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The BBC's Simon Montague
"BA says a merger would mean lower fares"
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Virgin Chairman Richard Branson
"This can not be in the interests of the consumer"
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Simon Calder from 'The Independent'
"British Airways are going to tread very carefully"
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Wednesday, 7 June, 2000, 15:22 GMT 16:22 UK
British Airways confirms KLM talks
BA tailfin and KLM aircraft
BA and KLM would create a European gaint
British Airways and Dutch national airline KLM have confirmed they are in talks on a "possible combination of businesses".

A brief statement said: "As these talks are at a preliminary stage, there is no assurance that they will result in any transaction between the parties."

The companies said that no further public comment would be given until there was "anything material" to announce.

There had been widespread speculation that BA was poised to take over KLM, amid reports that the UK airline had appointed an investment bank to advise it on the deal.

There had been repeated rumours following the collapse of the merger between KLM and Alitalia earlier this year.

US merger link?

A merger between the two would create the world's third largest carrier behind United Airlines and American Airlines.

Reports about the talks had helped push KLM shares up 19% before they fell back slightly, valuing the airline at $1.3bn. BA's shares have risen over the past two weeks, on the reports of the talks. But they closed weaker at 373p, giving BA a market value of 4.1bn ($6bn).

The two European companies have US partners who are also rumoured to be merging. American Airlines, part of BA's Oneworld alliance, is said to be planning a bid for Northwest Airlines, KLM's alliance partner.

KLM spokeswoman Sandra Maas said the talks could lead to a full-fledged merger, an alliance, a takeover or cooperation in various business areas.

Talks with BA were just one option for KLM, she said, although she also stressed that the Dutch airline was now only talking to the UK airline.

Analysts stressed the regulatory hurdles that would have to be cleared before any deal could be finalised.

"It could be a good few years while the regulators decide whether to allow it or not," said Ian Wild of SG Securities.

Cultural similarities

The advantages in striking a deal with BA included opportunities for efficiencies, cost-savings, better choice of destinations and the possible integration of operations at London's Heathrow and Amsterdam's Schiphol airport.

"Heathrow is one of the wealthiest origin and destination markets," she said, "while Schiphol is one of the leading transfer airports."

Ms Maas also said KLM and BA had a "similar culture," noting other successful Anglo-Dutch tie-ups such as Unilever and Royal/Dutch Shell group of companies.

One of the tension points in the collapsed alliance with Alitalia was reported to have been cultural difference between the Dutch and Italian airlines.

The deal is an attractive option for BA, which has seen its profits slump as it faces increased competition on transatlantic routes, competition from budget airlines and high fuel prices. Any alliance or merger would greatly strengthen its hand, analysts say.

Any deal would be the first strategic deal for its new Australian chief executive, Rod Eddington.

Earlier merger talks

The merged company would be far larger than rivals Lufthansa and Air France and give BA a major European hub and greater access to Asia and the West coast of the United States.

But it could face regulatory problems as the cross-border mergers in Europe have been fraught with difficulties.

BA and KLM talked about a merger several years ago, but the deal collapsed when KLM demanded a near-equal partnership.

The merger talks follow a fresh wave of consolidation in the US airline industry.

American price worries

Last month, United Airways announced plans to buy US Airways, creating the world's largest airline.

On Friday, Northwest Airlines was reported to be in merger talks with American Airlines.

Shares in Northwest Airlines jumped by as much as 25% on the reports. Both companies have declined comment on the report.

If Northwest Airlines and American Airlines did decide to merge, they would have to convince the regulators that the merger would not result in higher prices for consumers.

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See also:

05 Jun 00 | Business
BA 'closer' to deal with KLM
23 May 00 | Business
Has BA turned the corner?
23 May 00 | Business
BA plunges into the red
25 Apr 00 | Business
British Airways goes for Aussie
24 May 00 | Business
US airlines merge
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