Air France inks deal to take over KLM

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WASHINGTON -- Air France signed a deal to take over KLM in a merger that could help reshape the airline industry.

The $920 million, all-stock deal would create the largest airline in Europe -- if it meets with shareholder approval and passes antitrust reviews in the U.S. and Europe.

Air France and KLM would keep their separate identities but would code share and coordinate their scheduling, revenue management, sales and strategy.

The airline could get even bigger: Alitalia wants to join and signed agreements with both carriers that would enable negotiations to begin as soon as the Italian government relinquishes control of Alitalia.

The deal also could be a precursor to more airline consolidation in Europe. Within days of the Air France-KLM deal, British Airways and Iberia were fending off rumors they were starting merger talks.

"The airline industry is fragmented and its current competitive structure, with national carriers for each individual country, is an inheritance from a former era," Air France and KLM said in a joint statement. "The need for structural changes and consolidation in Europe is widely accepted but has not yet commenced as a consequence of regulatory and political constraints."

That consolidation, however, might not happen quickly. Many airlines are waiting for a U.S.-European Union pact that would create a completely open transatlantic market, replacing U.S. bilateral agreements with individual European countries.

The bilateral agreements discourage consolidation because the rights apply only to carriers whose majority ownership is in one of the signatory countries. For example, British Airways could not acquire KLM and use the Netherlands' open-skies agreement to offer service from Amsterdam to the U.S.

The U.S. and EU just started negotiations, which most observers expect to take years.

With most of the airlines already in global alliances, "I can't see anyone else doing anything [with mergers] in the short term," said Dominic Edridge, transport analyst for Commerzbank Securities in London.

In a way, the Air France-KLM agreement shows why. Its complex structure is designed to overcome barriers but could create a business challenge.

The deal would create one Air France-KLM holding group for two operating companies -- one for Air France and one for KLM, enabling each to retain its own brand and operations.

Air France's chairman and CEO also would be chairman and CEO of Air France-KLM; KLM's CEO would be vice chairman. A strategic management committee at the Air France-KLM level would be responsible for the overall group strategy.

France and other Air France shareholders would own a majority of the Air France-KLM holding company.

For a three-year transition period, however, Air France-KLM would own 49% of KLM voting rights in the KLM operating company; the remaining 51% would be shared by two Dutch foundations and the Netherlands.

That's intended to retain KLM traffic rights to foreign countries, including the U.S.

To contact reporter Andrew Compart, send e-mail to [email protected].

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