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Last Updated: Tuesday, 30 September, 2003, 13:13 GMT 14:13 UK
Does KLM-Air France make sense?
The leading European airlines from France and the Netherlands are teaming up in a landmark deal. But not all analysts are convinced that the deal is the solution to the industry's troubles.

Europe's airlines realised long ago that they needed to consolidate to survive.

The fragmented industry - where each country boasts a flagship national carrier as well as one or more no-frills alternatives - has finally woken up to the fact that there are too many airlines chasing too few passengers.

KLM and Air France chief executives shake on the deal
All smiles now - but for how long?
But straightforward mergers are difficult to negotiate because of the way bilateral aviation arrangements have been agreed between countries, dictating where airlines can fly.

To get round those problems, KLM will remain a separate legal entity and operate its flights much in the same way as before.

Indeed, passengers will hardly notice that Air France and KLM have joined forces: the two airlines will keep their own brands, hubs and network of flights.

And that raises questions of whether the agreement will actually do what it sets out to do and save each party money.

Rational?

The two groups have laid out the areas in which they hope to cut costs by combining their sales teams, negotiating a joint position on catering and ground-handling partners, buying aircraft together and converging IT applications.

If they are going to say they have merged and then each side looks after its own interest, then it will create conflict rather than benefits
Fariba Alamdari
Airline expert
That, the new group hopes, will eventually produce savings of between 385m euros and 495m euros a year.

But analysts are not impressed by the size of the proposed savings.

"The estimated synergy savings are not that big, especially considering that KLM already has plans to cut 650m euros of costs on its own," said Bert van Hoogenhuyze, an analyst at Effectenbank Stroeve.

And the fact that neither party raised the possibility of job cuts also caused surprise.

"If they are not going to lose staff then they're not rationalising their network and so what's the point of it?" Fariba Alamdari, head of the air transport group at Cranfield university told BBC News Online.

Conflict?

Analysts are also concerned about how the new management structure will work out in practice.

"Every corporate deal has a risk in terms of execution," warns Dominic Edridge, an airline analyst at Commerzbank.

Airbus Industries passenger jets at Le Bourget Airshow
More mergers ahead?
The fear is that, with both parties operating as separate airlines, they may focus more on how to look after their own business than on the need to work together.

"If they are going to say they have merged and then each side looks after its own interest, then it will create conflict rather than benefits," said Ms Alamdari.

Analysts say this deal is just the first step in what needs to happen to secure the future of the airline industry.

More mergers and alliances are expected to follow, with British Airways and Lufthansa both likely to want to seek similar deals in order to preserve their market positions.

The EU is currently negotiating a new, pan-European agreement with the US for transatlantic flights, which might make it easier in the future.

Analysts say other airlines are likely to want to wait until those rules come into force, in order to avoid some of the difficulties KLM and Air France face.

"Yes they've taken the first step but there's still a long way to go before they get to where they want to be," Mr Edridge told BBC News Online.




SEE ALSO:
European airlines join forces
30 Sep 03  |  Business


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