Appendix 1

(1)

55

Appendix 1

Summary of the convention on International Civil Aviation

The Convention on International Civil Aviation (1944), signed at Chicago, was intended to prepare a framework within which civil air transport could develop (not military or other state activities whether in a piloted or drone craft). It introduced nine freedoms of the air for those states that have adopted the Convention and enter into bilateral treaties that may grant any of the following rights or privileges for scheduled international air services:

1. To fly across the territory of either states without landing.

2. To land in either state for non-traffic purposes, e.g. refueling without boarding or disembarking passengers.

3. To land in the territory of the first state and disembark passengers coming from the home state of the airline.

4. To land in the territory of the first state and board passengers travelling to the home state of the airline.

5. To land in the territory of the first state and board passengers travelling on to a third state where the passengers disembark, e.g. a scheduled flight from the U.S. to France could pick up traffic in England and take all to France (sometimes termed beyond rights).

6. To transport passengers moving between two other states via the home state of the airline, e.g. a scheduled flight on an American airline from the United Kingdom lands in the U.S. and then goes on to Canada on the same aircraft. 7. To transport passengers between the territory of the granting State and any

third State state without going through the home state of the airline, e.g. a scheduled flight on an American airline from England to Canada that does not connect to or extend any service to/from the U.S..

8. To transport cabotage traffic between two points in the territory of the granting State on a service which originates or terminates in the home state of the foreign carrier or (in connection with the so-called Seventh Freedom) outside the territory of the granting State (also known as consecutive cabotage), e.g. an American airline flies from the U.S., lands passengers in London and then boards passengers to fly to Manchester.

(2)

56 cabotage), e.g. an English airline operates a service between Perth and Sydney in Australia).

Because only the first five "freedoms" have been officially recognised by international treaties, the ICAO considers the remaining "freedoms" "so-called".

Source: Wikipedia http://en.wikipedia.org/wiki/Open_skies

(3)

57

Appendix 2

Summary of Open Skies treaty 2007

Key open skies provisions

Most of the existing civil agreements include: 1. Free Market Competition:

No restrictions on international route rights; number of designated airlines; capacity; frequencies; and types of aircraft.

2. Pricing Determined by Market Forces:

A fare can be disallowed only if both governments concur -- "double-disapproval pricing" -- and only for certain, specified reasons intended to ensure competition.

3. Fair and Equal Opportunity to Compete: For example:

All carriers — designated and non-designated — of both countries

may establish sales offices in the other country, and convert earnings and remit them in hard currency promptly and without restrictions. Designated carriers are free to provide their own ground-handling services — "self handling" — or choose among competing providers. Airlines and cargo consolidators may arrange ground transport of air cargo and are guaranteed access to customs services.

User charges are non-discriminatory and based on costs; computer reservation system displays are transparent and non-discriminatory. 4. Cooperative Marketing Arrangements

Designated airlines may enter into code-sharing or leasing arrangements with airlines of either country, or with those of third countries, subject to usual regulations. An optional provision authorizes code-sharing between airlines and surface transportation companies.

5. Provisions for Dispute Settlement and Consultation

Model text includes procedures for resolving differences that arise under the agreement.

(4)

58 Carriers may choose to operate under the charter regulations of either country.

7. Safety and Security

Each government agrees to observe high standards of aviation safety and security, and to render assistance to the other in certain circumstances. 8. Optional 7th Freedom All-Cargo Rights

Provide authority for an airline of one country to operate all-cargo services between the other country and a third country, via flights that are not linked to its homeland.

(5)

59

Appendix 3 Cases

KLM

These are the selected cases for KLM:

• Alliances: ’92 Northwest, ’95 Eurowings, ’98 Alitalia.

• Mergers/Acquisitions: ’93 Air Uk, ’02 Air France

In this section the hypotheses from chapter three are tested on a number of alliances and mergers/acquisition in which KLM was involved. Three alliances and two

mergers or acquisitions are selected; alliances with Northwest in 1992, Eurowings in 1995, Alitalia in 1998, the acquisition of Air Uk in 1993 and of course the merger with Air France in 2004. Per case a short introduction is given.

Alliances

Northwest

In 1992 Northwest and KLM created the first transatlantic alliance. “Not only was the Northwest/KLM alliance the first airline alliance in the world, ours is the most deeply integrated. The Northwest/KLM alliance coordinates schedules, prices and capacity under an Open Skies agreement between the United States and The Netherlands.” (From http://www.nwa.com/corpinfo/upclose/).

