Global Corporate Strategy

Table of Contents
Introduction ............................................................................................................................ 3 Core competences and dynamic capabilities used by Air France-KLM ............................. 3 The meaning and effectiveness of strategic alliances (SAs) and mergers and acquisitions in Airline Industry .................................................................................................................. 7 The corporate profitability-corporate responsibility paradox .............................................. 11 Conclusion............................................................................................................................ 14 References ............................................................................................................................ 15

Introduction
The overall purpose of this study is to better understanding key strategic issues relating to the Global Airline Industry. There are three parts in this paper, firstly, this paper critical analysed the core competency and dynamic capabilities used by Air France-KLM in order to accomplish competitive advantage in the global airline industry. Secondly, critically evaluate the Strategic Alliance (SA) and Mergers and Acquisition (M &A) in the context of Global Airline Industry and particularly how Air France KLM using SA and M & A to maximise cost leadership and product differentiate. Thirdly, critical evaluate the corporate profitability and Corporate Social Responsibility with examples of Air France-KLM.

Core competences and dynamic capabilities used by Air France-KLM

Teece and Pisano (1994) was introduced the concept of dynamic capabilities. The have stated that an organisations competitive advantages will depend on the internal routine and process in a dynamic environment that allow the organisation to change and renew its normal organisational capabilities thereby it is possible to deliver as continuous stream of innovative and new services and products to customers. Capabilities are complicated bundle of knowledge and skills that are implemented by process of organisations. Thus Capabilities explain the usefulness in undertaking process relevant to the competition (Wnag & Amhed, 2007) and the past literature also demonstrate a very close link between underlying processes and their capabilities ( Tecce, 2007, Sambamurthy et al, 2003 and Wnag & Amhed, 2007). Core competencies are specific strength relevant to other firm in the sector which deliver the fundamental foundation for the endowment of added value (Sambamurthy et al, 2003). It is collective learning in firm and involves how to integrate multiple streams of technologies and diverse production skills. It is an involvement, communication and a deep commitment to working across the boundaries of organisations (Sanchez, 2004). The recognition of the core elements of dynamic capabilities and the planned difference between enabling processes and goal allows this paper to analyse the dynamic capabilities and core competence of Air France and KLM. The following are the dynamic capabilities and core competences of Air France KLM:

Innovative Capability: Innovation enables companies to obtain sustainable competitive advantages in time (Vermeulen, 2004) and represents a determining element of economic growth (COTEC, 2006). The concept of innovation involves technological innovation and innovation in management methods (AECA, 1995b). Technological innovation (Freeman, 1974) refers to changes in the typology of products and the introduction of new production processes (product and process innovation). Innovation in management systems is implemented through changes in the organizational structure of the company and in the administrative process, both of which are aspects more related to management than to the primary activity of the company. Innovation is considered to be one of the most relevant starting points for a company to become competitive, and is one of the best responses to competition intensity. Understanding the relationship between performance and innovation can help SMEs develop policies that improve productivity, improve competitiveness, and increase performance (Jusoh, 2010). Air France-KLM has won two awards at the Future Travel Experience which was held in Vancouver for the best use of Mobile Technology Award. The technology provides notification service for check out and in, delays, cancellation of the flights and also for the delayed luggage (KLM, 2012). . Further, the Air France and KLM has won second award jointly with Schiphol for the introduction of SSDOP (Self Service Baggage Drop Off) at Schiphol for the international airport (KLM, 2012). In addition, the Air France KLM has teamed up with Delft University in order to develop Strategic Innovative Agenda in Civil Aviation and the main of this agenda how to develop innovative strategy including technological factors (KLM, Innovation, 2012). In addition, Air France-KLM is also founder member the AGD (Aviation of Global Deal) group. The main purpose of this AGD is to make positive contribution to dialogues about the industry can assist decrease emission globally in line with the international targets. Brand Image: Given its leadership on the passenger transportation (Air France - KLM is the first airline company by turnover) and the maintenance segments, the Air France enjoys from an historical strong brand image, and is known as a quality airline company. Its size has been an advantage when it comes to the merger with KLM and the Sky team alliance, in which Air France is de facto the leading member. However, the main strength and competitive

