturally diverse work force and finally how organizations socialize individuals to their particular cultures. There are several types of organization cultures, these includes labels of baseball team, club, academy and fortress. Organizational culture represents a complex pattern of beliefs, expectations, ideas, values, attitudes and behaviors shared by the members of an organization. More specifically, organizational culture includes routine behaviors, norms, and dominant values held by organization.

CHAPTER 4 -Leadership and management

As Hellriegel et al (1998), leadership is the process whereby a person influences others to achieve a goal, i.e. is a process of creating a vision for others and having the power to translate the vision into reality. The ways in which leaders attempt to influence others depend in part of the power available to them and in part on their competencies. Leaders draw on five sources of power to influence the actions of others: legitimate, reward, coercive, referent and expert. Vision, empowerment, meaning through communication and self understanding are the competencies that help leaders become more effective.

CHAPTER 5 – Team working

For example, after KLM and Air France merged, management decided to create teams of people from both companies to exchange information about particular topics. ―The most valuable part is the intangible part, teaming up the guy from IT with the CRM guy from marketing, with the network planning guy, who normally don’t speak together, explained Groeneveld.

CHAPTER 6 – Resourcing

Air France-KLM rates as the sector leader on human resources issues and actively addresses all of the challenges relevant to its business. The Group’s reporting on social dialogue and the extent of collective bargaining illustrate a culture of interaction with trade unions on both working and employment conditions, all embedded in the “Ethics and Social Rights Charter”, signed with all of its European trade unions, and by a wide range of collective bargaining agreements. The group has also allocated significant means to limit the impacts of restructuring. In terms of career management, AF-KLM has put increased emphasis on developing careers for older employees. Extensive means are put in place to deal with health and safety issues, although key performance indicators are not disclosed on a group-wide basis, but separately for AF and KLM. AF-KLM is one of the few companies who show transparency on how to deal with atypical working hours. Overall, AF-KLM’s performance on human resources issues remains stable (far above average) compared to the last rating. Against the backdrop of the recent combination, tough competition and tight margins, the main labour relations issues for the group are to develop employability and staff mobility, primarily through training and proactive social dialogue. Other major issues for the group involve promoting non discrimination, diversity, and equal opportunities, and safeguarding health and safety in the workplace.

CHAPTER 7 – Communication skills

Cook et al (1997) describes that, communication begins when one person sends a message to another with the intent of evoking a response. The effective communication occurs when the receiver interprets the message exactly as the sender intended. Effective communication is essential for the functioning of any organization. Managers need to transmit orders, and polices, build cooperation and team spirit, and identify problems and their solutions.

CHAPTER 8 – Performance and Motivation

Armstrong M (2006) defined, a motive is a reason for doing something. Motivation is concerned with the factors that influence people to behave in certain ways. All organizations are concerned with what should be done to achieve sustained high levels of performance through people. Giving close attention to the individuals can best be motivated through such means as incentives, rewards, leadership and importantly, the work they do and the organization context within which they carry out that work. Essentially motivation can take place in two ways; such as people can motivate themselves (intrinsic motivation) by seeking, finding and carrying out work that satisfies their needs and secondly people can be motivated by management (extrinsic motivation) through such methods as pay, praise, promotion and punishments such as disciplinary action

CHAPTER 9 – Management systems

Earlier this year, Air France-KLM introduced a new combined executive management structure on a functional basis, replacing the separate management structures in Air France and KLM. In place of the Strategic Management Committee, which had supervised the development of Air France and KLM over 2004.2007, the business is being managed from 2007 through an Executive Committee whose members has a group level responsibility and can come from either Air France or KLM while retaining their responsibilities at a company level.

The historic commitments of both companies, joint ambition and specific action plans

CHAPTER 10 – Management of change

Hellriegel et al (1998) explained, many sectors of the economy, organizations must have the capacity to adapt quickly and effectively in order to survive. To a certain extent all organizations exist in a changing environment and are themselves constantly changing. Increasingly organizations that emphasize bureaucratic or mechanistic system are ineffective. Organizations with rigid hierarchies, high degrees of functional specialization, narrow and limited job descriptions, inflexible rules and procedures, and impersonal management can’t respond adequately to demands for change. Organizations need designs that are flexible and adaptive. They also need systems that both require and allow greater commitment and use of talent on the part of employees and managers.

Organisational change can be difficult and costly. Despite the challenges, many organizations successfully make needed changes. Adaptive, flexible organizations have a competitive advantage over rigid ones. Thus managing change has become a central focus of effective organization worldwide. There are so many pressures for change, these includes global market, the spread of information technology and computer networks and changes in the nature of the workforce employed by organizations.