A bet on the future

Date: 04/10/03

At last, a cross-border merger of airlines

NO ONE could accuse Air France of going for short-term gains by hooking up with KLM, an airline half its size. Shareholders in the French national carrier, 54% owned by its government, are paying €784m ($913m) to acquire four-fifths of the Dutch carrier. Last year KLM lost €271m while Air France made pre-tax profits of €111m.

There is the gloire of owning what will be the world's largest airline, measured by sales. But the deal offers little prospect of reducing costs, says Chris Tarry, an independent aviation consultant. The comfort is that it makes few demands on cash. Air France is paying in shares and will not have to pump capital into its new partner.

The merger (in all but name) certainly helps KLM, whose credit rating has sunk as it has scoured Europe's airlines looking for a safe haven. Its shareholders are being offered a 40% premium on the share price the day before the announcement (a price already inflated in anticipation of a deal).

The two airlines will be owned by a joint holding company, but will operate as separate brands from their bases in Paris and Amsterdam. There are no plans for rationalisation or cut-backs other than those already in the pipeline for the loss-making KLM. Instead, Air France's boss, Jean-Cyril Spinetta, seems to have his eyes on the blue yonder. “It's a bet,” says Keith McMullan of Aviation Economics, a London consultancy, “on the outcome of the EU-US talks on an open aviation area” (that began in Washington, DC, this week - see main story). In fact, it puts some pressure on the EU negotiators to speed up the talks.

For the next three years, two Dutch trusts and the Dutch government will own 51% of the voting shares of the KLM operating company in order to safeguard its traffic rights under its existing bilateral aviation agreement with the United States. The (optimistic) hope seems to be that the EU-US liberalisation talks will have swept away all such restrictions by the end of that period.

By snapping up KLM, Air France will dominate two of the four long-haul hubs in Europe (the others are Frankfurt and London's Heathrow). Once it is free to behave like any other business, Air France-KLM could have a great future. Until then, Air France may have cause to rue this week's acquisition.

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