Air France set to create aviation partnership with Dutch rival KLM

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Air France approved plans yesterday to acquire its Dutch rival KLM, a board member said. The union would create one of the world's largest aviation partnerships.

The French airline's board, in a meeting lasting more than three hours, approved a letter of intent that will be given to the Dutch carrier's board, which also met separately last night, Yvon Touil, a union official who sits on the French carrier's board, said.

"The essential thing is that it has begun," he said. He declined to provide details on the value of the offer for KLM other than to say the price "is exorbitant. We are overpaying. It is too expensive". Details will be released today by Air France. Another union leader who met Air France managers earlier, said the proposal calls for Europe's second and fourth largest carriers to unite beneath the same corporate umbrella but stops short of a complete merger.

François Cabrera, of the CFDT trade union, said Air France and KLM would create a holding company and unite by becoming its subsidiaries. They would retain their separate brand names for at least eight years. But the proposals do not spell out what would happen after that, M. Cabrera said, appearing to leave open the possibility of a full merger in the future. He said the deal could be concluded by late March or early April.

Air France and KLM expect the merger to save between €400m and €500m (£280m-£350m) a year, primarily in purchasing and administration, M. Touil said.

He added that major decisions regarding Air France-KLM fleets, networks and alliances will be decided by an eight-person management committee with four people each from the Netherlands and France. M. Cabrera, meanwhile, said that his CFDT union, the second largest among Air France employees, wants guarantees that jobs will be safeguarded.

The French government's 54.4 per cent stake in Air France would be diluted to less than 50 per cent by the capital increase.