BA and KLM extend talks 'several weeks' and keep merger hopes alive

British Airways and KLM Royal Dutch Airlines inched closer towards sealing the world's first international aviation merger yesterday with an agreement to extend their exclusive talks.

British Airways and KLM Royal Dutch Airlines inched closer towards sealing the world's first international aviation merger yesterday with an agreement to extend their exclusive talks.

The move had been expected after BA indicated at the start of the week that negotiations were going well but faced many obstacles, both between the parties and with industry regulators.

Yesterday's statement shed little light on the unresolved issues, although these are understood to revolve around the equity share that KLM would enjoy in a merged business, and arrangements needed to satisfy regulators' concerns.

"Constructive discussions have taken place and important progress has been made. Parties recognise that a business rationale for a potential merger exists," the duo said.

The talks have been extended "for an additional several weeks".

Late on Wednesday, KLM said the pair would file formal merger documents with the European Union in late September, more than a month later than had been originally planned. BA and KLM, Europe's first and fourth largest airlines, admitted in June they were in talks.

If combined, they would form one of the industry's top-three players.

Analysts said the extension was a positive sign but many remained sceptical a deal can be brokered and satisfy the regulators' concerns.

Chief among these are the dominance that a BA-KLM grouping would have in Europe, and the implications for the allotment of international routes.

Currently, a flag carrier's right to fly between two countries depends on its nationality. If KLM were to become British-owned the status of its rights to third countries would have to be reviewed, with implications for industry practice around the world.

BA shares eased 4.5p yesterday to 389.25p, while KLM rose 1.35 euros to 31.70 euros. At those levels, the Dutch group represents about 18 per cent of the value of a combined business. Analysts say KLM is looking to secure about a quarter of any combined entity.

"Clearly there must be some business case [for a merger] or they would have stopped talking long ago," one analyst said.