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News > International
British Air in KLM talks
June 7, 2000: 5:52 a.m. ET

Anglo-Dutch combination hinges on US deals; regulators will have final say
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LONDON (CNNfn) - British Airways confirmed Wednesday that it is in preliminary talks with KLM Royal Dutch Airlines that could lead to a merger or broad-based alliance to form Europe's largest airline by revenue and the global No. 2.

Analysts have said they see the combination as a good strategic fit, but warned it might face objections from regulators on both sides of the Atlantic. Antitrust watchdogs are currently examining a fresh wave of consolidation in an industry quickly pairing off into three global alliances.

A deal with KLM would cement BA's status as Europe's largest carrier. On the basis of last year's sales, revenue for the combined company would be around $20 billion, head and shoulders above second-ranked Deutsche Lufthansa (FLHA).

Andrew Lobbenberg, an airline analyst at Fleming Securities in London, said a merger would allow BA to focus high-value business traffic on its main base at London's congested Heathrow airport, with international connecting traffic directed through KLM's Amsterdam Schiphol airport.

BA, currently the global number three, would also leapfrog UAL Corp.'s (UAL: Research, Estimates) United Airlines unit, though the U.S. carrier's planned acquisition of US Airways would boost United's annual revenue to around $25 billion. United and Lufthansa are the founders of Star, the world's largest airline alliance.

graphicKLM shares jumped 8 percent to a year high of 30, repeating their leap on Tuesday, valuing the company at 1.4 billion ($1.23 billion). BA (BAY) shares slipped 2.3 percent to 378 pence, cutting the company's capitalization to £4.1 billion ($6.3 billion).

Industry observers believe that BA will have to pay a premium of around 40 percent on KLM's current share price to acquire control.

AMR, Northwest tie is key


British Airways is seeking to recover from losses inspired by intense competition in Europe and across the Atlantic as well as a series of labor disputes which led to the ousting of chief executive Bob Ayling in March. He was replaced in May by former Cathay Pacific boss Rod Eddington (pictured, below).

graphicBA's attempts to create a global alliance with AMR Corp's (AMR: Research, Estimates) American Airlines, known as oneworld, have also been bogged down by disputes with regulators, while KLM has forged a successful alliance with Northwest Airlines (NWAC: Research, Estimates). American was last week reported to have held separate merger talks with Northwest. Wednesday the Wall Street Journal reported American was talking to Delta Air Lines.

KLM last month faced being left without a European partner after walking out on a prospective merger with Alitalia. KLM was concerned about the slow pace of plans to privatize the Italian airline.

"If American and Northwest were to happen, then [a BA-KLM deal] would be clean and logical," said Lobbenberg. "It's a very uncertain environment: we need to see what happens in the United States."

The link between the proposed deals reflects the state of flux in the regulatory regime governing the international airline industry. Both U.S. and European regulators have authority to clear or block the proposed United-US Airways merger and a BA-KLM deal. Both are likely to be examined in similar fashion, said legal experts, suggesting that both will be passed, or both blocked.

United Airlines' $12 billion bid to buy US Airways is already the subject of scrutiny from U.S. antitrust officials, and European Commission officials told CNNn.com that it will follow suit.

Ownership restrictions


The Anglo-Dutch talks revisit territory first traveled in 1992 when the airlines came close to a merger. On that occasion, disagreements over the companies' relative valuations sunk what at the time would have been a groundbreaking combination. Both firms conceded Wednesday that the latest discussions might not result in a deal.

Analysts believe that the talks will revolve around a "virtual merger" which would see the firms retain their independent identities, though a transaction would take the form of an effective takeover by BA, whose market value is more than five times higher.

A full merger is unlikely given restrictive international rules which govern the airline industry and require that more than 50 percent of a national carrier must be controlled by nationals of that country.

A BA-KLM deal is likely to follow the path set by the proposed takeover by Swissair parent SairGroup of Belgium's Sabena earlier this year, the first cross border acquisition in Europe. SairGroup plans to boost its stake in Sabena from 49 percent to 85 percent, with the additional shares being owned by a Belgian-owned holding company.

American Airlines already has an alliance with both Swissair and Sabena and has made no secret of its desire to bring them into the oneworld pact. The decision by the pilots' union at Delta Air Lines, the third-ranked U.S. player, has led to speculation that it may also seek to pursue a deal with American

Eddington already has experience in engineering cross border deals, having led Ansett Australia during its acquisition by Air New Zealand. Back to top

  RELATED STORIES

United buying US Airways - May 24, 2000

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.