Airline

Industry Consolida1on in Europe Interna(onal Mergers and Acquisi(ons

Sonja Vogeler UTS MBA 14 August 2010

 Key Issues
Airline industry consolida(on in Europe since 1980s leads to a drama(c change in ownership and structure. Na(onal ag carriers and the new low-cost carriers redene the airline business in Europe through mergers, acquisi(ons and start-ups. Priva(zed open sky policy developed through, rstly priva(za(on, cross-border acquisi(ons and deregula(on, and most recently the enforcement of the Open Sky Agreement between the EU and US, increasing global compe((on. The opportuni(es for the new low-cost carriers and consolida(on of na(onal ag carriers bring big advantages to consumers in form of lower air fares, more des(na(ons and more ights. This massive change however, has come at a cost, with airline bankruptcies and predatory pricing by the low-cost carriers changing the European airline industry permanently. Many struggling airlines are looking for strong partners. Due to demand for valuable airport slots and strategic hubs, the strong airlines such as LuUhansa and Air France have used these opportuni(es to expand their network through strategic acquisi(ons.

 Priva1za1on (1987 onwards)

The rst major European-based airline to be priva(sed was Bri(sh Airways in 1987 under the UK Thatcher Conserva(ve Government. Priva(sa(on of na(onal ag carriers usually comes with condi(ons. Rarely does a Government-owned airline become fully priva(sed without restric(ons on the levels of foreign ownership and carriage condi(ons to sa(sfy domes(c poli(cal requirements. Strong na(onal sen(ment and pride would not like to see the na(onal ag carrier go under. However, many governments recognised the benets of priva(za(on, which has led to a gradual transfer of ownership of airlines from the state to the private sector. In order to appeal to prospec1ve investors and shareholders, airlines were forced to become much more ecient and compe11ve.

 Cross Boarder Acquisi1ons (1992 onwards)

Early 1990s: Deregula(on of the European Union airspace ocially started, long aUer the US led the way with the Airline Deregula(on Act in 1978. Whilst the US deregula(on s(ll had heavy restric1ons on foreign ownership of its airlines, the EU enforced measures in 1993 that would allow the development of a single European avia1on market. This made the EU the rst region in the world to remove foreign ownership restric(ons (Hsu & Chang, 2005). Cross border acquisi(on was now seen as the best way to access the otherwise inaccessible European market. Cross border acquisi(ons provide a second advantage in crea(ng new hubs to connect into (eg. Air France-KLM merger). Cross border acquisi(ons provide the added benet of gaining access to valuable airport slots (eg. LuUhansa took advantage of by acquiring 20% shareholding in Bri(sh Midland)

 EU Deregula1on (1997 onwards)

The EU's nal stage of deregula(on took eect in April 1997, allowing airlines from one member state to y passengers within another member's domes(c market. Deregula(on was seen as a way to s1mulate compe11on and has changed the structure of the industry substan(ally. Small low-cost carriers on shorter routes, such as easyJet and Ryanair have grown at the expense of the tradi(onal airlines. The European Union has ruled that Governments should not be allowed to subsidize their loss-making ag-carriers. But there has always been a safety net for airlines no country likes to see its na(onal carrier go down. No other industry sector even our closest strategic equivalent, telecommunica8ons remains shackled by the no8on of na8onal sovereignty and archaic ownership rules (Chairman of Bri(sh Airways Lord Marshall, 2001). Most industry watchers agree with Lord Marshall that only those airlines prepared to consolidate without regard for borders will survive the future (Symonds, 2001).

 Consolida1on (2004 onwards)

2004 merger of French ag-carrier Air France and its Dutch counterpart KLM was the rst major European airline merger. Given the economic challenges following the 9/11 disaster (2001) - such as lower consumer spending, security concerns that have reduced leisure travel and corporate cost culng that has reduced business travel and the opportuni(es following deregula(on, it is surprising that the airline sector has not begun to consolidate years before. Booz & Co (2008) see two main reasons for the lack of industry mergers in the past: 1. Flag-carrier airlines operate in a poli(cal and cultural environment that is hos(le to deal making. 2. Although the EU con(nues to push for more mergers, tensions remain between EU rules and the policies of na(onal governments. They also see two major factors have produced the condi(ons that will make merger ac(vity much more likely: 1. Rising Fuel Prices - causing higher margin pressure 2. Open Skies Agreement, - crea(ng more interna(onal compe((on 3. Carbon Emissions Trading Scheme (ETS) Disadvantaging European carriers (Mallan, 2009) In Europe, the experts said there would eventually be only three airlines. That has not happened yet, but we are on our way to it. The big airlines are worrying that they will miss the opportunity if they dont buy poten8al candidates now. It has become a race.
(BCD Travel senior vice president for supplier rela(ons in Europe, Middle East and Africa Thomas Stoeckel, 2009).

