From Reuters
KLM, Air France talks seen rattled by identity issues
Thu 18 September, 2003 16:27 BST
By Christopher Borowski and Noah Barkin
AMSTERDAM/PARIS, Sept 18 (Reuters) - Air FranceAIRF.PA and KLM KLM.AS plan to set up a joint holding that could evolve into Europe's largest airline, but a host of factors complicate the talks, including KLM's need to retain national identity.
A deal seemed likely this week, but Alitalia's AZPIa.AS increasingly louder demands to be part of any combination and the possibility of a challenge from KLM's pilots if the alliance leads to job cuts, appear to have stalled the talks.
KLM's pilots union said on Thursday it would consider legal action or other moves if the Dutch airline reneged on a deal signed a year ago that guarantees that no job would be cut if the group were to ally with a rival, such as Air France.
Creation of a common holding company, which Air France indicated to its unions is now being considered, may also prove tricky. Troubles over creating a similar structure shot down one of KLM's past tie-up attempts with British Airways BAY.L .
In order to retain crucial bilateral landing rights around the world, KLM must be considered a Dutch entity, but based on market capitalisation its shareholders would receive less than a fifth of the holding company with Air France.
"KLM will have to remain Dutch enough to hold on to its landing rights in many countries," said Pablo Mendes de Leon, the director of Institute of Air and Space Law at Leiden University.
The two would likely retain individual listings and guarantee separate identities, but analysts said many details remained hazy.
"What I don't understand is who will own this holding, whether it will be proportional ownership based on the size of the companies or something else," said Martin Borghetto, analyst at Morgan Stanley in London.
Whatever its form, many investors still say a deal between Air France and KLM will eventually pave the way to a full-blown merger to create Europe's largest airline.
KLM shares rose 5.31 percent on Thursday, reversing losses from previous session, while Air France was 1.5 percent stronger by 1520 GMT. Alitalia was down 0.6 percent.
GOING DUTCH
The Netherlands has about 130 international aviation agreements. Mandes de Leon said countries such as the United States should be easy to convince that KLM was still Dutch, but others, such as Japan, could give KLM a much rougher time.
KLM, among the world's oldest airlines, has said that its identity, as well as the strong position of its Amsterdam Schiphol airport were key in its alliance negotiations. French plans to privatise Air France are also a factor.
To deal with such concerns, KLM may be demanding strong Dutch board representation in the new holding and some form of supervisory role for the state, which has 14 percent of KLM.
KLM has to balance these concerns with the need to team up with a larger player as the industry, struggling with an economic slowdown and more nimble no-frill carriers, heads for consolidation over the coming years.
Air France and KLM have declined to reveal what points remain to be settled or the deadline for an agreement.
Some newspapers have speculated that Air France may be concerned by a deal KLM signed with its pilots a year ago, which provides job guarantees and stipulates that flights between partner countries would be shared equally.
"We may consider court action if this agreement is violated, but we have not seen anything so far to make us think that such action would be necessary," said Henk de Vries, the head of KLM's VNV union.