AZ to end AF/KL partnership from january 2017
 

News of the day :(
http://www.ft.com/intl/fastft/325692...lm-partnership

Not an unlogical move knowing the new shareholder of AZ, but there is not too much details in this article. I understand it will be the end of the JV for flights between Italy and France (don't know if it was covering also the Netherlands). It doesn't necessarily mean the end of the code-share agreement. For sure,mint doesn't concern the North Atlantic JV as the end of the current agreement is much later. But will AZ stay in Skyteam ?
Any thoughts guys ?

Ending agreements with AFKL does not mean that they will leave the SkyTeam alliance, but it is sad to see such agreements end.

Hopefully (for me :)), AF will maintain their code share agreements on most Alitalia domestic routes to be able to reach half of my family ;)

Their Skyteam membership doesn't have an expiry date, as that 2009 deal did.

So there is no reason to expect that this news - which is merely the passive act of allowing a deal to expire at the end of the agreed timeframe - will lead to something as active as withdrawing from Skyteam.

I would imagine that the customer flows from Skyteam are a vital requirement for Alitalia's ongoing survival.

The story of yet another AFKL failure. The airline was in pole position from the start but neither read the situation accurately nor was able to propose a solution that would turn AZ into a healthier and leaner airline whilst being acceptable by the Italians. The AZ plan was atrocious and AF was right to refuse it, but AF's own proposed counter plan was bad too and someone else offered much better.

Note that the plan is about JV AND partnership, which probably means some of the codeshare agreements on long haul whereby AZ effectively feeds AF long haul flights outside of the TATL JV. This could be an important income loss for AF.

There will now be discussions to see if something gets salvaged or not but I personally do not believe that AZ will leave Skyteam.

With due respect, this looks to me as if your vision is skewed by looking through a pair of "AF can do no good" glasses.

What exactly is that "solution that would turn AZ into a healthier and leaner airline whilst being acceptable by the Italians"? Should AF have done what EY is doing? Should AF have offered to poor gazillions of Euros into AZ and hope for the best?

If there was an easy solution to the AZ problem, how come that BA or LH did not come rushing to the door and snap it from AF's or EY's hands? Some problems have no good solution and the least bad is sometimes to let go and turn away. AF may have many flaws but it is not a sufficient reason to hold them accountable for not being able to do miracles.

Yes its true that AF could not have saved AZ but they did pour some money into AZ and in return got what Cassano calls a favourable agreement. And he is now upset about it. But AF effectively paid for that agreement and with AZ indeed turning things around thanks to EY it appears to have been a smart move by AF. At least they will be able to milk this favourable agreement for a few years before it expires.

AF is lost, hence they asked some industry experts to take a look at options and present various scenarios for the future for the Group. I fear MOL already made fun of one of the options recently in an interview with a French paper.

This is a great step forward from people within AF who did not lose the sense of reality. AF is running out of time and should have options for the future, aside from the old one, asking the tax payer for help.

More than 15 years ago, Alitalia was also an option for KLM, because Pieter Bouw was smart enough to understand the future for a carrier the size of KLM. Alcazar did not happen, so in the process carriers like Lufthansa and Air France benefitted from it and they were simply given time to develop their options

Later that decade Alitalia became an option again and the beautiful Italian bride was able to lure the Dutch very close to their spider web called Malpensa. Fortunately, the Dutch realized the trap and only lost some 1XX million in the process, otherwise I fear both would have been dead by now or the respective tax payers would have bailed them out. ( in the NL they seem to be realistic about the future and bailouts judging from Fokker and Lelystad Museum...)

More importantly; Alitalia, Italy and Malpensa is not what it used to be. Italian domestic traffic used to be highly lucrative, now we have high speed rail and low cost competition, Malpensa turned out to be an airport from the 1970's and not the late 1990's and Linate is still operating, so Alitalia is really only an option for carriers with deep pockets trying to buy influence in the EU, aka Etihad or Qatar.

Nevertheless, the feeder traffic fed into AMS and CDG should not be underestimated, we all know that the feeder slaves within Europe are not really making money, so it will be interesting to see how AF/KL manage to connect a major European market to their networks.

KLM already lost a major feeder once, when LH purchased Eurowings and needed years to recover (KLM Alps was not that important)

Under the bottom line, another issue for the KL/AF, which they really do not need to have on their desks right now...

The agreement expires in 1.5 years and it seems that no one doubts that it is more favorable to AFKL (feeder flights for AFKL longhauls) than to AZ. And it is hard to see how that fits with the strategic plan of EY (good luck to them with AZ).

