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. Last Updated: 07/27/2016

Air France, KLM to Form Europe's No. 1 Carrier

PARIS -- A sweeping combination of two of Europe's largest airlines was achieved Tuesday when the boards of Air France and KLM approved a proposed stock swap with KLM shareholders.

If the deal wins the approval of the French and Dutch governments, and of regulators on both sides of the Atlantic, the combination would surpass British Airways to become Europe's largest airline company.

After Air France's board sanctioned the deal Monday, KLM's board met overnight to formulate a response to the Air France proposal.

Labor union representatives on Air France's board had opposed the proposal. One, Yvon Touil of the leftist General Confederation of Labor, told reporters about some details of the plan at the conclusion of the board meeting.

The proposal would make each airline a wholly owned subsidiary of a new holding company based in Paris, he said. Air France shareholders would get about 85 percent of the new company's equity and KLM shareholders the rest. The deal would take the legal form of a capital increase by Air France.

"It is a landmark day for KLM and for Air France, and a defining moment for the European aviation industry," said Jean-Cyril Spinetta, Air France chairman and head of the new group, at the joint news conference at Schiphol Airport outside Amsterdam.

For Air France, the current structure "doesn't create enough revenue for its shareholders," he said. "The time has come to change."

In the 12 months ended March 31, Air France and KLM together had 19.7 billion euros ($22.6 billion) in revenue. By comparison, American Airlines' revenue in the period was $17.3 billion.

Investors bid up Air France shares 1.3 percent Tuesday, to 13.69 euros, in anticipation of a deal. KLM rose just under 1 percent, to 11.96 euros.

The proposal would finesse two problems facing cross-border airline mergers. One is the Dutch government's unwillingness to allow a foreign country to have majority control of a Dutch airline. The proposed merger would dilute the French government's current 54 percent stake in Air France to about 45 percent of the new holding company.

The other problem is the potential loss of KLM's landing rights outside the European Union under aviation treaties that depend on the nation of ownership of each airline. The proposal would keep KLM technically Dutch by creating a special Dutch nonprofit foundation that would hold 51 percent of its voting rights, though none of its equity.

"The wedding banns have been published," said Francois Cabrera, a representative of another labor union at Air France. He spoke after union leaders had been briefed by Spinetta but before the board voted on the proposal.

The union leaders said they were told that Air France hoped a merger would lead to savings of 400 million euros ($458 million) over five years, which some analysts called modest.

The deal would bring KLM into the SkyTeam alliance led by Air France and Delta, which also includes Aeromexico, Alitalia, CSA Czech Airlines and Korean Air. Adding KLM would make SkyTeam the largest such grouping, surpassing the Star Alliance led by Lufthansa and United. Touil said a committee of four executives each from KLM and Air France would examine the carriers' fleets, networks and alliances.

The possibility of a merger has provoked strong feelings in the Netherlands, a small country with little need for domestic flights. KLM is the oldest international airline in the world and a source of national pride that some Dutch fear would be swallowed up in a merger. The government of Prime Minister Jan Peter Balkenende has expressed concern about jobs at Schiphol, KLM's hub.

Both airlines will safeguard their national identities, logos and brands. Air France also gave assurances to the Dutch government that Schiphol would become its second hub and be developed on equal terms with its Roissy Charles de Gaulle base near Paris.

In France, a deal would allow the government to meet a goal of reducing its stake in Air France despite soft stock markets.

Emmanuel Jahan, another Air France union leader, said the board of the new holding company would consist of 16 directors -- 11 French, four Dutch and one representing Alitalia, which owns 2 percent of Air France stock. Alitalia has applied political pressure in recent weeks not to be excluded from any Air France deal with KLM.

The European Commission said Tuesday it was likely to examine the planned tie-up.

And rival British Airways, whose attempts to merge some operations with partner American Airlines have been thwarted by regulators, urged regulators to look hard at the impact of the deal.

Spinetta, who will head the merged Air France-KLM, said the two airlines had signed a trilateral accord with loss-making Alitalia that would it to cooperate with the new entity.

(NYT, Reuters)