Air France-KLM Merger Anticipated

The well-sourced word in the media is that Air France will announce a major partnership with Dutch carrier KLM, and possibly a complete merger, this Friday. The announcement, if it comes, will follow months of intense merger talks between the two flag-bearer airlines.

"These negotiations are in an advanced stage," a spokesman for the company’s negotiators said on Wednesday. "However, critical points are still under discussion between the parties and further communication will follow as soon as an agreement is expected to be reached."

But most industry believe the merger is already a done deal.

"An Air France takeover of KLM is imminent," Henrich Maass, an equities analyst for WestLB Bank, told Deutsche Welle. Maass said he doesn't expect the negotiations to be completed before the end of the year, but the two companies have finally indicated that talks are in an advanced stage. Even executives for Air France, who has remained reserved up until now, are talking more openly about the likelihood of a merger now.

A new European market leader

A merger could change the landscape of the European aviation industry. "It would be the first takeover of a national airline by another [national airline]," explained Maass, who is responsible for WestLB’s transportation and logistics coverage.

Previously national carriers had only possessed marginal holdings in other flag carriers – like the minority stake British Airways holds in Spain’s Iberia or Air France’s partial ownership of Italy’s Alitalia.

The new air carrier would surpass the two most profitable airlines in Europe – Germany’s Lufthansa, with €17 billion ($19 billion) and British Airways with around €13 billion ($15 billion) in revenues in 2002. Together, Air France and KLM had revenues totaling over €19 billion ($21 billion) last year.

Currently, Lufthansa, British Airways and Air France carry roughly the same number of passengers. A merger would easily make Air France-KLM Europe’s largest airline. The Franco-Dutch alliance could also surpass the world’s most prosperous airline, American Airlines, which also recorded €19 billion in revenues last year.

An oversaturated market

"This fusion would be a breakthrough in consolidating the European transportation market," said WestLB’s Maass. Insiders in the sector say there are too many national air carriers in Europe. A deal between the French and the Dutch could have a snowball effect, with Alitalia, Swiss and Iberia quickly becoming the next takeover candidates. Indeed, top managers from Alitalia and Air France already met on Wednesday, a day after the French and Italian prime ministers discussed the prospects of closer ties between the airlines.

"An important market effect would be that every country would no longer have its own airlines for the sake of prestige," said Robert Czerwensky, an equities analyst at Vereins- und Westbank.

Market experts believe Air France will exchange 20 percent of its equity shares with KLM’s Dutch shareholders, making the French KLM’s single largest shareholder. In a welcome side-effect, the exchange of shares would also lower the French state's stake in its national airline -- still 54.4 percent -- which had already been planned. In the long term, analysts believe Air France will absorb KLM and its other smaller European partners to become one of the world's biggest airlines.

Alliances between discount airlines?

In addition to helping streamline the European market, the Franco-Dutch merger would make the SkyTeam airline alliance into the strongest in the world. The move would also bring KLM’s North American partners, Northwest and Continental, into the alliance with Air France and Delta Airlines. The Star Alliance with Lufthansa and United Airlines and Oneworld with British Airways and American Airlines would be faced with a much bigger competitor.

"The SkyTeam airlines could be more strongly coordinated and also use their purchasing power better when buying new planes," Maass said, identifying advantages inherent to the deal.

Meanwhile, Czerwensky, a stock market expert for transportation and logistics firms, identified another possible effect: "One signal could be that [an air carrier] can't survive without an alliance. Mergers between European discount airlines -- which haven't happened yet -- would be conceivable."

Price wars expected

In the short term, the real winner could be consumers, who could soon profit from an Air France-KLM merger. The French and the Dutch airlines share many destinations, which they won't be able to rationalize immediately. So, to avoid competing for the same customers and to put the heat on rivals like Lufthansa and British Airways, they are likely to cut fares and trigger increased competition on the European market.

"In order to sell the new joint capacities there could well be fighting conditions on some of the new partners' stretches," WestLB's Maass suggested.