 Open Skies Agreement (2008 onwards)

The recent Open Skies agreement between the US and the EU, eec(ve as of 30 March 2008, is the most ambi(ous air services deal ever nego(ated (European Union, 2008). It permits US and European airlines to make transatlan(c ights between any two airports in each region, meaning the European ag carriers are facing greater compe((on by the US through the removal of market access restric(ons. Air France-KLM Group and Delta Air Lines signed a joint venture agreement on 20 May 2009: The partners will jointly operate their trans-Atlan(c routes, thereby sharing revenues and costs. Air France-KLM will achieve around 25% of the total trans-Atlan(c capacity, and annual revenues es(mated at 12 billion dollars (Air France Corporate, 2009). The two biggest avia8on markets, encompassing 60 percent of world trac, will cooperate closer in all elds of avia8on policy. Building on the success of the European internal avia8on market, this agreement is an important rst step towards the normaliza8on of the interna8onal avia8on industry
(European Union, 2008)

Services airlines are predominantly former ag carriers/ na(onal airlines. They can have very dierent business models:

LuUhansa: -Strong mul( hub network (Frankfurt, Munich, Vienna) -Focus on the number of hubs - Largest number of strategic alliances through StarAlliance - Innova(ve services, through restructure and outsourcing to sister companies -Favourable cost structure, through keeping aircraU types to a minimum - Acquisi(ons of strategically similar airlines (SWISS, Austrian, Brussels) Air France/KLM: - wo coordinated hubs at developing airports (Paris and T Shipol) -Focus on the size of hubs -A powerful and large network of des(na(ons -Unique partnership with the North Atlan(c -Partner in the second larges airline alliance (Skyteam)

 Old World vs New World

 Services Airlines
The industry remains under pressure. According to industry es(mates, 30 airlines ceased ight opera(ons in 2008 alone due to the economic downturn. The pressure on the avia(on industry to consolidate has now also reached the growth markets of Asia aUer Europe and North America (LuUhansa Management Report, 2008). Porters Five Forces Model:

An LCC is an airline that oers generally low fairs in exchange for elimina(ng many tradi(onal passenger services (budget airline guide, 2009) Typical low-cost carrier business model prac1ces include: -A single passenger class -A single type of plane (reduces training and servicing cost) - A simple fair scheme, such as charging one-way (ckets half that of return trips (typically fares increase as the plane lls up, rewarding early reserva(on) - unreserved sea(ng (encouraging passengers to board early and quickly) -Flying to cheaper, less congested secondary airports - Flying early in the morning or late at night to avoid air trac delays and take advantage of lower landing fees. - Fast turnaround (mes on the ground (allowing maximum u(liza(on of the aircraU) - Simplied routes, emphasizing point-to-point transit instead of transfer at hubs - Emphasis in direct sales of (ckets via internet (avoiding commission paid to travel agents and computer reserva(on systems) -Encouraged use of electronic (cket - Free in-ight catering and other complimentary services are eliminated, and replaced by op(onal paid-for in-ight food and drink (which represent an addi(onal prot source for the airline) - Unbundling of ancillary charges (showing airport fees, taxes, lugguage fee, as separate charges, to make headline fare lower)

 Current Challenges

 What does the Theory say?

 Conclusion
The tradi(onal airline business models are changing. The former stand-alone strategy of airlines and their intercon(nental hub and spoke networks is outdated. Challenges emerge not only from internal compe((on, but also now from low cost carriers at the low end and business avia(on at the high end of demand. To survive the airlines must acknowledge and understand the importance of down sizing, merging and equity alliances. This will bring with it large scale consolida(on, and as a result the airline industry will shape up as a market structure, which experiences great consolida(on and only a few mega carriers. The European airline industry is entering a stage of real maturity. The consolida(on process is forecast to grow and the number of independent carriers will gradually diminish (Associa(on of European Airlines 2008). Interna(onal alliances are forecast to con(nue to play a crucial role and may even extend in scope at least in the rst few decades of the 21st century.

Part 2

What is Design Thinking?

What is Design? Symbolic & Visual Communica(on (Graphic Design) Material Objects (Product Design. Industrial Design, Fashion Design) Ac(vi(es & Organised Services (Process or Systems Design) Complex Systems and Environments. Living, working, playing, learning (Architecture, Interior Design, Urban Design, Organiza(onal Change)

Business & Design

Design organiza1ons vary from tradi1onal rms: Tradi1onal Firm 1. Flow of work 2. Style of work 3. Mode of thinking 4. Source of status 5. Dominant Altude Permanent job My Responsibility Induc(ve & deduc(ve thinking Big budgets, large sta numbers Constraints are the enemy Design Firm Project work Our Responsibility (team work, collabora(on Abduc(ve thinking Solving wicked problems Constraints are a challenge

Source: Roger Mar(n, 2009, The Design of Business Why Design Thinking is the Next Compe((ve Advantage

Business & Design

Induc1ve thinking: Proving through observa(on that something actually exists Premise: All observed crows are black Conclusion: All crows are black Deduc1ve thinking: Proving through reasoning from principles that something must be Premise: All dogs have four legs. Premise: Rover is a dog, Conclusion: Rover has four legs. Abduc1ve thinking: The logic of what MIGHT be. There is not MUST be.

Can you prove that?

Business & Design

Business Skills and Design Skills are converging Design skills are required to reach into ambiguous situa(ons New kind of business enterprise Tradi(onal rms must look more like design shops Its not about the business of design Business needs to understand the design process

Source: Roger Mar(n, 2009, The Design of Business Why Design Thinking is the Next Compe((ve Advantage

The Process
The design thinking is a crea(ve process based around the building up of ideas. 7 Stages: 1. 2. 3. 4. 5. 6. 7. dene research ideate prototype choose implement learn

Design Thinking

Crea(ng ideas

Checking ideas

Other References: Tim Brown with Barry Katz, 2009, Change by Design, Harper Business Press, USA Roger Mar(n, 2009, The Design of Business Why Design Thinking is the next Compe88ve Advantage, Harvard Business Press, USA Thomas Lockwood, 2010, Design Thinking Integra8ng Innova8on, Customer Experience and Brand Value, Design Management Ins(tute, Allworth Press, USA

Thank you.