British Airways and KLM abandon £4bn merger talks

British Airways and the Dutch carrier KLM last night abandoned talks on a £4bn merger, blaming political and regulatory hurdles.

British Airways and the Dutch carrier KLM last night abandoned talks on a £4bn merger, blaming political and regulatory hurdles.

The surprise announcement, made after the close of the London and Amsterdam stock markets, leaves BA searching for an alliance partner at a time of intensifying competition in the world airline market.

Rod Eddington, BA's chief executive, said the key obstacle had been agreeing a structure which would have given BA control of the merged airline at the same time as guaranteeing KLM's traffic rights, which are granted on the basis that it is Dutch-owned.

"We thought we had a structure which would work. KLM thought it was too risky," he said.

The prospects of a deal were also hampered by the slump in BA's share price since the talks began in June. In the past three months the combined value of the two airlines has fallen by £1bn, while BA's shares, the currency in which it would have bought KLM, have dived 22 per cent. This made it increasingly difficult for BA to fund the deal.

Mr Eddington maintained that this was "clearly a concern, but not a primary driver" of the decision to abandon talks.

The US government had also made it clear that it would not approve a BA-KLM merger unless there was also an open skies agreement between the UK and the US on transatlantic air services.

Despite the failure of the KLM talks, BA's chairman, Lord Marshall, said he still believed there needed to be consolidation within the European airline industry. "Europe is our backyard," he said. "We have always been a leading player in this market and we will continue to look for opportunities to strengthen our position in it."

A combination of the two carriers would have created Europe's most powerful airline with 90,000 employees, a fleet of 600 aircraft and a network of 800 destinations.

The two carriers had set a deadline of the beginning of next month for deciding whether to proceed with a deal. But last night they called off the talks early, saying: "We always recognised that this would be a complex transaction, involving not only commercial and economic issues but also aeropolitical, regulatory and other matters. Although we have made considerable progress, it has not been possible to resolve these."

This is the second time that merger negotiations between BA and KLM have failed. A previous attempt to reach a deal in 1992 foundered over disagreements on price.

Analysts believed a BA-KLM merger could have yielded cost savings of up to £525m. Despite this, there was always a large degree of scepticism about the rationale for a deal, given KLM's high-level of dependence on low-yielding transfer passengers.

Chris Tarry of Commerzbank, one of the biggest sceptics, said last night: "To me, KLM was never the answer for BA. The failure of the talks poses a much bigger question for KLM and what it does now. For BA the key question is how it now goes about building a bridge across the North Atlantic."

Lord Marshall said that BA "certainly wasn't" contemplating any board changes following the collapse of the KLM talks, and Mr Eddington said that all the management team at BA had been behind the concept of a deal.