advantage of the company rely on its unique resources: the Paris and Amsterdam hubs. Care has to be taken when one wants to compare Air France profitability. On the one hand, as a full service company Air France is doing better than its competitors, on the other hand compared to low-costs airlines on short-haul flights, it appears as largely ineffective. Indeed, from a structural and financial point of view, Air France has a huge, complex and costly organization, although it has made recent efforts to improve its effectiveness by controlling its costs. Air France has to manage its SBU portfolio carefully, most of its activity is on the short-haul SBU where competence is fierce, because of its costs Air France is losing ground. The long-haul business unit is where Air France has developed strong dynamic strategic capabilities, however due to recent turmoil this particular market is decreasing. Thus, as a weakness this paper can underline Air Frances over-reliance on the long-haul flights. The objectives of the company are the maintaining of this position on its traditional (European) markets, the improvement of its profitability and simultaneously an external growth by entering into emerging markets, where Air Frances presence is relatively low. The increasing environmental awareness is a biggest opportunity for Air France KLM to become leader in terms of sustainable development in the airline industry. The brand image which is globally recognised and also its reputation can use by the group in order to become an airline industry benchmark in terms of sustainable development and corporate social responsibility (CSR). This opportunity associates the airline to concentrate on environmental and technological factors, which minimise the impact of environment of the group. Absorptive capability: According to Cohen and Levinthal (1990), it is absorptive capacity as the organisations ability to identify the external information, value of new, integrate it and apply it to commercial purpose and the firms ability to evaluate. In terms of Air FranceKLM has been continuously developing new strategies by using external information in terms of commercial purpose, for example, short haul flight which has competitive price with other low cost airlines. Actions have already been implemented in this direction capability: Improvement of ground and flights operations to reduce oil consumption. As owner of the dual hub system Roissy CDG and Schiphol Air France KLM has a great unique resource, which can allow the Group to consolidate its leadership of the international airline arena. Moreover, this dual hub system fits with the new international social context where flying has become something normal and not exclusive to a few ones.

In addition, the twin centre system between Amsterdam and Paris is presently acting as shock absorber thanks to the transfer flows diversity, which are not all, showing to the disaster to the same way. The dual hub system is a cornerstone of the profitable growth of the Group. Finally, Air France KLM its a large company whose structure can affect the productivity and the adaptability to the global threats. Whereas in the short-haul business unit Air France KLM is losing ground because of the high competition, the long-haul unit is the star of the group. Indeed, Air France - KLM has leadership on flights from Africa and North America, but the company in Asia has few routes. This is because the group provided quality service to their passengers. The group can validate its comparatively high price on long-haul, besides those flights are more profitable, in part because of the business class. The growth in passengers traffic brought by emerging markets is probably an opportunity for Air France to act as the European vector. Develop strategic capabilities Despite a slight difference between low-cost and full service, airline companies have similar competences. What really differentiate them are their strategic resources. They define in a way the airlines strategic capabilities, and the strength of the companys position on the market. How many routes the company operates on? How many terminal has the company been granted with? How many hubs does it possess? Those are the fundamental questions a company has to ask itself to acknowledge and measure the extent of its competitive power over the market. Consequently, if the Group is to consider to a development of its strategic resources, it has to do by resource sharing and external growth synergies and sharing making associates. Getting control on the companys unique resource mean getting control over the companies. For example, the recent acquisition of Atlanta Capital which is about 25% share has doubles the routes of the group towards Italy. This move provided maximises synergies on the local market and also the groups leadership. However, has mentioned before, Europe isnt where to seize growth opportunity, but rather where to consolidate ones advantages. The airline industry is heading to an inevitable concentration. Analysts expect the market to be run by a handful of great groups, hence the size has become crucial. Thus, Air France is still perceived as a national company rather than as a private and global operator. The simple fact that the word France appears in the companys name should scare more than one government. Air France KLM is perceived as a reliable company but what is stopping it from being attractive to foreigners is its national (chauvinist) image, not to mention French

governments significant share hold. So, the internationalization of the group and more diluted shares are to be advocated.