Hypotheses 1. Credit Rating.

In 1992 KLM had a good rating, preferring an acquisition. 2. Previous Experience.

Prior to this alliance KLM had little or no experience in alliances or M&A’s. As stated in the introduction this alliance was considered to be the first alliance of this

magnitude. Therefore it is not possible to draw conclusions on this hypothesis. 3. State control.

Northwest, like all other American carriers, was privatized in the 80’s so the American state had no ownership in this airline. This is a preference for an acquisition.

4. Foreign ownership.

Although the first step towards a real open skies agreement was taken in September ’92, there were still severe restrictions on foreign ownership of US airlines.

(6)

60 In the years 1991 and 1992 economic growth was slow, respectively 1,6% and 2,4%. The average of 2% would indicate that an alliance would be preferred over a merger. 6. Oil price

In 1990 and 1991 the oil price was $22,99 and $19,37, averaged $21,18. In 1992 the oil price further dropped to $19,04 per barrel. Therefore the oil price can not be labeled as high in 1992 and a merger or acquisition should be preferable. 7. Nationality

Northwest is an American airline and KLM a Dutch carrier, this makes it international cooperation and therefore an alliance would be expected preferable.

Eurowings

“Eurowings has code shared with KLM since 1995, providing 36 daily flights to Amsterdam from 10 German cities, while KLM itself operates to Schiphol from five German cities. Jointly, the two airlines account for about 7% of the German market and the aim is to increase that figure to 15%, said Santner. About 70% of the 900,000 passengers that Eurowings flies to Amsterdam annually transfer to either KLM or Northwest for long-haul flights.” (Eurowings aligns with KLM, 1998)

In 1995 KLM had a bad rating, indicating a preference for an alliance 2. Previous Experience.

In 1992 KLM started the alliance with Northwest which turned out to be a great success. Even though there were some problems in cross share ownership and control this alliance was success. Almost ten years later this is said by a KLM director: “the cost and revenue synergies created by the alliance are far better than predicted” (KLM director, 24 October 2001).

Since this was effectively the only substantial form of cooperation, it can be said that the successful alliance with Northwest would indicate a preference for a new

alliance.

7. State control.

The German Eurowings airliner was a complete private company, which indicates a preference for an acquisition.

Since the introduction of the European single market and the so called “third package” of airline liberalization in 1992 it was allowed for European airlines to be owned by any other European nationality. This made it possible for KLM to acquire Eurowings if it wanted to.

9. Economic growth.

(7)

61 10. Oil price

The oil price in 1993 and 1994 was $16,79 and $15,95, averaging $16,37. In 1995 the oil price had risen to $17,20, an increase of 5%. An increase of 5% is not seen as a high oil price, which again leaves both an alliance and acquisition even attractive.

11. Nationality

Eurowings is a German airliner, wholly German owned, which makes this cooperation international and thus favoring an alliance over an acquisition.

Alitalia

“The KLM/Alitalia deal is the most comprehensive alliance yet. The two companies have taken unprecedented steps toward truly melding each company's service offerings into one transparent network. . Network planning, sales, marketing, and revenue management will be interwoven. A joint alliance board will oversee the integrated management of passenger and cargo operations. Each airline maintains autonomous control of capacity and crews. However, decisions pertaining to the shared fleet of aircraft will be made jointly, and profits will be split 50/50. “

(KLM/Alitalia take joint operations to higher plane., 1999). Hypotheses

1. Credit Rating.

In 1998 KLM had a bad credit rating, indicating a preference for an alliance. 2. Previous Experience.

By 1998 KLM has gained extensive experience in alliances; Northwest, Eurowings, Air Kenya (’95), and Braathens (’95) all are successful alliances. This is best exemplified by the fact that in 1999 all these alliances have intensified in terms of number of code shared flights and increased joined operations (KLM VERSTERKT WERELDWIJD ROUTENET IN SAMENWERKING MET ALLIANTIEPARTNERS, 1999). The positive experiences with these previous alliances indicate that a alliance with Alitalia would be preferable.

3. State control.

The Italian state had a 53% in the Italian airliner Alitalia. This is substantial more than the 25% criterion of hypothesis seven, 53% share ownership means that Alitalia was a public owned airline. The Italian state had effective control and ownership, this should indicate that an alliance would be the preferred form of cooperation. As would become more clear in a later stadium, the Italian state was not willing to sell its majority stake, thereby preventing a merger or acquisition by KLM.

