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Flying higher – together

Most mergers and acquisitions fail because of competing visions, personnel or processes.

By Dave Del Canho and Joeri Engelfriet . 01 March 2008

Most mergers and acquisitions fail because of competing visions, personnel or processes. Air France and KLM Royal Dutch Airlines, however, have become a model for making a merger successful. Dave Del Canho and Joeri Engelfriet helped the two airlines fly higher. They tell how, here.
Flying higher  togetherIn a recent book on the subject, it’s noted that almost 70 per cent of all business mergers fail. Happily, we have been part of the successful 30 per cent: the combination of Air France and KLM Royal Dutch Airlines, the first international airline merger, has been successful since its start in May 2004. The time seems ripe for an insider’s view of how the merger fared so well. Via this retrospective, we can perhaps help others to avoid falling into the traps and dead ends that befall so many other companies seeking a triumphant union.

We have – with a background in corporate strategy and business development at KLM (reporting to the CEO) – worked intensively on the strategy and merger implementation for seven years. Around the start of the new millennium, we concluded at KLM that partnering with one of the top three European network carriers (British Airways, Lufthansa or Air France) was inevitable. This was the result of the vision that globally there would be, over time, only room for three major alliances, each centred in Europe around one of the top three. This was a crucial strategic insight, considering how Sabena (bankruptcy), Swissair (same), and Alitalia (losing two million euros a day) have fared meanwhile. After 9/11, it prompted us to adopt a two-tiered strategy: improving our stand- alone position and finding a major European partner. This strategy has created value for our shareholders – who have seen the value of their stocks more than triple in five years – our customers and employees. The hardest part of implementing this strategy was of course in the merger process.

In our view, five major factors contributed to the success of the merger:

Jointly develop an explicit vision, ambition and strategy Having a common vision of the industry and the challenges it faces is important. First, it makes explaining the rationale of the deal to stakeholders on both sides easier. In addition, once the general direction is clear and shared, it facilitates discussions on further implementation. In our discussions with Air France, we soon found we had a similar vision on both the consolidation in the airline industry and on the best merger model to be adopted (using one group with a common bottom line, and two airlines each with their own hub and brand).

Once merged, the overall vision and strategy, of course, need to be further updated. The key points here are that managers from both parties have sufficient input and that the process is truly run as a joint process. This is the only way to gain widespread commitment for execution, and it allows intrinsic knowledge and best practices from both sides to be taken into account.

To demonstrate, immediately after the merger, we decided to start developing a joint strategic five-year plan, which was discussed in a strategic seminar with the top 20 executives of both airlines. The manager in charge of, for example, KLM’s engineering and maintenance (E&M) developed, together with his French counterpart, their part of the strategic plan. Upon completion, they discussed it with the newly created Strategic Management Committee (SMC), the executive body of Air France-KLM during the first three years. KLM’s E&M manager shared with us that this process forced him and his French colleague to sit down together to discuss and write explicitly their view of the business and how they needed to manage to make the merger successful.

The strategic seminar concept was such a success that it is repeated annually. Making the vision, ambition and strategy explicit is important in any organization, but it is even more so in a cross- border merger that allows more room for ambiguity and confusion.

Integrate only where a clear business rationale exists and consider a step-wise approach Excessive focus on organization destroys many mergers. While top management is busy drawing the new org chart, people in both organizations worry about their own position, delay decisions, fret and gossip – and are distracted from serving customers well and running the day-to-day business efficiently. When the new chart becomes known (or when rumours run rampant), people dissatisfied with their new position start to leave. Focusing too much on organizational issues can easily paralyze an organization and put the whole merger process at risk. There is a better way.

It is said that organization must follow strategy. In M&A cases, this means organization must follow synergies, the strategic rationale of any merger. As organizational change has inherent risk not only regarding people but also in terms of broken processes, it should only be pursued if there is a clear business case. Depending on the merger, in many business areas a large part of the synergies can also be captured without integration – especially purchasing and revenue synergies. At Air France- KLM, we have always kept a focus on synergies much more than on organizational structures. At the start, we installed 14 committees (one for every business area), headed by the two respective managers of Air France and KLM responsible for synergy implementation and reporting to the SMC.

As you might expect, in some areas, integration is required to encourage optimal synergy realization. One example: we decided to integrate the cargo commercial organization. Given the nature of this area (with a small number of large customers, less importance of brand and less dependence on a particular hub to fly from), the benefits clearly outweighed the risks. A step-wise approach, first integrating some areas and steering other areas in a more coordinated way, has many benefits.

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