Air France KLM and GOL Linhas Aéreas Inteligentes S.A., which comprises the GOL and VARIG brands, have signed a commercial cooperation agreement which will enable the 15 million customers who are members of AIR FRANCE and KLM’s “Flying Blue” and GOL’s 6 million “Smiles” frequent flyer programmes to have access to new Frequent Flyers benefits and destinations.
The agreement has provisioned for code-sharing. By mid 2009, Air France will be adding its code to GOL flights between Sao Paulo and Rio de Janeiro and thirteen major Brazilian cities: Belem, Brasilia, Belo Horizonte, Campinas, Curitiba, Florianopolis, Fortaleza, Iguassu Falls, Manaus, Porto Alegre, Recife, Salvador and Vitoria. More cities could be added later. A similar agreement is being prepared between KLM and GOL.
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Alitalia was put into bankruptcy on August 29, after two years of attempts to sell the 49.9 percent state owned airline. On December 12, CAI agreed to buy Alitalia’s main assets and to combine it with smaller rival Air One SpA before bringing in a foreign airline as a minority investor.
From tomorrow, Alitalia will operate as a new company. Air France-KLM will get three out of 19 seats on Alitalia’s board and two out of nine on the executive committee.
The tie-up is expected to deliver 720 million euro in savings and additional revenue over three years.
The press release from Air France-KLM
AIR FRANCE KLM reinforces its co-operation with Alitalia
Air France-KLM and Alitalia have 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 thanks to Alitalia which, following its acquisition of Air One, has reinforced its position on the domestic market. It also links Alitalia to the world’s leading air transport group, thereby offering its passengers access to the most powerful network linking Europe to the rest of the world, henceforth organised around a unique combination of hubs from North to Southern Europe.
Jean-Cyril Spinetta, Chairman and Pierre-Henri Gourgeon, Chief Executive Officer of Air France-KLM stated “In view of the numerous challenges facing our sector, cooperation between airlines is becoming increasingly necessary, and this partnership represents an important milestone. We are happy with this reinforced partnership with Alitalia, which represents a compelling development opportunity for both our companies, and is in the interest of our shareholders, our customers and our employees”.
Terms of the operation
Air France-KLM will subscribe to a reserved capital increase for an amount of some 323 million euros. As a result of this operation, Air France-KLM will own 25% of the capital of Alitalia. Alitalia’s other main industrial and financial shareholders include the Riva Group, IMSSI, Banca Intesa and the Benetton group.
A lock-up agreement will be implemented for a period of 4 years up to 12 January 2013., During this time, no Italian shareholder will be able to transfer shares externally to the Alitalia shareholder group or to Air France-KLM. During the fifth year – between 13 January and 28 October 2013 – the transfer of shares to third parties will be possible, but only on condition that the other shareholders have not exercised their pre-emption rights and that the transfer is approved by Board of Directors of Alitalia. The lock-up will cease to apply only in the case of a stock market quotation starting as of the third year.
Air France-KLM’s holding in Alitalia will be accounted under the equity method.
Synergies
Air France-KLM and Alitalia have estimated a level of potential synergies which will feed through progressively. They should derive mainly from the optimization of the networks and revenue management as well as the extension of the JV between Air France and Alitalia and the implementation of a JV between Alitalia and KLM. These JVs will cover all traffic between the three countries.
For Air France-KLM, these synergies are estimated at around 90 million euros per annum by Year 2 or 3 at the EBIT level. Alitalia will generate total synergies of around 280 million euros per annum by Year 2 or 3 on its side, of which Air France-KLM will consolidate 25% by the equity method.
The operation will be earnings accretive for Air France-KLM as early as Year 2. Return on Equity on Air France-KLM’s investment will be in the region of 15% as of Year 3, excluding the positive impact of its own synergies.
Governance
Air France-KLM will be represented on the Alitalia Board by three members out of a total of 19 and on the Executive Committee of the Board by two members out of a total of nine. Elsewhere, a Partnership Manager responsible for implementing the partnership strategy and overseeing the generation of synergies will be appointed for a term of three years, renewable once, and will be appointed on a rotating basis by the two groups. The first such Partnership Manager will be designated by Air France-KLM.
Suspensive conditions
The implementation of this agreement is subject, amongst others, to the approval of the various competition authorities, including the EU, which could be forthcoming before the end of the first quarter of 2009.
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While airlines have seen one of their biggest expenses, fuel, come down in price, they are still struggling to find demand as the world's major economies contract, and tis the season of industry consolidation.
British Airways on Tuesday said it's holding merger talks with Australian national carrier and fellow OneWorld alliance partner, Qantas Airways, in a deal that could combine two of the world's best-known international carriers.
British Airways, in a brief statement, said
In response to recent media speculation, British Airways Plc confirms that it is exploring a potential merger with Qantas Airways Limited via a dual-listed company structure.