(8)

62 5. Economic growth.

The alliance started in 1998. The economic growth in 1997 and ’98 was 4,2% and 2,7%, averaging 3,45%. This is higher than 2,5% and therefore seen as high economic growth. This indicates that based on economic growth both an alliance and acquisition would be possible.

6. Oil price

In 1996 and ’97 the oil price was respectively $20,37 and $19,27, in 1998 the oil price dropped to $13,08 per barrel. This was mainly due to increased OPEC supply and the Asian financial crisis. Compared to the previous years oil was rather cheap, thereby leaving an alliance and acquisition even attractive.

7. Nationality

Alitalia is an Italian airliner, in which the Italian state had a majority stake. This makes the cooperation international and thus favoring an alliance over an acquisition.

(9)

63

Mergers and acquisitions

Air Uk

Air UK was a wholly privately owned, Independent regional British airline formed in 1980 as a result of a merger involving four rival UK-based regional airlines. In 1995, KLM increased its minority stake in Air UK to 45%. In 1999 KLM became Air UK's sole shareholder when it bought out British Air Transport Holdings. The following year Air UK was renamed KLMuk. (http://en.wikipedia.org/wiki/Air_UK)

In 1998 KLM had a bad credit rating, indicating a preference for an alliance 2. Previous Experience.

In 1995 KLM bought a minority stake and in 1999 it became the sole owner. In 1999 the acquisition was effected, therefore this year will be used as the year in which the acquisition was a fact. In 1999 KLM mainly had experience with alliances, as stated before these alliances were all successful. Even the alliance with Alitalia was still seen as a success at that moment. It was not until 2000 that the alliance with Alitalia was broken. These successful previous experiences would indicate that a new alliance should be the preferable for of cooperation instead of a merger.

7. State control.

As stated in the introduction of this case, Air Uk was a wholly privately owned airline. The state did not have any stake in this airline. This means that state control does not prevent an acquisition.

In 1999 it was possible for European nationals to acquire another European airline. Similar to the other European alliances foreign ownership was not an obstacle to acquire Air Uk for KLM.

9. Economic growth.

It was not until 1999 that KLM completed the acquisition of Air Uk. The economic growth in ’98 and ’99 was respectively 2,7% and 3,7%, averaging 3,2%. This is higher than 2,5% and therefore seen as high economic growth. This indicates that based on economic growth both an alliance and acquisition would be possible. 10. Oil price

In 1997 and ’98 the oil price was respectively $19,27 and $13,08, average $ 16,18. In 1999 the oil price climbed to $17,98 per barrel. This is an increase of 11,12%, considering the trend of rising oil prices the oil price is considered to be high. This high oil price should indicate a preference for an alliance.

11. Nationality

(10)

64 character of Air Uk this deal is considered an international form of cooperation. Again, this would indicate the preference for an alliance instead of merger.

Air France

“The tie-up between KLM and Air France creates one of the largest and most powerful airlines in Europe. The ground-breaking deal — which effectively sees Air France acquire its smaller rival for £545.5 million — creates a carrier with more than 100,000 employees, two large hubs, two complementary networks, aggregated revenues of £13.3 billion and 226 destinations. Both airlines will retain, for at least five years, their national identities, logos and brands. KLM shareholders will own 19% of the company, the French state 44% and existing Air France shareholders 37%. Similar deals could become more common if talks between the European Union and US to liberalize transatlantic routes are successful.” (from: Travel Weekly, 2003)

The Air France – KLM deal was announced in 2003 and effectively closed in 2004. The decision to prefer a merger, or acquisition by Air France, was made in 2003, therefore 2003 is the year that is used in the testing of hypotheses.

In 2003 KLM had a good credit rating, indicating a preference for a merger 2. Previous Experience.

In 2003 KLM already had much experience with alliances of all sorts and also minority stakes and mergers are used forms of cooperation for KLM. But the Air Uk acquisition was sold in early 2004 to Ryan Air, and the alliances with Eurowings, Braathens, Regional Airlines and Alitalia were broken. Especially the Alitalia alliance turned out to be a disaster. So at this point in time one can not say that the decision to cooperate with Air France was influenced by successful experiences from the past.

