As far they are concerned it is a marriage for life. A year's intense prematrimonial discussion between the Dutch carrier KLM and Italy's Alitalia has produced a 10-year deal that promises to be a fully blown merger on a global scale.
KLM has, of course, been here before. The Dutch-USopen skies agreement signed six years ago allowed KLM to pioneer a new form of alliance with Northwest Airlines, complete with anti-trust immunity. Although that marriage almost failed due to some highly public boardroom bickering over ownership - Northwest felt KLM was attempting to win control - the partners have since mended their differences. In 1997 they confirmed their long-term commitment, signing a 10-year deal.
Yet KLM's affair with Northwest has so far extended only as far as the North Atlantic and the promised cargo tie-up has remained elusive. With Alitalia the ideal is to marry the entire worldwide passenger and cargo businesses. The two chief executives Dominico Cempella and Leo Van Wijk signed the Master Cooperation Agreement in Amsterdam last November, pledging to work together on everything from route development to engineering.
According to Giovanni Sebastiani, general manager of Alitalia, each partner will get back what it contributes, although the actual formula on how the projected alliance booty of $380 million a year from the passenger business and $60 million from cargo is as yet undecided.
Most of the projected cost savings - which the airlines refuse to separate from revenues - will come from merging sales and marketing operations in much the same way as the KLM-Northwest alliance. Each carrier will take exclusive responsibility for sales and marketing in its home market, while working for a combined presence in third countries.
One area where the partners have little synergy is on joint fleet development - Alitalia has gone to Airbus while KLM is firmly with Boeing. But further ahead, analysts believe that the partners could look to move closer.
Fundamental to the success of the alliance will be an early US link. Cempella says a "tripartite agreement" will be signed with Northwest Airlines in February. The hope is for Continental, with which Alitalia already has transatlantic codeshares, to join simultaneously in the wake of its alliance with Northwest. However, that will rest on the outcome of the current battle with US competition authorities, which so far are opposed to to a full-blown Northwest-Continental pact. "If there is no progress we will go ahead with a deal with Northwest anyway," says Cempella. He adds that the transatlantic deal will be backed by an Italian-US open skies agreement to be signed by mid-year.
He confirms that there will be an "umbrella brand" for the alliance, possibly using the much touted "Wings" name, but a launch is unlikely until Northwest is firmly on board.
The two carriers have already launched a reciprocal frequent flier programme, and have begun codesharing to South Africa and Australia and between Amsterdam and four Italian cities, while KLM franchises have begun feeding Milan Malpensa from the UK, Netherlands and Germany. To be developed in the future are Alitalia's relatively strong presence in the Europe-Latin American market and KLM's eastern European network, says Sebastiani.
Dual hub
The real centrepiece of the alliance is the three-hub system of Amsterdam, Milan and Rome, which they believe will generate 1 million new passengers in Europe. KLM has long struggled to enlarge its modest share of a European market in which it cannot rely on a major home base. With access to the high yield passenger and cargo business of northern Italy, the Alitalia link should finally give it a little more security, taking combined market share above 15% (see table). Yet there are many problems ahead.
Not least, KLM needs the Dutch Government to ease growth restrictions at Schiphol - a decision was due in December - which threaten the carrier's credibility as an alliance partner. The new Malpensa hub also lacks efficient transport links and is short of long-haul connections. Less than 2% of Milan's passenger traffic goes to Asia and under 4% to North America. "We need a daily connection from Malpensa to all the major cities of the world," says Donald Kalff, KLM's head of alliances. "Alitalia has to build its south-east and north-east Asian connections," he adds.
In Asia the alliance may eventually be able to count on Northwest's flights to Japan, while KLM has a link with domestic carrier Japan Air System. However, the Dutch carrier is yet to confirm a proposed tie-up with Malaysia Airlines. Alitalia has no Asian partner, although it is understood to favour an alliance with Star's Thai Airways. "Many arrangements in Asia are not as stable as you think," says Kalff.
Despite the lack of equity stakes, KLM argues that its alliance will be more solid and effective than others, because they are only based on "loose commercial links".
"We need one revenue management, one sales force, one distribution policy," says Kalff, confident that neither side will use the three-year opt-out clause. "Three years from now we will be all one group. From then on, there is no way back." He places part of the responsibility for the success of the alliance on to the shoulders of the Italian Government. Apart from forbidding any single investor to buy more than 25% of either airline's stock before cargo and passenger operations are merged next year, it also demands that Alitalia is privatised before June 2000.
Alliance Share of intra-European market 1997
| PAX (million) | Share | |
| KLM | 7.7 | 6.7% |
| Alitalia | 7.7 | 6.7% |
| KLM uk | 2.7 | 2.3% |
| Braathens | 0.4 | 0.3% |
| "Wings" | 18.5 | 16.1% |
| Star | 26.4 | 23.1% |
| oneworld | 24.5 | 21.3% |
| Qualiflyer | 20.1 | 17.6% |
Source AEA Note: oneworld includes Iberia and Finnair, which are set to join.
Source: Airline Business
