When and why did Air France and KLM merge?

Summary

• The merger of Air France and KLM could have taken place in 1958 with Lufthansa and Alitalia.
• KLM’s failed merger attempts led to financial difficulties and September 11 made the merger with Air France inevitable.
• The merger resulted in cost savings, higher profits, joint loyalty programs and an aircraft swap between KLM and Air France.

In the year before the merger of Air France and KLM, these airlines together carried more than 66 million passengers. The two airlines also served a total of 225 destinations.

Not surprisingly, the merger resulted in the creation of what was then Europe’s largest airline group. But why did an airline like KLM, which boasts of being the world’s oldest airline, have to merge with Air France, whose creation itself has a rich merger history?

The merger of Air France and KLM could have taken place in 1958

As early as 1958, Air France and KLM discussed a merger. The two airlines wanted to create a company called “Air Union” together with Lufthansa and Alitalia (Italy’s national airline until its dissolution in 2021). It was hoped that the alliance would help the airlines operate aircraft such as the Boeing 707 and the Douglas DC-8.

After talks about such a merger died down, KLM has attempted to join a merger several times in the past. These included the following:

Separation of Alitalia: a springboard for the merger of Air France and KLM

After failed attempts to form alliances with other airlines, KLM managed to form a partnership with Northwest Airlines. The alliance had the catchy name “Wings”. But KLM wanted to expand further. Shortly before the turn of the millennium, it founded Alitalia, Europe’s largest airline.

But after less than a year, the partnership ended and KLM had to pay $175 million in compensation. Not only were hopes of an alliance (and an expansion of routes) dashed, but KLM’s financial losses continued to grow in the years to come.

And then September 11 happened and the merger was inevitable

The two years following the shutdown of air traffic after 9/11 were some of the worst times for KLM, as it recorded a combined net loss (in 2002 and 2003) of 572 million euros (approximately US$700 million). At the end of 2002, Leo van Wijk, then CEO of KLM, was quoted as saying:

“…there are few opportunities to generate more revenue. We are not growing and higher fares are out of the question in this incredibly competitive market. When you put all these factors together, you can see that our prospects are not very rosy.”

Although 9/11 impacted KLM’s operations, there were other factors that contributed to KLM’s huge losses. These included:

• The liberalization of air transport led to strong competition.
• The Iraq war in 2003 led to a rapid increase in oil prices.

Joana Bailey reported for Simple Flying that the merger would allow KLM and Air France to be standalone airlines while allowing the alliance to grow financially:

“…the merger should bring the group an additional 400 million euros in the fifth year and 600 million euros annually thereafter. Cost savings would also be achieved through the consolidation of areas such as catering, station handling and shared use of airport lounges.”

Half a decade after the merger, KLM was making huge profits. The KLM-France group reportedly made $3.2 billion between 2003 and 2008. The merger of Air France and KLM led to other significant changes, such as:

• More connecting options for passengers, who will have more routes available as the two airlines join the joint alliance.
• Use of the same loyalty/mileage program
• Aircraft orders between KLM and Air France could be stolen, as shown in the example from 2019 when Air France received all A350 orders from KLM.

The merger officially took place on May 4, 2004. The French state’s 54 percent share in Air France was reduced by 10 percent (due to the merger). According to Air France-KLM, the group’s shareholdings today consist of:

• Treasury shares: 0.2%
• Company employees: 2.5%
• Delta Air Lines: 5.8%
• Dutch government: 9.3%
• China Eastern Airlines: 9.6%
• French government: 28.6%
• Other 44.0%

But how did the merger develop?

In March 2023, Simple Flying reported that despite “ticket sales of over 1.5 billion euros ($1.65 billion) in the first quarter of this year, enabling revenue of approximately 6.33 billion euros ($6.96 billion),” problems such as strikes in France had resulted in operating losses of nearly 306 million euros ($336.75 million) for the group.

A previous study conducted by Sveinn Vidar Gudmundsson of the Toulouse Business School examined the question of whether mergers actually lead to greater profitability for airlines:

“Although the AF-KLM Group achieved impressive financial results in the first period after the merger, dark clouds soon began to gather. While in the US two airlines can fully merge and achieve significant cost savings through synergies, in Europe this approach may simply be impossible due to the national-cultural ties of the airlines. AF-KLM’s senior management team faces major challenges for which there are no obvious answers.”