3. State control.

Although the Air France – KLM deal was presented as a merger, it effectively was a take over of KLM by Air France. For this reason the focus is on the degree of state control in KLM, not Air France. The ownership structure and voting rights in KLM and Air France was quite complex. The most important aspect if the deal for this

hypothesis is that the Dutch state only had 14,7% voting rights in KLM, as part of the new Air France – KLM deal. (Doganis, 2006)The 14,9% is not enough to qualify the state influence as high. Therefore the preference for an alliance or merger can not be determined.

(11)

The Air France – KLM deal was announced in 2003, the economic growth in 2002 and 2003 was 3,1% and 4,0%. This is enough to qualify the growth as high clearing the way for both a merger or alliance.

6. Oil price

7. Nationality

(12)

66

Air France

These are the selected cases for Air France:

• Alliances: ’99 Delta Airlines, 2001 Alitalia.

• Mergers/Acquisitions: ’97 Air Inter, 2000 Regional Airlines, 2003 KLM

In this section the hypotheses from chapter three are tested on a number of alliances and mergers/acquisition in which Air France was involved. Two alliances and three mergers or acquisitions are selected; alliances with Delta Airlines in 1999, and Alitalia in 2003. The acquisition of Air Inter in 1997, the acquisition of Regional Airlines in 2000, and of course the merger with KLM in 2003. Per case a short introduction is given.

Alliances

Delta Airlines

“Air France and Delta Air Lines announced Tuesday the creation of a new

partnership that analysts said was designed to carve up passenger and cargo traffic across the Atlantic and pave the way to a third global air alliance.

Analysts said that Groupe Air France, which was partly privatized earlier this year, was seeking to bolster its 5 percent share of trans-Atlantic traffic and compete

against its main European rivals, British Airways PLC and Lufthansa AG, which have significantly higher shares in that market through rival alliances. At the same time, the new deal will give Delta Air Lines Inc. immediate access to hundreds of

European destinations through Air France's hub at Charles de Gaulle airport near Paris. Delta has long complained about being excluded from trans-Atlantic traffic by American Airlines' preferential access to Heathrow airport near London through its partnership with British Airways in the Oneworld alliance.“ (International Herald Tribune, June 23 1999).

In 1999 Air France had a good rating, indicating a preference for an acquisition. 2. Previous Experience.

Prior to this alliance Air France already had a number of successful alliances with other airlines. Especially some domestic competitors had agreed to alliances with Air France.

3. State control.

Delta Airlines, like all other American carriers, was privatized in the 80’s so the American state had no ownership in this airline. State control was therefore no obstruction for a merger, therefore, instead of an alliance, a merger would have been preferable.

(13)

67 Although the first step towards a real open skies agreement was taken in September ’92, there were still severe restrictions on foreign ownership of US airlines.

Substantial ownership and effective control of US airlines were still restricted to Americans. This prohibited a potential merger between Delta and Air France. 5. Economic growth.

In the years 1998 and 1999 economic growth was slow, respectively 2,7% and 3,7%. The average of 3,5% would indicate that a merger is the preferred form of

cooperation instead of an alliance.

6. Oil price

In 1997 and 1998 the oil price was $19,27 and $13,08, averaged $16,18. In 1999 the oil price increased to $17,98 per barrel. This is an increase of more than 11%. This increase indicates that an alliance is preferable.

7. Nationality

Delta is an American airline and Air France is French, this makes it international cooperation and therefore an alliance would be expected preferable.

Alitalia

“On Monday 12 November 2001, Air France and Alitalia are starting their alliance on flights between Italy and France, therefore implementing the bilateral agreement signed on 27 July 2001. This commercial partnership between Air France and Alitalia enable the two airlines to step up capacity and improve services offered to

customers, both on passenger and cargo routes. The partnership is also built around the joint commitment to develop a “multihub” system based at Milan-Malpensa, Rome-Fiumicino and Paris-Charles de Gaulle airports. These hubs, at the heart of a dense route network, offers customers more than 64,000 weekly connecting

opportunities, and form a strong pole to deal with competition from other European airlines.” (Press statement Air France – Alitalia November 12th, Rome).

In 2001 Air France had a bad credit rating, indicating preference for an alliance 2. Previous Experience.

By 2001 Air France had many successful alliances, the Delta alliance was working really good. Also some smaller alliances were still in process or had converged to equity alliances and acquisitions. An alliance with Alitalia

3. State control.

The Italian state had a 53% in the Italian airliner Alitalia. This is substantial more than the 25% criterion of hypothesis three, 53% share ownership means that Alitalia was a public owned airline. The Italian state had effective control and ownership, this should indicate that an alliance would be the preferred form of cooperation.

