Industry observers are sceptical that the takeover can be brought about without extra job cuts, writes Kevin Done

The combined forces of Air France and KLM will jump straight to the top of many airline league tables.

The company will overtake American Airlines as the global leader by turnover and rank third behind American and United Airlines by traffic.

But does size matter in an industry where the biggest carriers have been suffering billions of dollars of losses during the past three years and in which the largest US carriers have flirted with bankruptcy protection?

The marriage of Air France and KLM has already brought scepticism among industry observers that a union can be made in the bloodless manner outlined yesterday, with no extra job cuts.

Both airlines couched the benefits in terms of enhanced growth prospects as the industry recovers from the traumas of the past three years, with synergies viewed by many analysts as modest. The two airlines said the deal was expected to generate synergies resulting in an improvement in operating profits of €385-€495 million after five years.

About 60 per cent of the gains would come from cost savings in areas such as procurement, sales and distribution.

The co-ordination of sales forces around the world could save €100 million after five years, with another €195 million coming from the optimisation of the network, harmonising revenue management and improved utilisation of the fleet. Information technology savings could yield up to €70 million and merged procurement and inventories up to €65 million.

"The proposed cost savings are pitiful," said Mr Chris Tarry, an independent aviation analyst. "Here is an industry that needs to fundamentally and structurally change its economics, yet the proposed cost savings from Air France-KLM are negligible and take far too long to emerge.

"The industry has too much capacity and just putting two airlines together is not enough. You must take capacity and costs out."

Air France and KLM maintain they have developed a balanced growth strategy based on the potential of their respective hubs. Paris Charles de Gaulle, which handled 48.4 million passengers last year, ranked third in Europe behind London Heathrow and Frankfurt, while Amsterdam Schiphol ranked fourth with 40.7 million.

Both airports are viewed by analysts as having the best expansion prospects, with less congestion than their UK and German rivals. - (Financial Times Service)