BA sets October deadline for KLM merger

British Airways has set a target of the end of this month for agreeing the terms of a £4.5bn merger with the Dutch flag-carrier KLM.

British Airways has set a target of the end of this month for agreeing the terms of a £4.5bn merger with the Dutch flag-carrier KLM.

Senior BA executives believe that if a deal cannot be reached by October then the prospects of the two sides agreeing terms will start to slip away rapidly.

If an agreement can be reached, the merged airline is likely to offer to dispose of KLM's low-cost airline Buzz in order to gain regulatory approval for the tie-up and retain BA's rival no-frills airline Go. But BA is likely to drop its US partner American Airlines and seek a transatlantic tie-up instead with KLM's existing alliance partner Northwest airlines on the grounds that regulatory clearance will be easier to obtain.

The two carriers are now in agreement that there is a satisfactory business case for the merger, which would bring big cost savings and give BA the scope to expand at Amsterdam's Schiphol airport. According to an analysis by Chris Tarry of Commerzbank, the merger would result in 16,200 job losses and £525m in cost savings.

But BA and KLM are still split over valuations and the respective shareholding each airline would have in the enlarged group. Based on Friday night's closing share prices, KLM would account for 18 per cent of the combined company by market value. The Dutch airline is pressing for a stake of nearer 30 per cent but BA's chief executive Rod Eddington is thought to want to restrict it to something closer to 25 per cent.

The two carriers are also awaiting confidential guidance from the European Commission as to what sort of concessions they would need to make to obtain regulatory clearance and how long the regulatory process would take. BA and KLM accept that for the deal to be approved by US regulators there will have to be agreement on an "open skies" deal governing air travel between the UK and the US. However, BA is prepared to take the risk of signing up to an open skies deal across the Atlantic is advance of gaining regulatory approval from Brussels.

BA's attempts to forge an alliance with American Airlines were hampered by the insistence of its former chief executive Bob Ayling that EC anti-trust immunity had to be obtained before an open skies deal was agreed.