Airline merger talks crash: Plans for European fortress founder over US partner

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FRANKFURT (Reuter) - Alcazar, the most ambitious airline merger ever attempted, was grounded yesterday when four European carriers abandoned talks because of a dispute about which US partner they should fly with.

'Austrian Airlines, KLM Royal Dutch Airlines, SAS and Swissair-Schweizerische Luftverkehr have terminated their negotiations on the Alcazar project envisaging a far-reaching alliance,' the airlines said.

'The airlines continue to hold fundamentally different views on a US partnership,' they said.

KLM Royal Dutch Airlines, Scandanavian Airlines System, Austrian Airlines and Swissair first announced talks on Alcazar in January. They had aimed to create a 'European fortress' airline big enough to compete in a liberalised market.

Their plan to link operations would in effect have created Europe's largest carrier, rivalling low-cost competitors in the US and Far East.

The failure throws the airlines into a dilemma about how to negotiate a liberalised aviation market. Europe's skies are due to be thrown open to free competition, a process which in the US spawned fierce competition and bankruptcies.

Talks foundered for months on a dispute about whether to fly with the US number two, Delta Air Lines, or number four, Northwest Airlines.

A US partner is essential to feed American travellers into the transatlantic routes that account for 45 per cent of the global aviation market.

Swissair, which has a loose alliance with Delta, was worried that KLM's partner, Northwest, was financially weak and argued that the US would not extend the liberal aviation pact it currently has with the Netherlands to other European countries.

KLM wanted the new entity to extend the almost symbiotic tie it has built up with Northwest, in which it owns a 20 per cent stake, by using anti-trust immunity and the liberal 'open skies' pact with the US.

The question facing mid-sized carriers is whether to try to carve out a niche as small regional players, or by forging alliances to have a hand in the global market serving intercontinental passengers.

'People are going to wonder what future is there for these mid- sized European carriers,' Guy Keckwick, aviation analyst at Lehman Brothers in London, said.

SAS, which is 50 per cent-owned by the governments of Norway, Denmark and Sweden through a complex structure, is believed to be the most vulnerable of the four.

'SAS in particular faces a more difficult future,' Mr Keckwick said. The Scandinavian carrier has a weak financial base and is located on the edge of the passenger-rich European market.

Austrian, 51.9 per cent state-owned, is expected to firm up talks with the German carrier, Lufthansa, which it held concurrently with the Alcazar negotiations. Aviation analysts say a link with Lufthansa may restrict it to a regional role.

Swissair, in which the Swiss public sector holds 20 per cent, is the most financially robust of the four carriers, and a strategic decision is less pressing.