.

(14)

68 In 2001 it was possible for European nationals to acquire an Italian airline. This indicates that a merger would be the preferable form of cooperation.

5. Economic growth.

In the years 2000 and 2001 economic growth was respectively 4,8% and 2,5%. The average of 3,7% would indicate that a merger is the preferred form of cooperation instead of an alliance.

6. Oil price

In 1999 and 2000 the oil price was $17,98 and $28,24, averaged $23,11. In 2001 the oil price dropped to $24,33 per barrel. The lower oil price indicates that a merger would be preferable.

7. Nationality

Alitalia is an Italian airline and Air France is French, this makes it international cooperation and therefore an alliance would be expected preferable.

Mergers and acquisitions

Air Inter

As part of the ongoing reorganization of Air France by its president Christian Blanc, officials have revealed that the company -- which until now has concentrated on the domestic market -- is going European. Under the new plan, Air France "Europe" will merge its operations with Air Inter, the other carrier owned by Air France. The merger is scheduled to take effect on January 1, 1997.

The two airlines, which jointly employ 16,000 workers, experienced a deficit in 1993 totaling $454 million and are facing an intensified competition coming to the

European market with the arrival of Euroconcept, a similar European merger of British Airways and Lufthansa.

In 1997 Air France had a bad credit rating, indicating a preference for an alliance. 2. Previous Experience.

In 1997 Air France mainly had experience with acquisitions of domestic competitors such as UTA and TAT. These acquisitions were qualified as successful, mainly because the domestic competition was reduced. These successes with previous acquisitions indicate a preference for an acquisition.

3. State control.

(15)

69 4. Foreign ownership.

Since this is a domestic acquisition foreign ownership is not an issue. 5. Economic growth.

In the years 1996 and 1997 economic growth was respectively 4,1% and 4,2%. The average of 4,15% would indicate that an acquisition is the preferred form of

cooperation.

6. Oil price

In 1995 and 1996 the oil price was $17,20 and $20,37, averaged $18,76. In 1997 the oil price increased to $19,27 per barrel. This is an increase of less than 10%,

therefore a merger would be preferred.

7. Nationality

Since Air Inter and Air France both French airlines are, a merger indeed is preferred.

Regional Airlines

“Regional Airlines is being acquired by Air France Finance for around $62.5 million. Following approval by various competition authorities, Air France will hold 70% of Regional's capital. Jean-Paul Dubreuil, whose family founded the carrier, will remain chairman.

The acquisition will enable Air France to complete its network of partnerships with various third-level airlines. As part of that effort, Regional will provide aircraft for thin Air France routes and connecting traffic to hubs at Charles de Gaulle and Lyon. Air France also will gain access to markets it does not now serve. Regional, which operates 250 daily flights to 160 destinations throughout Europe, carried 937,000 passengers in 1999 in a fleet of 17 Brasilias and ERJ-135s/145s and posted revenues of $176 million.” (Air Transport World, Mar2000)

In 2000 Air France had gained a good credit rating, indicating a preference for an acquisition.

2. Previous Experience.

Following the success of the acquisitions of the early ‘90s and Air Inter in 1997 it is reasonable to argue that indeed a merger was again the preferable form of

cooperation. Even though Air France had some alliances. 3. State control.

Regional Airlines was majority owned by KLM, and the French state had only a small share in it. Therefore state ownership did not prohibit an acquisition and an

acquisition was the preferable cooperation. 4. Foreign ownership.

(16)

70 In the years 1999 and 2000 economic growth was respectively 3,7 % and 4,8%. The average of 4,3% would indicate that an acquisition is the preferred form of

cooperation.

6. Oil price

In 1998 and 1999 the oil price was $13,08 and $17,98, averaged $15,53. In 2000 the oil price increased to $28,24 per barrel. This is an increase of more than 80%,

therefore an alliance would be preferred above an acquisition

7. Nationality

Since Regional Airlines and Air France both French airlines are, a merger indeed is preferred.

KLM

The merger between KLM and Air France, ratified in mid-October, created the biggest airline in the world in terms of turnover. Under the all-stock deal Air France valued the Dutch airline at €785m. The agreement was signed after KLM gave job security guarantees to its workforce. The merger between the two national flag carriers will create a holding company Air France-KLM with an annual revenue of €19.2bn. KLM shareholders will have 19% and the French, including their

government, the rest.