In the meanwhile several things can happen.
Within the current agreement AZ might be able able to make bookings on AFKL more difficult/expensive. I am not sure how, but such contracts always allow some leeway. On the other hand, this could be negotiating tactics by AZ to obtain more favorable terms. Future will tell.

The JV DL-AFKL-AZ is another story. Supposedly it ends in 2022. But there are probably all kinds of opt-out clauses.

And, apparently, very expensive ones.

G

We do not know. We can easily imagine that the DL-AF-KL-AZ JV is much more profitable to all airlines than the AFKL deal they had for France and Netherlands.

All big US airlines and alliances have a TATL JV now, so it is a must rather than a big overall benefit.
Within each alliance, there is the question of who gains more.

Well that's an easy answer. Whomever has the most leverage gains more. As AF did in this particular deal.

I was referring to the transatlantic Joint venture with Delta, AFKL and AZ.
That is different from the partnership/JV solely between AFKL and AZ signed when AFKL was a major shareholder of AZ. But I am not privy to those confidential contracts.
The press report is very short. It is unclear whether it only targets the agreement between AFKL and AZ or whether it also lead to a withdrawal of AZ from the JV with DL.

The news report on the KLM website announcing Alitalia's entry into the TATL joint venture does seem to date it around the same time as this reported "agreement" with AFKL.

Therefore - it is perhaps likely that Alitalia is preparing to exit the TATL JV, too.

This would probably have been inevitable if, as is possible, Etihad wishes to ramp up service to the US, using Alitalia to operate services from Europe to the United States, in co-operation with feeder flights from Etihad themselves, and from airberlin/Etihad Regional.

Will be interesting to see Etihad's reaction to the new challenges in Germany (for those not familiar with the situation, it looks like they cannot use Air Berlin as a feeder slave to Abu Dhabi as they intended to do... making AB obsolete for them...)

Without any doubt, there is demand between Italy and the US, good old Clark called the Italian market 'underserved' from the US trying to justify his 7/7 service between Milan and New York.

So far, AZ fed a lot of passengers into CDG, especially to LAX the number used to be amazingly high, actually high enough to try nonstop service on their metal some years ago. IIRC, it used a three digit number daily just to LAX through MXP and CDG.

But AF did not act in the same way as LH and BA. I am merely repeating what I have said before, that AF's attitude towards AZ has been incoherent over time in my view. They spent a lot of money into it to not change anything and let the situation worsen, and then a few years later they put together a proposed plan which was perfectly ridiculous before disengaging themselves.

BA decided that they were not interested. That was coherent. LH did exactly the same. AF's attitude was entirely different and to me, seemed to defy rhyme or reason. They could have perfectly stayed out, or they should have only stepped in if they had a plan or if they wanted to integrate AZ into their group and take the losses and hope to sort it out from the "inside" (which of course would have also been an option).

They did none of that. They did not walk out, but they did not walk in either, they had no strategy to start with, and then claimed to have one years too late.

In other words, I'm perfectly happy for you to tell me that my judgement against AF is bias if you can explain to me in what sense AF's actions made sense and how it was mere bad luck that their clever plan did not work, but apparently saying that "there is no good solution" for AZ and "the least bad is to let go" precisely suggests to me that AF's actions made no sense in the first place and that time and money have been wasted in yet another failure indeed.

I will come back to what you said in the quote just above but let us go back to a second to the post my comment was an answer to: you did not state that, in your view, it was wrong for AF to get involved with AZ at all. Your criticism was more pointed and directed at something much more specific: you criticised AF for not being able "to propose a solution that would turn AZ into a healthier and leaner airline whilst being acceptable by the Italians" despite being "in pole position."
IMO, this would be a very sound criticism to make if somebody else than AF would have been in a position to do what you criticise AF of being unable to do. Therefore, it seems to me a fair question to ask you what exactly that solution is that AF should have proposed. Because if there is no such solution, then AF can hardly be blamed for failing to find it: a l'impossible, nul ne saurait etre tenu.

Now moving onto the wider question that you raised in your more recent post, I do not think that AF's position re AZ was incoherent. The line was fairly clear: they wanted to anchor the Italian market into the AF/KL group but did not want to do it at just any price. In particular, they did not want to have to maintain an Italian danseuse (as one might have said in the 19th century ;)) to do it. When it turned out that the price would be too high when a Middle-Eastern sugar daddy entered the dancefloor and seemed happy enough to have its Italian danseuse, they pulled out. That seems to me a pretty coherent position to take overall.

