Airline merger paves way for more tie-ups

Air France and the Dutch carrier KLM yesterday kick started the long-awaited consolidation of Europe's airline industry by unveiling a ¤4bn (£2.8bn) merger.

Provided the deal clears regulatory hurdles, it will set the scene for further tie-ups among Europe's flag-carriers, with British Airways and Spain's Iberia seen as likely candidates to merge. BA last night said they would be watching the deal closely, and also urged regulators to examine its impact. "[The competition authorities] will need to be vigilant in ensuring the deal does not reduce competition, especially across the North Atlantic," a BA spokeswoman said.

The merger of the two continental carriers will create a grouping with ¤19bn in revenues and a fleet of 540 aircraft serving 226 destinations from the hubs of Paris and Amsterdam. The two airlines estimated that the merger would create between ¤385m and ¤495m of annual benefits within five years, in addition to the ¤650m cost-saving programme KLM is already carrying out. But they ruled out job losses among the 106,000 combined workforce and said the airlines would continue to operate separately with their own identity and brands.

Air France will own 81 per cent of the enlarged group and KLM 19 per cent while the French government's stake in Air France will fall from 54 per cent to 44 per cent. The all-share deal values the Dutch carrier at ¤784m, a 40 per cent premium to its closing price on Monday.

To safeguard the Dutch carrier's landing rights, KLM's operating company will continue to be 51 per cent controlled by two Dutch foundations and the Dutch state for three years. KLM will also continue to operate its own network from Schipol airport.

This is KLM's third attempt to join forces with another European airline. A previous effort to merge with BA came unstuck over the inability of the two airlines to guarantee KLM's landing rights once it was no longer Dutch-owned.

The new airline, to be called Air France-KLM, said 60 per cent of the financial benefits identified would come through cost savings in areas such as sales and distribution, IT and engineering while the rest would come from increased revenues as flight schedules were harmonised. KLM will join the SkyTeam alliance led by Air France and the US's Delta. KLM has an existing tie-up with another US carrier, North West Airlines, which alsohas links with Continental.

The two carriers said they expected to achieve regulatory clearance in Europe and the US in time to complete the merger by next April. There was scepticism among rival airlines and industry experts about the extent of the cost savings that could be achieved given that there will not be job losses and the two airlines will continue to operate separately. Chris Tarry, an independent aviation analyst, said: "Size is not everything in this industry and in terms of consolidation, on its own it's not a panacea."

There weredoubts about the ease with which the merger would gain clearance on competition grounds because of the number of US airlines it would bring together under one alliance. "I suspect there is still an awful lot of work to be done. This is one merger where it will be good to be a spectator," said one airline executive.

If the deal clears regulatory hurdles, then it is certain to give impetus to a BA-Iberia merger. BA already owns 9 per cent of the Spanish carrier.