Dominic Edridge, transport analysts with Commerzbank in London said that a combination of factors was behind the deal. "Obviously there was the financial pressure in the aviation industry in the EU and the US where greater size is believed to bring greater synergies and cut costs," he said.

But he said the aviation environment could also change in the near future where large airlines offering two hubs, as AF-KLM will, could be at an advantage.”( Business Travel World, nov 2003)

Due to 9/11 and wars the credit rating of Air France was bad, therefore indicating preference for an alliance.

In the early ‘90s Air France had some successful domestic mergers and acquisitions, but in the late ‘90s the focus was more and more on alliances. See the examples of Delta and Alitalia, In 2003 the global alliance with Delta was seen a great success. From this viewpoint one could argue that based in the successful alliances in the period up to 2003 would suggest that Air France would have preferred an alliance with KLM.

3. State control.

The Dutch state was a shareholder in KLM, but a part of the Air France – KLM deal was that the Dutch state would only be a minority shareholder after the completion of the deal. Control of Dutch state was limited to less than 25% and therefore a merger should be the preferred form of cooperation.

(17)

71 Like all other intra European deals after 1992 there are no restrictions for Air France (French) to have a majority stake in KLM (Dutch). The foreign ownership restrictions do not apply to this deal and therefore a merger should be preferred.

5. Economic growth.

The Air France – KLM deal was announced in 2003, the economic growth in 2002 and 2003 was 3,1% and 4,0%. This is enough to qualify the growth as high indicating a preference for a merger

6. Oil price

7. Nationality

(18)

72

United Airlines

These are the selected cases for United Airlines:

• Alliances: ’94 Lufthansa, 1998 Delta Airlines, 2000 US Air.

• Mergers/Acquisitions: None.

In this section the hypotheses from chapter three are tested on a number of alliances in which United Airlines was involved. In the period 1992-2007 United Airlines did not acquire or merge with any airline of importance. Some routes of the bankrupt Pan Am airline were bought and an attempt was made to acquire US Air. However this acquisition was prohibited by regulators, instead United and US Air created a far stretching alliance.

Alliances

Lufthansa

“The LH/UA partnership, formed on June 1, 1994, is a commercial alliance without equity investment. As of December 1994, LH codeshared on UA flights serving 25 U.S. cities beyond UA hubs, while UA codeshared on LH flights serving 30 European and Middle Eastern cities beyond LH hub. They also code shared on their flights between their hubs. Each partner offered the same number of flights on the non-stop routes as before the alliance. For example, each partner provided 31 flights between Washington, D.C. and Frankfurt in July 1993 (pre-alliance) and July 1994 (post-alliance). Due to the code sharing, both partners offered 62 flights because each put its flight codes on the other’s flights”. (Review of Industrial Organization, June 2000)

United’s credit rating in 1994 was not good, indicating a preference for an alliance. 2. Previous Experience.

In the early ‘90s United had little experience with acquisitions and alliances. The Lufthansa deal was the first alliance of importance. Therefore there were no successful previous experiences and this hypotheses can not be tested. 3. State control.

Lufthansa started as a public company, in 1989 the government lowered its share to 51,62% and in early 1994 privatization was further continued when the state sold more shares and only held 35%. This is more than the criterion of 25% and therefore an alliance would be preferable.

(19)

73 In 1994 it was not possible for US carrier to obtain a majority share in a European airline. Foreign ownership, outside EU, was restricted to 49%. This makes an acquisition impossible and only leaves an alliance as option.

5. Economic growth.

The United – Lufthansa deal was closed in 1994. Economic growth in this year and 1993 were 2,4% and 3,8%, averaging 3,1%. This is higher than 2,5%, making a merger the preferred form.

6. Oil price

In 1992 and 1993 the oil price was $19,04 and $16,79 per barrel. In 1994 the price dropped further to $15,95. This qualifies the oil price as low and makes an

acquisition preferable. 7. Nationality

United Airlines was American and Lufthansa German, making it an international cooperation and preferring an alliance.

Delta Airlines

In 1998, Delta Air Lines and United introduced a marketing partnership that included a reciprocal redemption agreement between SkyMiles and Mileage Plus programs and shared lounges. This scheme allowed members of either frequent flier program to earn miles on both carriers and utilize both carriers' lounges.Delta and United attempted to form an even cozier code share relationship, but this was prevented by regulators

United’s credit rating in 1997 was not good, indicating a preference for an alliance. 2. Previous Experience.