Not really - the exact quote is that: "The airline was in pole position from the start but neither read the situation accurately nor was able to propose a solution that would turn AZ into a healthier and leaner airline whilst being acceptable by the Italians." [emphasis not in the original post]

You only focus on the second point but the first one was just as important ie 1) I think that AF misread what it would take to turn AZ around and how hard it would be and 2) indeed did not find a solution that managed that whilst being acceptable to the airline in question.

So what you point out as the "broader question" really is the one I was referring to in that quote too. My personal perception is precisely not that AF merely wanted to channel Italian customers to Paris (if so, frankly, I would have hoped that they could have done without the silly charade of claiming that under the right conditions the point was to merge AZ into AF-KL) and in fact I think that AZ would have refused that from the start. I think AZ wanted to be the third partner in an AF-KL emporium transformed into an AF-KL-AZ emporium, and I personally think that this is exactly what JCS had in mind even though he was careful to point out that AZ was not ripe for it yet. My point is that with the behaviour exhibited by both parties, I do not think that it was a credible outcome that it ever would be. Maybe you are right and AF was just being cynical and just interested in stealing the market and simply lied all along about the ultimate integration prospects, but I'm not sure that I would have any more sympathy for them if that is indeed the case.

Let me return the question in any case. I've outed my perception and called AF's AZ saga a failure. Would you call it a success?

I think in my recent posts I certainly called it a success. AF today is still bringing in Italian traffic. Yes it may end in 2017 or whenever, but as of right now it should be helping the bottom line quite a bit.

1. AF could not save AZ on their own.

2. AF could not prevent EY from coming in.

3. AF did successfully prevent EY from having a big negative effect right from the start.

We criticize these decisions the moment they are announced rather than looking back after some time has passed to see the wisdom.

If we link all the comments we have in this discussion so far, we get a nice overview why AZ is a bucket case and nobody had any real interest anymore...

More or less all feeder slave agreements are structured to benefit the major partner offering long haul service. I was able to look at some of them in great detail, i.e. at Eurowings and Tyrolean and the chances to make money from them were more or less non-existent, even for efficient airlines like the old Tyrolean used to be. And they understood their role almost perfectly...

I fear, I really really fear that the confidence at AZ increased quite a bit, so they want to re-establish themselves as a major player and not so much a feeder slave into the KL/AF network.

They are 20 years late to the party, but show up nevertheless, so will put more and more capacity into a market, which has already too much capacity hurting the bottom line of the existing players.

There is absolutely no doubt that 'The Flying Dead' are on life support provided by Abu Dhabi and do not have a working business case. Players like AZ and AB should have long gone.

Under the bottom line, it is another issue for Air France, which is just another obstacle they have to circumvent on their way to a working business plan for the next couple of years.

What I like about your comment, you try to put things into a perspective. As you said, it is always easy to draw a conclusion years later without remembering the actual status quo back then.

Do you remember the status quo back then? Then you must realize that AF had to do something and did the best they could. It would have been MUCH worse had they done nothing.

To be honest with you, after dealing too much with them and after I needed too much time to understand the inner workings of such a company in France, I did not really spend a lot of time thinking about AF anymore.

But I always love talking to guys from KLM and love listening to the stories about the French trying to run an airline able to compete with the likes of BA, LH not to mention the ME3 on steriods.

They always remind me of Eastern back then and the staff wearing shirts stating something like:

'Bankrupt, but paid without making concessions until the very last day.'

I had a major discussion at an Aviation Conference a few years ago with a guy from BCG who painted a bleak picture for KLM. I told him that he was wrong and quite frankly, I think I was right until a certain point in time. Now I begin to see his arguments a bit more and one can only hope that KL/AF understood that KLM has issues, but that the issues of AF are way more significant so instead of starting to restructure KLM, they should look in the mirror and start there.

Let me ask you one question:

What is more realistic for you?

Selling KL to LH or BA and giving away a chunk of AF to an investor from the Middle East or expecting the tax payer to pay for a major restructuring again in a few years from now?

Then that sounds pretty worrying about the future. If AF have been the cunning and cynical selves that you describe and managed to pull a fast one on BA and LH with that hypothetical strategy of claiming to work on a partnership whilst effectively only wanting feeder traffic from Europe's fourth largest traffic base, and as a result, are still well worse off financially than the two major competitors that they supposedly strategically defeated, I fear the worst now that this fat cow period is coming to an end.

That said, if for the sake of argument we accept your narrative at face value, the slightly odd part of the demonstration is that at no point do you relate those claimed gains to the actual cost of the operation. As a reminder, for this to be a success, then presumably the benefits must have outweighed the cost, which also means that the added profit strictly related to the AZ increased traffic must have been well north of €100 million/year given the overall investment.

I don't think either is realistic. People will talk extremes, but large institutions have a way of muddling along.