The discussions between British Airways and Iberia are continuing.
There is no guarantee that any transaction will be forthcoming and a further announcement will be made in due course, if appropriate.
British Airways shares shot up 12.1% in London. Qantas shares ended 4.3% lower in Sydney.Iberia shares added 5.3% in Madrid.
British Airway possessed a 25% stake in the early 1990s which it sold in 2004. The British Airways talks with Iberia have languished because of Iberia's concerns about the U.K. airline's pension liabilities.
British Airways has been a very busy airline lately. In addition to the Qantas and Iberia negotiations, it is seeking antitrust immunity, from U.S. and European regulators, on its proposed partnership with American Airlines for which it is seeking. A proposal vehemently opposed by arch rival Virgin Atlantic.Virgin has a presence in Australia in the form of low cost carrier, Virgin Blue. It will be interesting to see how the rivalry will carry over down under.
Like in the United States, Australia limits foreign ownership of domestic carriers. But the BBC was reporting that that may change:
It [the merger statement] follows indications from the Australian government earlier in the day that it may be prepared to relax the rules on foreign ownership.
Under current Australian law, Qantas must be at least 51% Australian-owned.
Any individual foreign airline can only own up to 25% of it and only a total of 35% may be owned by foreign airlines.
Transport Minister Anthony Albanese proposed earlier on Tuesday that the rules be changed so that while 51% must still be Australian-owned, the remaining 49% may be owned by a single foreign airline.
The Australian government recently released a key industry blueprint that would cap foreign ownership at 49% in a bid to keep Singapore Airlines out of the lucrative U.S-to-Australia route.The possible BA-Qantas link-up occurs as the industry consolidates. Delta has recently merged with Northwest, and on Monday, Ryanair Holdings launched a fresh offer for fellow Irish carrier Aer Lingus, which was rejected by the Aer Lingus board.
The Air France-KLM combine have shown the aviation industry how to combine functions while maintaining separate brands.
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As per a press release Air France and KLM will operate "rescue" flights to Phuket on 1 and 2 December from Amsterdam and Paris-CDG respectively.
Due to the closure of Bankok's Suvarnabhumi international airport, Air France and KLM will operate one flight on 1st December and one flight on 2 December 2008 from Phuket Airport.
Departure from Phuket on 1 December:
Boeing 747-400 flight operated by KLM to Amsterdam
Departure from Phuket: 7pm
Arrival in Amsterdam: 4am on the next day.
Departure from Phuket on 2 December:
Boeing 747-400 flight operated by Air France to Paris-Charles de Gaulle
Departure from Phuket: 11:30pm on 2 December.
Arrival in Paris: 5:50am on the next day.
All passengers holding an Air France or KLM ticket may take one or other flight. For passengers booked on one of these flights, Air France and KLM will arrange for a bus transfer from Bangkok to Phuket (please contact Air France/KLM Agency in Bangkok).
FOR FURTHER INFORMATION:
- IN THAILAND: CONTACT THE AIR FRANCE/KLM AGENCY IN BANGKOK: Vorawat Building 20th floor 849 Silom Road or the Call Center: 66 (0)2635 11 91
- IN FRANCE: 3654
LOG ON TO THE AIRFRANCE WEBSITE
Air France is keeping a close watch on the situation and will keep customers informed of any changes to the flight schedule in the next few days.
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The turmoil in the Indian airline industry during the month of October has produced results that can be, only mildly described as, significant. In just four weeks, castles built over the last four or more years, have come crashing down.
By the end of 2008, the Indian airline industry which accounts for less than 2% of the global airline market, will contribute about $2 billion, or over 33%, of the total global losses. This dire, lop-sided situation, which can be attributed to only primary factor – gross imbalance. It is ironic, that the demand – supply imbalance in the Indian airline industry, is resulting in this imbalance between market share and losses share.
How did the situation become so dire?
Over the last 4 years, the Indian airline industry has created this imbalance thanks to rampant and blind expansion. It was all on auto-pilot, thanks to low fuel prices and a robust economy.
In 2008, along came the “perfect storm” and the reality struck home. Skyrocketing fuel prices since late 2007, married to a populist fuel pricing policy by the central and state governments in India which grossly overtaxed aviation turbine fuel (ATF), and sent the already high fuel prices in to the stratosphere, followed by a slowing economy thanks to the global financial credit crises and subsequent meltdown of demand, and uncontrolled costs.
Capt. G.R. Gopinath’s Air Deccan believed in bring airlines to the masses. To expand customer base Air Deccan expanded in to the smallest of cities, and given that, India is an extremely price sensitive country, offered fares that were at par with, or just marginally above, that of the Indian Railways, known to be one of the most economical railways in the world.
