Pioneering partnership set for take-off

Date: 28/10/1999

By Bruce Barnard

KLM and Alitalia will catapult Europe's airline business into a new era next week when they launch twin passenger and cargo joint ventures.

Unlike the numerous airline alliances hatched in the past few years, which have often been little more than glorified marketing exercises, the Dutch and Italian carriers are going for the 'real thing' from 1 November.

They will split costs, revenues and profits down the middle, there will be a single management for both ventures and decisions on fleets, including investments in aircraft, will be made jointly.

Moreover, the two airlines plan to extend their alliance into a fully- fledged merger, probably inside three years, once the Italian government has shed its 53&percent; stake in Alitalia.

This pioneering partnership has attracted relatively little attention compared with the frenzy over the planned alliance between British Airways and American Airways which was eventually killed off by regulators in Brussels and Washington in July. The KLM/Alitalia deal, by contrast, was waved through by European Commission competition officials, with little fanfare, almost at the same time.

The significance of the deal transcends Europe's airline business and offers lessons for its entire corporate sector.

If it succeeds - and there are some who think it will not - it will demonstrate that cultural, historical and political differences are no longer a bar to the creation of a genuine pan-European business world where it is as easy to do business between Munich and Madrid as between Dallas and Detroit.

The idea of a merger between KLM and Alitalia would have been unthinkable even two years ago. KLM was admired by its peers for creating a successful global carrier from a modest domestic market and with little help from the taxpayer. Alitalia, by contrast, was a featherbedded, strike-prone, heavily loss-making airline kept in business with lavish state subsidies.

Moreover Dutch firms have a penchant for merging with their British counterparts to create world class companies like Royal Dutch Shell, Unilever, Reed Elsevier, P&O Nedlloyd, Reckitt & Colman and Benckiser and, most recently, Corus, formed by the alliance between British Steel and Hoogovens.

KLM itself came within an ace of merging with British Airways before setting off on a long search for another European partner which led finally to a competition with Air France for Alitalia's hand.

The fact that KLM and Alitalia are tackling cultural differences head on underlines how much European business has had to change to respond to globalisation.

Mergers between Dutch and German steel and aerospace companies fell foul of unbridgeable management differences. Volvo shareholders rebelled against a planned merger with Renault, mainly because it was French, but made little fuss when its car division was sold to Ford of the US earlier this year.

The take-over of the famous British car companies, Rolls Royce, Bentley and Rover by German firms did not provoke a backlash because the very survival of the companies involved was at stake.

But firms can still play the 'nationality card'. British Airways voiced alarm earlier this month that British Midland “is now under German influence” following the announcement that Lufthansa was negotiating to buy 20&percent; of its rival. BA never displayed similar concern, however, about SAS's long-held 40&percent; stake, from which the Lufthansa holding will be acquired.

The KLM/Alitalia deal is crafted to reflect certain realities about the partners' histories. Thus the sharing of costs does not extend to “excessive” increases in labour costs and “the consequences of an abnormal level of production interruptions due to internal reasons” - i.e. future strikes at Alitalia.

For good measure, Alitalia management have agreed not to use their mobile phones during meetings and KLM executives will eat dinner later in the evening than they are used to, according to KLM president Leo van Wijk.

Despite their differing images, KLM and Alitalia will be genuinely equal partners. Based on historic figures, KLM is contributing more in revenues and cashflow, but Alitalia's profit prospects look better because it is less dependent than KLM on low-yielding transfer traffic.

Moreover, flabby Alitalia has more to gain from future restructuring than lean KLM. The Italian airline will benefit from KLM's impressive intercontinental network, while KLM will benefit from its partner's strong position in southern Europe.

An added bonus for KLM is that it gets a second hub at Milan's new Malpensa airport to compensate for capacity restraints at its home base at Amsterdam Schiphol Airport. All this is topped by synergies expected to yield annual savings of €400 million within three years.

The KLM/Alitalia deal is the product of a decade-long process of deregulation of the European airline business which still has some way to go.

KLM was ahead of the game, forging the first transatlantic alliance - with Northwest - while the Netherlands was the first EU country to cut a bilateral 'open skies' deal with Washington. Nearer to home, KLM took control of a British airline - Air UK - to feed into its Schiphol hub, bought a stake in Kenya Airways and is currently mulling a joint venture with Braathens, the Norwegian carrier in which it has a 30&percent; holding.

But it is still running to keep up with deregulation: next January, it will launch a British-based low cost carrier, buzz.