An Air France takeover of KLM looks set to be announced early next week with the Dutch cabinet then expected to give its approval, analyst and media reports said today.
Speculation of an imminent deal increased despite a denial from the Dutch Ministry of Transport that the government had already decided to back the deal, which would create Europe's biggest carrier, surpassing British Airways.
The Dutch government has a "golden share" in KLM, giving it the right to veto any key decision planned by the airline, and will likely play a role in safeguarding the airline's international landing rights.
Prime Minister Mr Jan Peter Balkenende has said KLM needed to participate in the consolidation of the ailing airline industry. But he expressed concerns that Paris's Charles de Gaulle airport could reduce passengers from Amsterdam's Schiphol, the country's international hub.
Many analysts had expected the two airlines first to exchange small equity stakes. But Fortis Bank, citing an insider source, said the two airlines would create a joint holding structure with Air France and KLM operating as two units.
Fortis analyst Mr Maarten Bakker said KLM shares would be delisted, with the shareholders receiving 15-20 per cent of the new holding company.
Several newspaper reports have provided similar details of a likely agreement.
Air France has scheduled a meeting with its unions for Monday, when union leaders are expected to hear details of a pact. A Dutch union official said KLM told its labour leaders it expected to finalise a deal in a week or two.
KLM shares were the biggest gainers among Dutch midcaps, rising 4.2 per cent to €11.90 in early trade today. The stock, which in recent weeks has outperformed rivals on expectations of a deal, is up 127 per cent from an all-time low set in March. Air France shares slipped 1.8 per cent to €13.96.