Along with with Air Deccan (now Kingfisher Red), low cost carriers (LCCs) Air Sahara (now JetLite), SpiceJet, IndiGo, and GoAir commenced. India seemed destined for low cost paradise, as even full service carriers, Indian Airlines (now Air India), Jet Airways, and Kingfisher Airlines, scrambled to develop low cost fare models of their own.
Thanks to the unbridled expansion, HR costs went in to orbit. From expatriate flight crews to the ground handlers, people were at a premium, and airlines paid, and paid way to well.
Another problem is, India does not have adequate full service airports, let alone, separate low cost airports like Europe and North America.
At all major airports across the country the skies became heavily congested, and it was not uncommon to hear an announcement from the Captain “Ladies and Gentlemen, welcome to Delhi. We are 25th in line for landing, and should land 2 hours from now”. This on a 1.5 hour flight.
The higher costs of full service airports, these delays, and systemic inefficiencies eroded the advantage LCCs in Europe and North America enjoy, i.e., making 9+ flights per day per aircraft, compared to 6 or less in India, and only added to the operating cost burden on all airlines, particularly the LCCs.
As global fuel prices rose, thanks to the fuel taxation policy in India, which makes ATF about 70% costlier than global standards, the impact on airlines was even more severe.
The airlines began to bleed profusely. Unable to sustain, airlines have been raising their prices over the last year, in some non-metro routes, by over 100%. The price sensitive Indian market, particularly in Tier II cities began to slow down.
In parallel, along came the economic slowdown. Demand slowed, and passengers across the board began tightening their belts. The bottom fell out of the market, as passengers shifted from the skies back to rail and bus. At the same time, new airports at Hyderabad and Bangalore were commissioned in the first half of 2008, these airports are far away from the city, and the long and costly commute, along with the rising air fares, totally erased demand in the regional routes, the demand-strength on which LCCs had based their massive expansion plans.
Domestic traffic has contracted over the last four months, declining by as much as 19% in Sep-08. Growth has fallen from 33%+ to over -20% within the span of just six months.
Indian domestic passenger numbers and passenger numbers growth: Jan-07 to Sep-08
Source: Centre for Asia Pacific Aviation & Ministry of Civil AviationIn desperation, airlines have been resorting to steps, hitherto unthinkable, to stop their bleeding and cash burn.
To bolster yields per flight, airlines have cut capacity by 17% in the six months Apr to Sep 2008, and the further increase in prices have had even more impact on demand. Jet and Kingfisher entered in to an alliance, which left the jaws of most Indians agape on the floor, given the severe competition between them. Staff, including precious flight crew, started getting the axe. CEOs of three airlines are no longer there. Despite a 20%+ reduction in fuel prices (thanks to taxation cuts and falling crude prices), no fare reductions are being passed on to the passenger. The massive fleet expansions have been put on hold. Aircraft deliveries are being delayed. Aircraft already produced are being sold off to other global airlines. Aircraft in the fleet are being returned back. Disagreements and litigations will ensue, but the airlines have no choice. Their backs are against the wall.
The reduction in fuel prices will provide short term relief, but the outstanding fuel bills of the airlines are gigantic. Capacity reduction will have its impact only if properly rationalised with demand.
While, domestic demand crashed through the floor, the one bright spot was international traffic growth, which has remained consistently robust at 10% year-on-year for the first half of FY 2008-09. However, as the global economic slowdown has started taking its toll on international travel, many carriers, such as Singapore Airlines, Finnair, Austrian, British Airways, and KLM have announced capacity cuts and withdrawal of service. At the same time, with the Middle East being a robust market, Gulf carriers continue to grow. Emirates has become the largest foreign carrier in India and will aggressively expand from 132 to 163 weekly services over the next six months.
I am reminded of the Chinese saying “may you live in interesting times”. The rest of 2008 and whole of 2009 is going to be very interesting indeed. The medium term growth for the Indian airline industry is bright, but only for those who survive.
Kapil Kaul, CEO, Indian Subcontinent & Middle East, The Centre for Asia Pacific Aviation, gives us a look behind the scenes…
Jet-Kingfisher alliance - the unthinkable happens
The Jet Airways-Kingfisher alliance, which although unthinkable just a few weeks ago, is a reflection of the current fragile state of the market. The primary objective of this arrangement is to bring together the two largest players in the market, with overlapping networks, to reduce capacity and align it with demand, whilst at the same time being in a position to influence fares. At this stage, it would appear that this alliance will lead to extensive engagement and integration between the two carriers.
Key elements of the alliance will include code-sharing; interline and special prorate agreements; network rationalisation; joint fuel management; common ground handling; GDS integration; frequent flyer reciprocity and human resource sharing.
The alliance is yet to take-off in any meaningful way, to date there have been some initial meetings, but it is too soon to expect any concrete steps. The initial focus will be on network, commercial and revenue management issues. Both carriers are hoping that a reduction in capacity, optimisation of their respective networks, higher yields and lower fuel prices, together with the generally strong demand in the third quarter, should reduce losses. The future of the alliance depends on both carriers seeing equal and measurable improvements in performance.
