Air France, KLM Announce Merger

Air France and KLM Royal Dutch Airlines, citing the need to kick start industry consolidation, today announced plans to integrate operations in what is expected to become Europe's largest airline group. If a share exchange is completed as designed, the new Air France-KLM Group would be owned by the French government (44 percent), Air France shareholders (37 percent) and KLM shareholders (19 percent). It would represent roughly $23 billion in total annual revenues, field 540 aircraft and serve 226 destinations worldwide. The carriers said they expect to sign the transaction agreement officially in the next few weeks.

Various regulatory bodies, notably the European Commission and the U.S. Department of Justice, first need to approve the merger, which has not yet officially been submitted for review. Should the tie-up receive all necessary green lights, the group's shares and warrants will be listed on major exchanges in Amsterdam, New York and Paris.

Integration of the two airlines also means KLM will join the SkyTeam alliance, led by Air France and Delta Air Lines. Continental and Northwest airlines, mutual partners of both Delta and KLM, also are likely to join SkyTeam, giving the alliance a huge boost in its competition against Oneworld and the Star Alliance. Alitalia, also a SkyTeam member, "in the medium term" may join the Air France-KLM Group.

"In the short term, it is business as usual for corporate accounts," said Lee Macenczak, Delta senior vice president of sales and distribution. "Over time, as regulatory approvals come through, this will be a huge benefit for corporate travel managers who want to participate in an alliance that offers them the world."

Macenczak said salesforces at Delta and KLM have not yet begun cooperative discussions but noted that Delta and its alliance partners "don't enter these kinds of agreements lightly. Corporate agreements need to be simple, with one contract and one voice."

Welcoming the announcement, Northwest president Doug Steenland said, "Northwest's and KLM's transatlantic joint venture will continue in place pursuant to the long-term agreement between KLM and Northwest. Northwest will continue to serve Schiphol Airport as its main European hub." Steenland added that Northwest-KLM will continue to compete against the Air France-Delta alliance.

KLM, meanwhile, sought and received numerous assurances related to stakeholder voting rights--51 percent of voting interest will remain in Dutch hands during a three-year transition--international traffic rights and brand identity.

"Our valuable Schiphol hub will be an integral part of the dual hub strategy of the new airline group," said KLM CEO Leo van Wijk.

In a joint statement, the two carriers said: "If commercial alliances have contributed over the past years to initiate the first steps toward consolidation, deeper cooperation is now needed to generate significant and sustainable synergies."