The meaning and effectiveness of strategic alliances (SAs) and mergers and acquisitions in Airline Industry
Strategic Alliance and Merger is a common in any industry including airline industry. The airline industry is one of the key drivers behind rapid and dramatic globalisation for world businesses. The rapid developments of technologies are the responsible to help people for flying in short space of time. The de-regulation of the airline industry starting off in the US in 1978 which brought sea changes in the industry. On the other hand, the European countries have taken step for airline industry de-regulations within next 10 years. The aim of this de-regulation was to brining airline lines to fly anywhere in the world with collaboration of other airline which was form of Strategic Alliance and Mergers and Acquisitions. Hence, this de-regulation brought freedom in the competition in the airline market because of new entry for the other air line which helps to lowering price and basically the customers gets better quality service from the airline companies. The main aim of the strategic alliance and Mergers and acquisitions to reduce costs and improve technologies and increase profitability in the industry. There are many reasons found in the literature behind SA and M & A. Oum, Park and Zhang (2000, p. 4-5) have defined acceptable definition of M &A and SA for the airline industry: a long term partnership of two or more companies attempt to improve competitive advantages collectively sharing both companies resources including market access capabilities, brand assets, improving service quality, substantial part of their routes networks, integrating key areas of airline industry and hence finally improve profitability and sustainable position in the market. For example, British Airways and Spanish Airline Iberia have made merged and both the companies expected to save around 400 m Euro in a year and also the group together has operated with over 400 aircraft and flying over 200 destinations and carry approximately over 200 million passengers in a year ( BBC, 2010). . The SA and M &A provides improve technical efficiencies of lower production costs and better quality service to larger airlines in comparison to smaller airlines. Those concepts allow two or more companies or other words partners to integrate their best possible facilities such as technologies, maintenance and also increase routes and networks in globally. Hence, the increase of routes and network coverage provides airline profitability and sustainable

business in the airline industry. The airline companies are immensely benefited as the airline companies increased coverage without increasing their routes systems individually and increase market share and consequently it helps the airline companies to lower costs of unit production. For example, Delta airline has merged with Northwest airline in 2008 and consequently the both companies combined websites and reservation system in which both companies received increase passengers and able to reduce costs in the operations ( Delta, 2012). The concept of SA and M &A gives limit competition in the markets and it enables the companies to overcome restriction on market and route entry, pricing and capacity in international and domestic aviation markets but it increase monopolies in the market. For example, Lufthansa, Germany has purchased 19% share of Jetblue a US based low costs airline in 2008 in which provides technologies and operational co-operation to operate low costs routes ( Lufthansa, 2011).

How SAs and M&As have helped Air-France-KLM to maximise its corporate profitability through low-cost leadership and/or product differentiation The Dutch Koninklijke Luchtvaart Maatschappij N.V. (KLM) and the French airline Socit Air France (Air France) decided to concentrate their businesses in one corporate holding group called Air France-KLM. In this merger Air France acquired 100 percent control of the KLM carrier by an exchange of stocks (European Commission, 2004a). Momentarily the new entity still consists of the two operating airlines, but will most probably merge their operations at a later stage. It is also very important to point out that this merger created Europes leading airline group and also the worlds largest, with respect to revenues (Neue Zricher Zeitung, 2004a). With regard to these aspects it is tenable to pose the suspicion that competition within in the European airline market might have been harmed due to this new market leading entity. As all mergers that develop in the European Union (EU), the European Commission (EC), which is responsible for the competition policy, investigated the association of Air France and KLM as well. After some deeper enquiry the EC finally gave its approval to the merger but subject to conditions. Based on the latter, the question arises how the EC argued that this merger has not harmed competition in the European airline market and hence, Air France-KLM has been