Jet Airways restructuring
Jet Airways is similarly restructuring its domestic and international operations. Jet has reduced its capacity in H1 2008/09 by 13%. The combined seat production of Jet and JetLite has declined from around 56,000 daily seats in April 2008 to 50,000 in Sep-08.
Jet is actively pursuing a cost reduction strategy - staff rightsizing is a key element of this and has been implemented actively at JetLite. The recent attempt to do so at Jet Airways was poorly timed and managed, resulting in a significant media and political uproar. However, other measures include a zero commission structure, a focus on direct distribution and e-commerce, renegotiating GDS fees and other measures. Maintenance and operational issues are currently under intensive review.
On the other hand, investment is being made in strengthening areas considered weak, such as the overseas sales network which has not been making a sufficient contribution to the international routes. Targeted sales and marketing initiatives are being pursued to enhance revenue and yield.
The integration of Jet Airways and JetLite continues and although the process has been longer and more challenging than anticipated, positive results are expected to be seen shortly.
As a result of focusing on core operational and commercial issues over the last six months, the Jet Airways/JetLite combine has increased its market share lead over Kingfisher/Kingfisher Red and has posted much healthier load factors in the last quarter.
Seven B737s are being returned prior to the end of this year, while five B777s are being leased to Turkish Airlines, allowing for capacity on North American routes to be better aligned with demand. These routes have been under significant pressure. Deliveries due in the next 12-18 months are being deferred and no new international routes are expected during this period.
JetLite is expected to operate with a full strength of 24 aircraft shortly with the return of two CRJs from maintenance.
Kingfisher rationalising its capacity
The first steps of rationalisation can already be seen: Kingfisher Airlines has sold five A340-500s, which would suggest that plans to launch non-stop services to the US have been shelved for the time being. The current fleet of five A330s has two aircraft being used for the Bangalore-London route, with the remaining three aircraft yet to be deployed: routes under consideration are Mumbai-London; Mumbai-Singapore and Mumbai-Hong Kong.
On the domestic front, seven A320s are being returned in Nov/Dec and further reduction is still expected. Some A320s may be redeployed on short-haul international routes, primarily to the Middle East, where they can be used for back-of-the-clock operations. The ATR fleet is also under review, Kingfisher is reportedly not happy with the performance of the regional aircraft.
No expansion in the fleet is expected for the next 12-18 months.
The focus is on achieving commercial stability, stemming cash losses and addressing issues related to the integration of Kingfisher Red. The next 12-18 months will be a time of consolidation in terms of people, systems, operations and commercial issues and to restructure the cost base to compete more effectively.
SpiceJet and IndiGo consider their futures
The two largest independent LCCs are taking a cautious approach with respect to capacity expansion, SpiceJet has leased five of its aircraft to other airlines and is operating with a fleet of 15 aircraft. Its second quarter results were significantly below expectations and continued performance at this level will set the stage for further realignment.
IndiGo has also leased two A320s to Turkish Airlines and is evaluating fleet induction plans for the next 12-18 months.
Both carriers will benefit from lower oil prices and are launching some fare initiatives to stimulate the market. SpiceJet is currently the more vulnerable of the two carriers, despite its recent cash injection by a US-based private equity firm.
Air India ill-equipped to handle current environment
Air India is expected to show continued weakness in its domestic operations. The Jet-Kingfisher alliance will further accelerate this.
Air India is possibly the only domestic airline in India which does not have a modern yield management system - most fare decisions are taken manually.
Internal issues related to the merger between Air India and Indian, staff morale and a public sector mindset, continue to play havoc with its operations.
A massive cost-cutting exercise is under way which includes:
- Fuel conservation measures, for which IATA is assisting with an efficiency gap analysis;
- Older, less fuel-efficient B747s and A300s are being retired and leases on B747s and A310s are not being renewed. Of the 111 aircraft on order, 38 have been delivered, which has reduced the average age of the fleet from 14 years to ten years;
- International operations are being reviewed and the network is being restructured, including the suspension of certain loss-making routes;
- Reduction in weight and category of inflight catering.
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KLM announced on October 22, 2008, that KLM Royal Dutch Airlines is suspending its Amsterdam–Hyderabad service, effective February 1, 2009.
KLM launched flights to this destination in October 2005 in anticipation of a growth in traffic to India.
KLM is suspending this service in response to financial results of this route and local market developments.
All passengers will be booked onto other flights.
KLM continues to serve the Indian market with daily services to both Mumbai and Delhi.
KLM and its partners will continue to focus on India, operating direct flights from Amsterdam and Paris to Delhi, Mumbai, Bangalore and Madras.
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