Dissertation on Air France-KLM Group SA
Strategic Evaluation of Air France-KLM Group
SWOT analysis of Air France-KLM Group-Air Lines
Strengths
·
Air France-KLM group is a
market leader in air transportation in Europe with a balanced business model
which incorporates market traffic and customers and includes two airlines –
each with its own hub base and operating in several major business segments.
These are passenger transport, cargo transport, maintenance and other
activities within the airline sector including foodservice and charter
services. Passenger transport is the company’s major business segment,
accounting for more than 80% of its turnover and 92% of its operating income.
Air France-KLM carried 74.8 million passengers in 2008 and has a fleet of 600 aircrafts.
·
The company operates one of the
most modern fleets in the world from its key transportation hubs Paris-Charles
de Gaulle and Amsterdam-Schiphol. These home base centres are among the largest
in Europe. Moreover, increased capacity at Paris-Charles de Gaulle boosts
capabilities offered to clients.
·
Air France-KLM has integrated
environmental issues and sustainable development as part of its policy. In
2007, the company issued a Climate plan in which it commits to limit the
negative consequences of developing air transport on the environment and to
promote sustainable development. This plan has been reinforced in 2008.
·
The Group has a strong
competitive advantage through its wide and balanced customer base, of which 52%
are leisure passengers and 48% are business travellers. The company also
balances point-to-point traffic and connecting flights, with 56% transfer
passengers in comparison with 44% direct flights customers.
·
Air France-KLM’s extensive
route network provides customers with 114 long-haul destination opportunities,
which accounts for 63% of the total 181 offered by the company.
·
The company had a strong
financial year in 2008 with operating income of EUR1.4 billion, due to its wide
geographical spread and lack of over-dependence on particular markets, which
have minimised economic and geopolitical threats.
·
Strong logistics network with
recently opened centres in three main regions (Southeast Asia, China and the
US), contributes towards the localised logistics services provided by Air France-KLM
as well as repair capabilities.
·
Through the acquisition of VLM
Airlines at the end of 2007, the Group was able to tap into the business travel
market and the MICE sector and attract business men attending conferences and
events from around the world.
·
Air France-KLM has introduced
an e-ticketing service, self-service check-in kiosks, baggage drop-off points,
check-in via the internet, thus providing greater flexibility for its
customers.
Weaknesses
·
The unfavourable economic
conditions, which started in 2008, as well as the rising fuel prices have hit
the whole airline industry, including Air France-KLM, and led to falling demand
for air transportation and increased demand for rail and bus transportation,
which can be a major threat to the company.
·
Reduced capacity and changes to
flight routes are some of the measures adopted by airlines to counter the
effects of the economic crisis. However, passengers are expected to opt for the
cheaper alternatives offered by the low-cost carriers. This can negatively
affect Air France-KLM’s profitability. Indeed, the company’s market share has
been decreasing in 2008, due to direct competition from easyJet, especially on
the Paris-Nice and Paris-Toulouse routes.
·
Increased competition from
emerging markets such as India, China and Brazil on the Europe-Asia and
Europe-Latin America axis, poses a major threat to the Group’s business and
profitability.
·
Increasing maintenance costs in
Europe due to the strong fall of the US dollar against the Euro can hit Air
France-KLM. The company’s major contracts are negotiated in US dollars, but
European maintenance activities are predominantly priced in euros, which
negatively impacts the airline’s operational costs.
·
Due to the higher fuel costs,
Air France-KLM has introduced specific taxes on customer fares. For example,
for long-haul trips, this has sometimes added EUR240 on a return ticket.
·
Despite increased overseas
traffic following the alliances and the partnerships with North American
airlines, Air France-KLM is highly price-sensitive and strongly influenced by
the financial downturn. Rising air fares and declining household budgets have
led to a decrease in domestic travel in North and South America. As a result,
leisure and business people reconsider or cancel their travel plans.
·
The number of passengers on the
London-Paris route fell from 2.9 million in 2002 to 2.1 million in 2007 and the
decline has accelerated in 2008 because of faster and more frequent Eurostar
services. Air France-KLM has therefore released slots to its partner carrier
Northwest Airlines, to allow it to start operating from Heathrow, and the
company is using one of its slots to operate a service to Los Angeles. However,
this service was withdrawn during the 2008-2009 winter, due to lack of demand,
and from April 2009, Air France-KLM will use the slot to complement Delta’s
Heathrow-New York service.
Opportunities
·
The Group can strengthen its
leadership position by increasing its network and alliances. Opportunities for
new partnerships are seen in emerging markets with strong growth potential,
such as Brazil, India and China, which can boost the company’s profitability
and its geographical reach. As the host nation of FIFA 2014 Football World Cup,
there are expectations that the Brazil government will enhance the country’s
air transportation network in terms of flight frequencies/routes, to cater
efficiently to the strong demand, which can create further opportunities for
airlines such as Air France-KLM.
·
In April 2008 aiming to
establish a strong network out of Heathrow, Air France-KLM gave Delta Airlines
(Delta Airlines acquired Northwest Airlines in October 2008) slots to operate
nine daily flights to seven cities in the US thus benefiting from the US-EU
Open Skies agreement. This step will lead to the increase of flight
frequencies, improved scheduling and competitive price offers for customers.
·
A source of passenger growth
for the carrier could come from markets such as France, the Benelux countries,
Germany and Switzerland. In September 2008, Air France-KLM has proposed a rival
train service to Eurostar, to operate from 2010 (when Eurostar’s monopoly
ends). The carrier plans to launch a high speed train service on routes London
to Paris and Paris to Amsterdam.
Threats
·
Increasing oil prices can cause
services previously offered to customers for free to be charged by airline
operators which in turn can generate a reliance on ancillary revenues to offset
rising costs. Although oil prices declined in the latter half of 2008, airlines
are expected to see decreasing numbers of leisure and business travellers.
·
Strong competition from
companies such as British Airways (BA), Lufthansa as well as the Gulf airlines
with regards to passenger flows is amongst the major threats for the Group. For
example, the second largest European airline British Airways plans through its
proposed merger with Iberia, an airline in which it already has a 13% stake, to
reinforce its presence in South America.
·
The worsening economic crisis
can further affect demand and decrease passengers’ capacity in key markets,
which can hit Air France-KLM’s profitability. With a deteriorating operating
environment, decreasing freight traffic can be expected as well.
·
The introduction of
“environmental” and flight taxes, as in the Netherlands, can influence the
market and further increase airfares for the consumers and hit Air France-KLM’s
revenues. Passengers are expected to use alternative transport modes in order
to avoid paying the taxes.
·
The emergence of new
competitors from emerging markets such as China, India and Brazil can pose a
serious threat to Air France-KLM. For example, the over-capacity of airports in
China is leading to the construction of new airport terminals. In Brazil,
airlines in 2008 continued investing heavily in marketing and operations to
capitalise on the untapped potential presented by the Brazilian market. The
entrance of Azul Linhas Aéreas in December 2008 is a good example of this
trend.
·
Domestic air traffic has
decreased due to more intense rail competition. With the development of TGV
East in particular, Air France has had to reduce the frequency of flights from
Paris to Strasbourg. Flows from province to province are, however, increasing,
especially between Lyon- Toulouse and Marseille-Bastia.
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