trying to maximise the corporate profitability by introducing a series of mini-fares on domestic flights and it means the group focused on the low cost airlines. The group has started fare only 49 euros but in which not included a reserved seat and checked-in bags. The group has said that the limited resources in France and economic downturn forced them to buy Italys struggling flag carrier Alitalia ( BBC, 2012). The group has paid more than a billion euros in order to rescue Alitalia in 2008. In contrast, it is important to emphasize that this route connected the hubs of each airline, KLM and Air France, respectively. Due to that, it becomes evident that between these airports, Amsterdam and Paris, Air France and KLM also built up the highest market share. If there had not been any constraints to the merger it is even more interesting to observe that with their concentration the market share of Air France and KLM, then combined, would have amounted to 90 percent (European Commission, 2004a). Consequently, the new holding group Air France-KLM would have had such a dominant position on this route that competition would have almost been entirely eliminated. In such a situation other suppliers of air transportation could not have emerged and consumers would have had no choice of supply anymore, just for the reason that Air France-KLM would be the only one in the market left. Air France- KLM has made important enhancement, especially on its short haul routes with lowest possible price but in in terms of load factors the long-haul routes are more sustainable however, the merger of both companies provides low-cost leadership in many regions including Middle East, for instance, Middle East operations has able to deliver a competitive products in terms of quality and innovative differentiate products in last five years. However, Europe remains a high revenues region which is 36% (Credit Agricloe Group, 2012).

Figure 1: 2011 Passenger Revenue by Region

(Source: Credit Agricloe Group, 2012) The group has announced restructuring programmes which focuses on the combination of lower investments in order to lowering financial gearing and a reduction in controllable costs. The company has been facing a huge competition with Easy Jet and Ryanair in terms of lows flying. Hence, this programme will help them to cost savings and achieving more sustainable cost structure and mainly lows costs leadership and various products differentiate. The group has invested millions in last few years in order to one of the most modern and fuel efficient fleet worldwide and also cost effective and affordable price for their passengers. The group has been more succeeded in long haul flight rather than short haul flights compared to other competitors (Figure 2)

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Figure 2: Sustainable business in short haul and long haul flight

(Source: Credit Agricloe Group, 2012)

The corporate profitability-corporate responsibility paradox

Corporate Social Responsibility has termed as corporate citizenship which means that a company should be a good neighbour in its host community (U.S. Agency for international development, catalyst consortium, 2002). Corporate Social Responsibility (CSR) is ostensibly about doing good. But the question is good for whom? Good for the company, the owners, the managers, the employees, the customers, the environment, the local community, the world? The possibilities are many, and most CSR reports give reasons for why a particular company engages in CSR. Since CSR is about doing good, these reasons may be seen as ethical commitments. However, it has been proven corporate social responsibility provides corporate profitability as it is one of the significant corporate strategy to send messages to the communities that the company is there for them by participating various social, and charity programs. In recent researches we have found that organizations fulfilling their social responsibility towards the betterment of their employees, found there employees more committed to the organization then before. Corporations are looking for a growth which is sustainable. More and more amount of money is to be incurred to adopt CSR as a strategic tool (Ali, Imran

