KLM, Air France form alliance

/ Source: The Associated Press

Air France and KLM Royal Dutch Airlines plan to share the same corporate umbrella to create an aviation group that will surpass British Airways as Europe’s largest airline operator and could set new benchmark for the future of European aviation.

The deal announced Tuesday would unite Europe’s second- and fourth-largest carriers even as many airlines are seeking to survive a downturn in travel that followed the Sept. 11, 2001, attacks, wars in Afghanistan and Iraq, and outbreaks of severe acute respiratory syndrome.

National state-supported airlines have been under threat for years, and the Belgian and Swiss flagships were the first to collapse in the aviation recession. No-frills rivals cut further into market share.

The new company, called Air France-KLM, would generate annual revenues of about $22.08 billion. It would serve 226 destinations worldwide, operating a fleet of 540 aircraft and employing about 106,000 people. The group will maintain two operating companies.

If completed, the deal would mark the first time two major European airlines had joined forces in such a tight alliance. KLM’s board unanimously approved the deal, the airlines said.

Alitalia, the Italian flagship carrier, also signed a cooperation agreement with the larger airlines, adding a southern tier to the proposed alliance that links two of Europe’s largest airport hubs.

“All airlines know that current setup of European aviation will have to change,” said KLM chairman Leo van Wijk. “The dominant factor of national airlines will disappear.”

“It is a landmark day for KLM and for Air France, and a defining moment for the European aviation industry,” said Jean-Cyril Spinetta, Air France chairman and head of the new group, at the joint news conference at Schiphol Airport outside Amsterdam.

For Air France, the current structure “doesn’t create enough revenue for its shareholders,” he said. “The time has come to change.”

The two companies expect to sign the transaction agreement in the next few weeks. The deal would be closed next April.

The alliance, while stopping short of a full merger, will go significantly farther than the traditional airline partnerships by uniting two carriers under the same corporate umbrella.

“The key is in the implementation, but the overall result will be a positive and strong international airline company,” BNP Paribas analyst Nick van den Brul told Dow Jones Newswires. He said the two airlines have strong bases: at Paris’ Charles de Gaulle and Schiphol Airport in Amsterdam.

A thicket of European rules on air travel, such as about who may hold landing rights, have typically made merger possibilities between airlines tough. To get around that, Air France and KLM plan to maintain two separate carriers under a single holding company.

Van Wijk said the deal will be scrutinized by competition regulators in Brussels and Washington, and will be discussed in negotiations next week with the United States on an “open skies” accord. But “the inevitability of consolidation is clear on both sides of the Atlantic,” he said.

KLM also brings to the deal its tie-ups with the two U.S. carriers. “Assuming Northwest and Continental follow suit, our alliance will become a world leader,” said Van Wijk.

The Dutch government, which has an 14 percent stake in KLM but holds special voting rights, won important concessions from the French carrier to develop Amsterdam’s Schiphol airport, a key asset for the Dutch economy.

For the French government, which controls 54.4 percent of Air France, the alliance would dilute its stake to 44 percent — taking it a major step forward in plans to privatize the French airline.

Air France said its offer to acquire KLM values the smaller Dutch carrier at $19.41 per KLM common share. Air France will offer 11 of its own shares and 10 Air France warrants for 10 KLM common shares, according to a statement by the French carrier.

The deal values KLM at $909 million, Air France said.

As a result of the Air France-KLM linkup, the six-member SkyTeam Alliance will become the world’s second largest alliance, the statement said. Air France is one of the six members.