In 1998 United gained successful experience in the Lufthansa alliance. This hypothesis therefore indicates a preference for an alliance.

3. State control.

As noted earlier, all American airlines had been privatized by the end of the ‘80s. The US government was no shareholder in Delta. This indicates a preference for an acquisition.

4. Foreign ownership

Since this is a cooperation between two US airlines foreign ownership is not an issue. An acquisition therefore should be preferable.

5. Economic growth.

(20)

74 6. Oil price

In 1996 and ’97 the oil price was respectively $20,37 and $19,27, in 1998 the oil price dropped to $13,08 per barrel. This was mainly due to increased OPEC supply and the Asian financial crisis. Compared to the previous years oil was rather cheap, thereby indicating that a merger is preferable.

7. Nationality

United and Delta are both American, making it a domestic cooperation and preferring an acquisition.

US Air

In May 2000, United announced plans to acquire competitor US Airways in a complex deal valued at $11.6 billion. The offer drew immediate scorn from consumer groups and employees of both airlines. By the following year, regulatory sentiment was against the deal, and United withdrew the offer just before the Department of Justice barred the merger on antitrust grounds in July. The two airlines subsequently formed an amicable partnership that led to US Airways' entrance into the Star Alliance.

Due to a number of positive years with profits in 2000 United had gained a good credit rating.

BY now United had very positive experiences with both Lufthansa and Delta alliance, this clears the way for new alliances.

3. State control.

US Air was privately owned, making a merger or acquisition preferable. 4. Foreign ownership

Since this is a cooperation between two US airlines foreign ownership is not an issue. An acquisition therefore should be preferable.

5. Economic growth.

In the years 1999 and 2000 economic growth was respectively 3,7 % and 4,8%. The average of 4,3% would indicate that an acquisition is the preferred form of

cooperation.

6. Oil price

therefore an alliance would be preferred above an acquisition

(21)

75 United and US Air are both American, making it a domestic cooperation and

preferring an acquisition.

American Airlines

These are the selected cases for American Airlines:

• Alliances: ’96 British Airways, 2004 Swiss.

• Mergers/Acquisitions: ’98 Reno Air, 2000 TWA

In this section the hypotheses from chapter three are tested on a number of alliances and mergers/acquisition in which American Airlines was involved. Two alliances and two acquisitions are selected; alliances with British Airways in 1996, and Swiss in 2004. The acquisition of Reno Air in 1998 and the acquisition of TWA in 2000. Per case a short introduction is given.

Alliances

British Airways

“BA and American Airlines want to sign a five-year alliance that would involve full dovetailing of their networks, with revenue sharing on many routes. A deal with American would increase BA's overall share at Heathrow by only a small fraction. But it would give the two carriers a stranglehold on transatlantic flights. Together they provide 98 out of the 153 flights a week between Heathrow and New York's JFK airport.” (Economist, 25 May 1996)

In the mid ‘90s American Airlines had to cope with huge losses resulting in bad credit ratings. This indicates a preference for an alliance.

American Airlines had successful experiences in domestic acquisitions before 1996, but the alliance experience was very limited. Therefore, based on previous

experience an acquisition would be preferable. 3. State control.

The British government was a forerunner in Europe in privatizing airlines. In the early ’90s BA was already largely privatized and in 1995 the British government was not a shareholder anymore. Therefore, this hypothesis would prefer a merger instead of an acquisition.

(22)

cooperation.

6. Oil price

In 1994 and 1995 the oil price was $15,95 and $17,20, averaged $16,58. In 1996 the oil price increased to $20,37 per barrel. This is an increase of 25%, therefore an alliance would be preferred above an acquisition

7. Nationality

Although the American and British culture are often seen as comparable, but in this research the criterion is based on nationality. This makes it an international

cooperation and preferring an alliance.

Swiss Air

“AA Code share – American Airlines has expanded its code share agreement with Swiss. The AA code will no be seen on Swiss flights between Zurich and Johannesburg and other flights to Africa, Middle East, and Europe” (Market Monitor 2002)

1. Credit Rating.

In 2004 American Airlines experienced many years with huge losses, resulting in a bad credit rating and indicating a preference for an alliance.

American had a number of successful acquisitions such as Reno Air and TWA in 1998 and 2000. Based on these successes a new acquisition would be preferred 3. State control.