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2010). Corporate social responsibility (CSR) can be a way for companies to improve their reputation in market by which company can make a significant corporate profitability . According to Air France-KLM (2011) , the companys objective is to become the world leader of airline industry and connect the wider economy and society together and enhance their lives through providing their service in airline passengers. Stakeholders expect Air France-KLM to demonstrate leadership in tackling these issues; strengthening environmental regulations mandate robust action; and the rising costs of energy, resources and waste disposal have a direct impact on our financial returns. The company involved affiliated, staffs and business partners in order to ensure top- down, external to internal were sharing same value of CSR. The company also conducted regularly global CSR workshop, published monthly newsletter and developed joint projects. It has been found that the Air France-KLM actively involved in various CSR programs and hence, there are various CSR professional expert Advisory Panel involved to deliver effective CSR programs. The panel provides magnificent feedback and ideas towards to face challenges and Air France-KLM s conduct. Moreover, there are a number of forums participated in companys CSR strategy and its purpose to improve CSR ideas and 10policies. Its interest was demonstrated through its widespread involvement into global business Council for Sustainable Development, Air-France has been deeply involved to fulfil their CSR responsibilities. This study found that Air France-KLM has taken various initiatives to implement their three pillar of CSR strategy. For example, the Air France-KLM scored 75 for employee engagement, which was found by Global People Survey. Hence, the main aim of the Air France-KLM is to deliver innovative products and services of which contribute to growth and allow a low-carbon economy (Air France-KLM, 2012). Therefore, the Air France-KLM has been actively involved in CSR activities. Air France-KLM has been actively involve to implement safety regulations which is improve and adopt strict regulations. Air France-KLM is participating in additional safety policy to improve passengers safety (Air France-KLM CSR Report, 2011). In addition, the group involves in integrating security of the flights also at the airport. In addition, Air France-KLM is the first airlines to support Air France industries to integrate ISO 26000 guidelines in the groups operations ( Air France-KLM CSR Report, 2011).

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The below figure 2 demonstrate various groups of stakeholders with whom the Air FranceKLM maintains regular dialogue and consequently the results of dialogue helping to obtain further steps of their mapping issues, policy and are mentioning in yearly CSR reporting. Figure 3: Key principles of CSR ( Airline France-KLM) .

(Source: Air France-KLM CSR Report, 2011) The group has examined by the key international non-financial agencies such as Oekom, Vigeo, SAM and Eiris. The group has been ranked in leader in Dow Jones Sustainable Index for the six consecutive years.

Recommendations: During the year significant disruption occurred in a number of markets notably in the Europe, Middle East. Air France-KLM will need to review whether its approach to stakeholder engagement and responsiveness is sufficient to balance stakeholder needs and define appropriate responses in these rapidly changing markets. Environmental data Air France-KLM Groups guidelines for reporting environmental data have been

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disseminated to all the markets. However, during local market visits the customers noted that the internal review of sustainability data in certain markets could be improved to help build confidence in the data sets used to manage these issues. Progress against objectives Air France-KLM consistently reports against its objectives many of which are qualitative in nature and are set on a short-term basis. The company saw evidence of a number of strategic initiatives which could shape Air France-KLM s sustainability direction over a number of years in which leads to corporate profitability. Air France-KLM could consider including a roadmap of its sustainability journey over the next few years to enable stakeholders to assess progress over a longer period of time. The local markets visited had programmes in place to drive improvements in managing and reporting safety performance across their operations. At Group level a number of initiatives have been developed by Air France-KLM to support the reduction of reported driving-related incidents, including fatality prevention plans and detailed root cause analysis. However, despite these efforts, over 50% of fatalities result from road traffic accidents. Air France-KLM needs to continue supporting the adoption of good practices and embedding a safety culture and standards on driving safety at both Group and local market level

Conclusion
The above critical evaluation has indicated that core competences and dynamic capabilities of Air Franc-KLM helping them to become leader in airline industry and those concepts are significant strategic tools to gain competitive advantage over the competitors. In addition, the merger of Air-France-KLM provided a strong and significant position in the market which helps them to gain sustainable position in the airline industry. The CSR is a significant strategic tool for any business to ensure local communities that the company is here to conduct a business beside deeply involve in local development.

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References
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Credit Agricloe Group, (2012), available at: www.agricloegroup.com[accessed on 07th Jan 2013]

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