As for KLM, why would LH or BA buy them? As you say they have issues and only a severe correction will fix those issues. Labor unions have a way of preventing severe corrections.

LH won't be buying anything for a long time!

IAG are always looking for new investments. If KLM was put on the block, you can be sure IAG would give them the once-over.

I'm sure IAG would like to have KLM, but there's no way they would pay the price that AF would expect.

I was going to write, but I figured that everyone knew this, that to determine if the cost was worth the investment we'd have to have access to all the numbers.

But beyond those numbers, I'm sure you remember what was happening at the time of the Italian "crisis", right? In 2008 Lufthansa announced plans to create its first hub outside Germany and its fourth European hub at Milan–Malpensa Airport. In October 2008, Lufthansa set up its Italian division, Lufthansa Italia. Operations commenced on 2 February 2009, and ceased on 30 October 2011 as Lufthansa abandoned plans to create a hub at Malpensa. It shouldn't be too hard to draw some conclusions should it?

Indeed, it's relative.

AF-KL is its own basket case situation, but how much, if anything, did AZ cost AF-KL given AF-KL's limits in dealing with AZ? AF-KL could have done worse than they did with AZ, but I doubt they would have done any better without AZ than they did with AZ.

I remember what happened indeed.

First noteworthy date is that it is in 2003 that the AF-AZ saga started with an explicit mention (on both sides) of prospects of a future merger.

It was confirmed in 2006 that the Italian government would not be allowed to continue injecting cash into AZ and the situation deteriorated badly from there on with AZ seeking discussions with partners. Around September 2007, AZ announced that it would radically diminish its operations from MXP and effectively stop functionning as a two-hub airlines. It had finally understood that MXP is one of the most idiotic airports ever built, poorly connected to central Milan, poorly designed, and subject to sever delays whenever there is fog (and it happens very frequently in the Milan area). The Berlusconi government also explained that it thought that LH would be a much better partner for AZ than AF and tried to generate talks along those lines.

LH looked into it and decided NOT to engage in the AZ adventure which in my view was probably a good idea. I do think that they betted nobody would considering the mess it was in and indeed announced that it would launch its own Italian operations from Milan with LH Italia. I find that LH idea just as ridiculous as AF's behaviour in the AZ saga. Perhaps the Germans are so used to all of their airports being reasonably well connected to their hinterland that they just read "Milan" instead of "Malpensa", but I'm sure they lost a fair bit of cash on the way and that is just what they deserved for that idea.

There were then multiple episodes of discussion between AZ and SU, various Italian groups, and then AF. The SU lead looked serious for a while but ultimately nobody bite.

Ultimately, AZ stopped being floated on the stock market in early June 2008, and filed for bankruptcy in August. The takeover of the least-hopeless aspects of AZ by the CAI group was proposed in October and agreed in November. The "new AZ" started operating in January 2009 and started losing money immediately.

What conclusions we can draw from that of the actual cost of AF's involvement in AZ I am, however, not quite sure! I would incidentally not draw any conclusion regarding the impact of AF's choice to continue spending money on AZ on the failure of LH-Italia either.

I certainly don't see the AZ saga until now as a failure for AF, as :
- they established a JV on FR/IT routes which, I believe, has been at the benefit of AF (otherwise EY wouldn't break it). And those routes represent a huge traffic
- has allowed to funnel many pax through CDG instead of other hubs (particularly LH hubs)
- and thanks to the idiocy of the Italian govt and "jusqu'au boutisme" of AZ unions has led to no further investment in a dead-end story.

EY is surely a high quality airline with "endless" money coming from their owner, but will they be able to turn AZ into something viable, that!0's not sure at all. AB is still a failure, ex-Darwin (Ethihad regional) future is also very questionable, and Air Serbia...

Overall I believe this end of the AF/AZ partnership is of course a bad news for AF, even if it is likely that a simple code-share agreement will remain in place. But, at the moment, AF is the sole operator on several routes like to VCE, TRN, BLQ, NAP, FLR, GOA (IIRC, both metals are only present on LIN and FCO), and so we can guess that there will be again AZ metal on some routes like VCE, FLR and BLQ.

I am a bit surprised that we claim success or failure of this AF saga in AZ without backing it by any financial figures. Personal intuition without facts seems insufficient to me.

All seem to agree that the potential success of the current agreement is to feed Italian pax to AFKL longhaul network. As was mentioned above, AF already flies to many Italian destinations, so the "scientific" question about the contribution of the AZ partnership is what would be the financials with and without the partnership. Certainly, Lufthansa decided that it did not need LH Italia to feed Italian pax into its longhaul network. It can well be that AF will lose few Italian pax if the partnership is fully ended (no codeshare) and save some money. or maybe AF will suffer gravely.

