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KLM: life after Alitalia
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May 2, 2000: 7:55 a.m. ET
Dutch carrier seen as alliance prize following collapse of Alitalia deal
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LONDON (CNNfn) - Dutch airline KLM's decision to drop its virtual merger with Italy's Alitalia will unleash a fresh wave of alliance activity in Europe, analysts said Tuesday.
KLM announced late Friday that it was terminating its 18-month-old deal with Alitalia, citing concerns about the privatization of the state-owned carrier and disagreements over the role of its main hub at Milan's Malpensa airport.
Alitalia shares traded at  2.19 in Milan, marginally down from Friday's close having earlier fallen to 2.07. The market was shut Monday.
KLM shares gained 3.4 percent at 19.65, having fallen some 30 percent so far this year.
Analysts predicted that KLM's move would prompt a reshuffle of Europe's largest carriers among the global groupings that dominate the world airline industry.
"This is a defining moment for the European aviation industry," said Chris Tarry, an airline analyst at Commerzbank in London.
British Airways (BAY) is the favorite to pursue a link with KLM, which has a long-standing tie with Northwest Airlines (NWAC: Research, Estimates) of the U.S. and has brought Houston-based Continental Airlines (CAL: Research, Estimates) into its Wings alliance.
Air France (PAF), which is allied with Delta Air Lines (DAL: Research, Estimates), is also viewed as a potential partner, though the clash of U.S. partners could make this difficult. Both the French carrier and BA - which held merger talks with KLM in the mid-1990s -- declined to comment.
Congestion hits earnings
KLM said it would have been "an unacceptable business risk" to remain tied to Alitalia, citing infrastructure and environmental problems at Malpensa, which had limited its growth. It also said the Italian government had failed to maintain its pledge to sell its 55 percent stake in Alitalia to the public by the end of June.
KLM, Europe's fifth-largest airline by sales, agreed last year to expand the alliance with sixth-ranked Alitalia, combining their passenger and cargo activities under a single management. KLM did not say how much it would cost to unwind the current arrangements.
Alitalia offered KLM a means to expand beyond its tiny domestic market and build its Amsterdam hub as a gateway to Europe. However, intense competition on long-distance routes and congestion in Amsterdam have slashed KLM's profit. The Dutch airline in March announced plans to cut 2,000 jobs to restore earnings.
The former partners said last year that their tie would enhance operating earnings by $427 million over the next three years.
Tarry at Commerzbank said Alitalia had the potential to recover after profit fell to break-even last year. The Italian government is understood to have approached a number of airlines about selling a strategic stake in Alitalia, with SAirGroup, parent of Swissair, seen as a candidate.
SAir last week agreed to boost its stake in Belgian national carrier Sabena from 49 percent to 85 percent in the first cross-border takeover of a national European airline. 
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