The Swiss government had a majority share in Swiss in 2002. This is higher than the 25% criterion, therefore preferring an alliance

In 2002 it was still not possible for US carrier to obtain a majority share in a

European airline. Foreign ownership, outside EU, was restricted to 49%. This makes an acquisition impossible and only leaves an alliance as option.

5. Economic growth.

In the years 2001 and 2002 economic growth was respectively 2,5% and 3,1%. The average of 2,8% would indicate that an acquisition is the preferred form of

cooperation.

6. Oil price

(23)

77 7. Nationality

American is from the US and Swiss from Switzerland, this makes it an international cooperation and thus preferring an alliance.

Mergers & Acquisitions

Reno Air

“Additionally in 1998, American announced its acquisition of Reno Air. “ (Businessweek 1998)

1. Credit Rating.

In 1998 American still had a bad rating, indicating a preference for an alliance intead f an acquisition.

Before the Reno Air acquisition American already successfully acquired other smaller domestic carriers. Based on these successes an acquisition indeed is preferable.

3. State control.

Reno Air was a completely privatized airline, therefore making an acquisition preferable.

This is a domestic cooperation and thus foreign ownership is not an issue. An acquisition is preferable.

5. Economic growth

The alliance started in 1998. The economic growth in 1997 and ’98 was 4,2% and 2,7%, averaging 3,45%. This is higher than 2,5% and therefore seen as high economic growth. This indicates that based on economic growth a merger or acquisition would be preferable.

6. Oil price

In 1996 and ’97 the oil price was respectively $20,37 and $19,27, in 1998 the oil price dropped to $13,08 per barrel. This was mainly due to increased OPEC supply and the Asian financial crisis. Compared to the previous years oil was rather cheap, thereby indicating that an acquisition is preferable.

7. Nationality

(24)

78

TWA

“After months of offers, counteroffers and debates, it's official: American (AA) has acquired TWA for about $625 million and the assumption of aircraft leases. But what happens now may make the negotiations seem like the easy part. The real test is melding two very different corporations into one with as few disruptions as possible. For the next few months, during the transition, the traveling public will see no

difference when flying TWA. During this time, a subsidiary of AA, the new TWA Airlines LLC, will run the airline. The airlines will maintain separate res systems, payrolls, aircraft operations and policies until they standardize maintenance, repaint TWA's livery and train TWA's employees. “That's not something that happens in a day or a week or even a quarter,” said Bill Compton, TWA's president and CEO, in March.” (Travel Agent, 04/16/2001).

1. Credit Rating.

In 2000 American Airlines profited from 5 good years in the airline industry and its credit rating was improved. Now it had a good rating, indicating a preference for an acquisition.

After successful integration of Reno Airlines a new acquisition is preferable. 3. State control.

TWA was a completely privatized airline, therefore making an acquisition preferable. 4. Foreign ownership

This is a domestic cooperation and thus foreign ownership is not an issue. An acquisition is preferable.

5. Economic growth

cooperation. 6. Oil price

therefore an alliance would be preferred above an acquisition 7. Nationality

(25)

79

Appendix 4

Economic growth, oil prices and credit ratings.

Economic Growth and oil price

Year Economic

growth (world GDP from IMF)

Oil price (in US $ per barrel) 1992 2,4% 19,04 1993 2,4% 16,79 1994 3,8% 15,95 1995 3,7% 17,20 1996 4,1% 20,37 1997 4,2% 19,27 1998 2,7% 13,08 1999 3,7% 17,98 2000 4,8% 28,24 2001 2,5% 24,33 2002 3,1% 24,95 2003 4,0% 28,89 2004 5,3% 37,76 2005 4,9% 53,35 2006 5,4% 64,27 2007 4,9% 60,75

(26)

80

Credit Ratings

In the table below you find the credit ratings for the four airliners discussed in this thesis. Per airliner a number of credit ratings are shown, the periods correspond with the mergers and acquisitions discussed in the thesis. It is not possible to give the exact credit rating, just the interpretation of the ratings as “good” or “bad” is shown.

Credit Ratings KLM Good rating Bad rating 1992 X 1993 X 1995 X 1998 X 2003 X Air France 1997 X 1999 X 2000 X 2001 X 2003 X United Airlines 1994 X 1998 X 2000 X American Airlines 1996 X 1998 X 2000 X 2002 X