Air France-KLM Deal Just the Beginning

Air France’s planned takeover of KLM Royal Dutch Airlines, which would create Europe’s largest airline, may just be the beginning of a trend as airline carriers look to ways to cooperate and cut costs after two years of extensive losses.

“There will be just three or four major carriers who will dominate the airline industry over the next five to 10 years,” Rigas Doganis, the former chief executive of Greece’s Olympic Airways, said in an interview in London last month.

Air France, Europe’s second-largest airline, has offered 784 million euros in stock for KLM in the largest airline takeover in Europe. British Airways, currently Europe’s biggest, and Lufthansa, the region’s third in size, may also seek to buy competitors, Mr. Doganis said (British Airways may eventually try to combine with its Spanish partner, Iberia Lineas Aereas de Espana).

Negotiations that began last month in Washington between European Union and U.S. regulatory officials may be the catalyst for more combinations, said David Henderson of the European Airlines Association in Brussels, Belgium. The EU wants to replace all the individual national trans-Atlantic agreements on landing rights with a single “open skies” accord with the EU.

An agreement would remove national restrictions in U.S.-European aviation treaties that have prevented airline mergers in the 15-nation region, said Gilles Gantelet, an EU Commission transport spokesman in Brussels.

British Airways abandoned merger talks with KLM in 2000 amid U.S. government concerns about the United Kingdom’s more restrictive landing rights for American airlines.

The world’s airlines are searching for partners because they may incur an estimated $10 billion in losses this year. They are suffering as a slowing economy reduces travel demand, forcing them to cut fares and challenge budget airlines.

Air France and KLM combined would be the world’s largest airline by revenue, with sales of 19.2 billion euros and 103,851 employees. The two carriers expect operating income to rise by as much as 495 million euros annually from 2005, primarily because of cost cuts.

Essentially, say analysts, the deal is a complex share swap to get around European legislation and dilutes the French government share of AF to 44%, the balance made up with 37% owned by existing shareholders and KLM common stockholders 19%.