More airline mergers forecast

Air France bid for KLM comes amid U.S.-EU talks

October 01, 2003|By BLOOMBERG NEWS

Air France's planned takeover of KLM Royal Dutch Airlines NV, which would create Europe's largest airline, may spur more combinations as carriers try to cut costs after two years of 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 yesterday.

Air France, Europe's second-largest airline, has offered 784 million euros ($913 million) in stock for KLM in the largest airline takeover in Europe. British Airways PLC, currently Europe's biggest, and Deutsche Lufthansa AG, the region's No. 3, may also seek to buy competitors, Doganis said.

Negotiations that began yesterday 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.

"If an agreement with the U.S. includes only one thing, it will be the nationality question," he said. "This is what prevented the alliance in the past between British Airways and KLM. Consolidation is a reality in the airline industry."

The United States is ready to consider changes to its treaties "that would allow and facilitate potential mergers between European carriers," said John Byerly, a deputy assistant secretary of state and chief U.S. negotiator in the talks.

"We're not encouraging or discouraging the consolidation of European carriers. We're strictly neutral on whether it should take place," Byerly said.

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.

The Sept. 11, 2001, terrorist attacks, the Iraq war and the spread of the deadly SARS disease damaged an industry that was already reeling from the growth of low-cost airlines. Budget carriers now have 16.7 percent of the European market, rising from 8.5 percent in August 2002, Doganis said.

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. Swiss International Air Lines Ltd. chose on Sept. 23 to join British Airways' Oneworld alliance of carriers. British Airways may eventually try to combine with its Spanish partner, Iberia Lineas Aereas de Espana, Doganis said.

Air France, based in Paris, and KLM, based in Amsterdam, expect operating income to rise by as much as 495 million euros annually from 2005, primarily because of cost cuts. Air France reported a 97 percent decline in fiscal first-quarter profit to 4 million euros. KLM recorded a fiscal first-quarter loss of 54 million euros for the same period.

"This is a defining moment in the European airline industry," Air France Chief Executive Officer Jean-Cyril Spinetta said.

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