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. Last Updated: 07/27/2016

British Airways, KLM Discuss Merger

AMSTERDAM, Netherlands -- British Airways and KLM said Wednesday they were in merger talks, opening the way for a pounds 5 billion ($7.5 billion) merger that would further shake an air industry being rapidly transformed by a wave of alliances and takeovers.

"KLM Royal Dutch Airlines and British Airways PLC ... have agreed to conduct talks on a possible combination of their businesses," read the statement issued by Europe's first and fourth-ranked carriers.

The talks come at a time when UAL, parent of United Airlines, has offered to buy US Airways for $4.3 billion. Meanwhile, AMR, American Airlines' parent, is wooing Northwest Airlines.

Low-cost rivals were rattled, raising fears that the deal would cramp competition and send up prices.

British budget airline Easyjet said it had written to the EU Commission demanding a probe on competition grounds, saying any merger should be blocked unless the partners were forced to surrender to competitors a substantial number of slots at London's Heathrow and Amsterdam's Schiphol airports. The Luton, England-based airline claimed that a BA-KLM merger would control 72 percent of all flights between London and Amsterdam.

The Commission said any deal would need its approval anyway. The EU vets mergers and acquisitions if the parties have combined global sales of at least 5 billion euros ($4.8 billion) and European sales of at least 250 million euros each.

In the year to March 2000, BA and KLM had combined operating revenues of $22.5 billion at current exchange rates.

Virgin Group, which owns Virgin Atlantic and controls low-cost carrier Virgin Express, said a BA-KLM merger would "create a behemoth."

"It will not be good for prices, fares or the consumer," a Virgin spokesman said.

Meanwhile, bigger competitors were less concerned at the talks. German carrier Lufthansa AG was sanguine, saying a BA-KLM merger would boost competition and would give it no reason to change its strategy of European partnerships.

The would-be partners, who tried unsuccessfully to merge eight years ago, warned that discussions were preliminary and there was "no assurance" they would result in any deal.

"It could be a good few years while the regulators decide whether to allow it or not," said analyst Ian Wild at SG Securities in London. "It depends how determined BA is to achieve a deal and how much they are prepared to give up."

Analysts said a tie-up could boost shareholder value by more than 1 billion euros through cost savings, but could take years to implement fully as the parties grappled with international air treaties, competition issues and political interference.

However, the path to a full merger is strewn with hurdles, not least the fundamental issue of how it would affect the industry's network of bilateral government treaties that determine where each nation's airlines can fly.

Hitherto, cross-border mergers in the international industry have been precluded by these bilateral agreements, which are negotiated by every government on behalf of its own airlines.

If an airline were to lose its national identity, governments could decide that airline was no longer entitled to fly under existing bilateral agreements.

But Swissair may already be blazing a trail for BA and KLM through its planned takeover of Belgium's Sabena. If they hammer out a solution to the bilateral treaties problem, analysts say that could set a model for other mergers.

Analysts say an Anglo-Dutch tie-up could solve the partners' main problems - KLM's weak position in Europe and BA's lack of U.S. antitrust immunity for transatlantic alliances, which KLM already enjoys under a Dutch-U.S. open skies trade agreement.

KLM spokeswoman Sandra Maas said the link-up could "take any form," but speculation has centered on an effective takeover by BA of its smaller Dutch peer.

KLM chief executive Leo van Wijk said recently the Dutch carrier is only interested in "true mergers" and would consider playing a subordinate role.

Maas said the BA-KLM talks began after the collapse in late April of KLM's alliance with Italian carrier Alitalia.

Previous attempts at an Anglo-Dutch airline merger failed over differences in valuation, but Maas said times had changed.

"The talks between KLM and BA reflect the current consolidation taking place in the airline industry," she said. "The market situation is different; the world has changed."

The consolidation bug is biting hard on both sides of the Atlantic, and a merged BA and KLM would create a potent grouping with a strong position on North Atlantic business routes.

BA is a partner of American Airlines - the world's second-largest airline - in the OneWorld alliance, while KLM has a close link with Northwest Airlines Corp., the No. 4 U.S. carrier.

American Airlines' parent, AMR Corp., has approached Northwest about a takeover, but the prey considered the initial offer too low.

The Wall Street Journal reported on Wednesday that American Airlines had held exploratory talks with Delta Air Lines on industry consolidation, even discussing a possible merger.

KLM shares initially soared 19 percent on the news to a 22-month high of 33 euros ($29), before falling back to 29.65 euros to value the airline at around 1.38 billion euros ($1.32 billion).

BA saw its shares slide nearly 3 percent to 373 1/2 pence, valuing the airline at pounds 4.1 billion ($6.2 billion). Analysts blamed jitters over the regulatory and financing obstacles.

If the merger comes off it could also create the world's largest airline cargo operation if BA and KLM could fully integrate their freight activities, European industry sources said Wednesday.

Cargo may not be the driving force behind the move, but a combined group would be a major force based on the two powerful cargo hubs of London and Amsterdam airports, they added.

International Air Transport Association figures for 1998 show that a combined global tonnage carried of just under 1.2 million tons, ranking behind the two express operators, Fedex (4.6 million) and United Parcel Service (2.8 million), over half of whose business is inside the United States. The two would be larger than Lufthansa - the world's biggest cargo airline.