In the same vein, it appears that many of us feel that EY is pursuing a money-losing strategy. My guess is that EY does not mind much to show losses at AB (and sonn AZ), as long as AB feeds profitable traffic to EY network. After all, this is also a matter of internal pricing. To some extent this was AFKL initial strategy and it could be that its 300+ investment loss in AZ was compensated by the gains of the partnership with AZ as feeder airline. It seems that EK and QR are very aggressive in getting European pax. EY has a tough time competing with them and intuition is not enough to demonstrate that EY strategy of getting those European pax via investments in AB or AZ is not a viable one.

The agreement lies in tatters and AF no longer has any claim on these passengers formerly provided by AZ with Alitalia free to pursue their own strategies and new relationships with other alliance members or with their fellow Etihad Partners affiliates; AFKL poured hundreds of millions of Euro into AZ in the hope of one day finding themselves in the driving seat, but instead saw their shareholding diluted down to almost nothing (when they decided not to partake in the share issue about 4 years ago) - they went from 25% to 7% - presumably Etihad's entry onto the share register has further diluted the AFKL holding; I'm finding it hard to see how AFKL's Italian adventure can be portrayed as anything other than an abject failure!

I'd actually be very surprised to see AZ open CDG-FLR or CDG-BLQ. Just like AF, they tend to be predominantly into hub traffic. VCE is a slight exception as they have their own equivalent of the bases province there (and another at CTA).

There is a separate question regarding whether AF would be able to sustain routes like GOA without a code-share agreement.

On the broader issue, the fact that the current codesharing agreement benefits AF is not in and by itself proof that the operation has been a success. You could just equally have a narrative where the AZ operation has been a failure and money losing operation but where the pay back for AF has indeed been that feeder traffic and codeshare opener, except that this is now being curtailed as AZ is not getting anything out of it!

In other words, it is back to what I was answering stimpy and which irishguy28 is in my view rightly pointing out in his post above: we know AF directly poured hundreds of millions into AZ over the years (I'm not counting any indirect costs and there were some). The whole question becomes whether the advantages that you describe match those costs in terms of additional profit or not. I understand that you and stimpy think that this is indeed the case, but I'll admit to still being very sceptical. In fact, I don't remember anyone at AF suggesting to me that they believe that AF has indeed benefitted from the AZ saga overall.

I'm also a bit puzzled about saying that the JV is good for AF. The whole point of a JV is to mutualise both costs and income on a given route. The mood on this and other fora is to keep shaming AZ for inefficient costs, so is it not paradoxical to suggest that mutualising costs and income with a devastatingly unprofitable partner would be beneficial? Isn't a JV supposed to be mostly beneficial to the airline which can balance its operations out with another airlines with lower costs?

Really? Did you not see the numbers from the AF meeting today?

What meeting and what numbers?

All I know is that the French state is trying to consolidate its say in the running of AF - which can only mean that even darker days lie ahead!

+1 on irishguy28's comment. Could you possibly be a little bit less precise just to avoid the odd risk that we might actually be stumbling by chance on the actual figure that you had in mind ;)

Reminds me a bit of one of my former colleagues who would randomly barge in a panicked state into someone's office and ask "have you seen the file?"

I thought you guys followed this company? The AF/KL General Assembly was yesterday. Maybe try Google if you weren't aware.

Google doesn't seem to be aware of it, either. Or maybe it's just that the English-language press didn't report on what was already known several weeks ago. The only reports are about the older news that the French Government was looking to change the voting rules - there is no news about yesterday's General Assembly. But I assume the French Government got its way.

The question was what figure did you have in mind that shows what the AZ partnership contributed to AFKL's bottom line. Clearly, you have seen something that you believe is relevant so why not just say what it is instead of telling people that the Encyclopaedia Universalis has the relevant information without committing to what article you believe is indeed proving your point?

Or do you mean the vague statement that AF is talking to AZ to see whether the partnership should be renewed? Again, I just do not see the relevance.

Sorry but you cannot expect us to be in your mind and double guess what figures you feel are relevant when none seems obvious from what has transpired from the meeting (I'm afraid that I am not a shareholder and was not there so all I read was from the press which was more about the double votes by the State, the renewal of AdJ, and the fact that the financial problems are continuing.)

Yes it's true I saw it in French. But AF was tweeting most of the details both in French and English.

Also of note, the lounge in Terminal 2G will get redone in the style of S4!!!! That part I read in Les Echos http://bourse.lesechos.fr/infos-cons...ac-973895.php#

Sorry I can't do more for you now. Gotta run.