Europe's fragmented airline industry received its biggest shake- up when Air France, the majority French state-owned airline, and KLM yesterday announced a preliminary agreement on a takeover of the Dutch flag carrier.
The deal will create Europe's biggest airline, the world's largest by turnover and fourth biggest by traffic volumes.
The attempt to combine two national flag carriers in Europe is unprecedented. Less ambitious consolidation moves have foundered in the face of regulatory hurdles and government intervention.
Air France is proposing an all-share deal to take over KLM, valuing the Dutch airline at €784 million, a 40 per cent premium over Monday night's closing share price.
Shares in Air France fell as much as 4 per cent as analysts warned that synergies offered by the deal could be limited. KLM shares rose 12.5 per cent to €13.46.
KLM shareholders will own about 19 per cent of a Paris-based holding company to be called Air France-KLM.
The French government's 54 per cent stake in Air France will be diluted to 44 per cent before any subsequent moves to sell more of its stake. Other Air France shareholders will own about 37 per cent of the enlarged group.
The Air France-KLM holding company will in turn own the existing Air France group and, initially, 49 per cent of the voting rights in KLM.
The 51 per cent majority voting stake in KLM will be held by two Dutch foundations and the Dutch government during a transitional period of three years.
The complex structure is necessary to ensure that KLM does not jeopardise its international traffic rights, which could be the case if the Dutch airline was deemed to be French-owned rather than Dutch-owned.
The deal is planned to close in the first half of April 2004.
The combined Air France- KLM will have turnover of €19.2 billion and a workforce of about 106,000. It will serve 226 destinations worldwide with 540 aircraft.
Meanwhile, the merger is expected to have a positive impact on low-cost airlines such as Ryanair and the structure of the deal, if approved, could pave the way for a partner for Aer Lingus.
Analysts suggest the link-up will result in much rationalisation of these businesses and will eventually create more opportunites for low-cost carriers.
Where the airlines are both operating on major routes, some of these will be abolished, leaving greater capacity for point-to-point carriers such as Ryanair to pick up additional passengers.
NCB analyst, Mr Shane Matthews, noted that consolidation in the US market had not harmed Ryanair's low-cost role model, Southwest Airlines.
Goodbody Stockbrokers analyst, Mr Joe Gill, also believes the merger will have positive implications for Ryanair but will not have any great impact on Aer Lingus.
Others suggest that if the holding company structure agreed between the two airlines is approved it may provide a template for Aer Lingus to bring in a partner such as British Airways, while the Government could still retain is voting rights.
