Air France and KLM unveiled plans yesterday to create Europe's biggest airline in an all-share deal that would see the French carrier swallow its smaller Dutch rival for €784 million.
KLM shares soared as much as 20 per cent and Air France stock slid seven per cent after Europe's second- and fourth-ranked airlines revealed the proposed alliance, approved by their boards late on Monday after almost two years of talks.
A successful combination, which Alitalia may join later, could serve as a model for other full-service airlines struggling with an industry slowdown and growing competition from no-frills carriers in an overcrowded market.
At a news conference in Amsterdam's Schiphol airport, Air France Chairman Jean-Cyril Spinetta forecast €600 million in annual long-term merger benefits and said no lay-offs were planned.
But some analysts said Air France's offer, which represents a hefty 40 per cent premium over KLM's closing share price on Monday, was too much given that merger savings would be limited by the pair's plans to continue operating as separate entities.
"The estimated synergy savings are not that big, especially considering that KLM already has plans to cut €650 million of costs on its own," said Bert van Hoogenhuyze, an analyst at Effectenbank Stroeve.
Many governments, which once saw the existence of flag carriers as a matter of national pride, now recognise the need for consolidation.
But aviation industry mergers have proved elusive in the past, partly because of bilateral agreements between governments which dictate which airlines can fly where on international routes.
Once such rules are modified, analysts say, the sector will be able to consolidate and tackle the overcapacity which has made many carriers unprofitable in recent years.
Air France-KLM would leapfrog British Airways to become Europe's largest airline in terms of traffic, and would be the world's number three carrier behind American Airlines and Delta .
The planned merger would hand KLM shareholders just 19 per cent of the enlarged company, bringing to an end KLM's 84-year celebrated history as an independent airline.
The Dutch government and other Dutch entities will hold a majority of voting rights in the KLM unit for the next three years to maintain key landing rights.
The French state would see its stake in the new company fall to 44 per cent from its current 54 per cent, while other Air France shareholders would own the remaining 37 per cent. The company would have a market capitalisation of about €3.5 billion.
France's Transport Minister Gilles de Robien said the French state could eventually cut its stake to "well under" 20 per cent.
"I'm disappointed the French state hasn't trimmed its stake. I'd rather have seen a government share of some 20 per cent," Stroeve's Van Hoogenhuyze said.
The Air France/KLM deal appeared a short-term disappointment for Italian carrier Alitalia, a partner of Air France which has lobbied for weeks not to be left parked on the tarmac.
Mr Spinetta said the three airlines had struck an accord which would allow the Italian carrier to cooperate with the new entity and combine their cargo businesses, though declined to say when Alitalia would be fully integrated. Alitalia shares fell 4.6 per cent by 1343 GMT.
The European Commission said yesterday it was likely to examine the planned Air France-KLM tie-up to see whether passengers in Europe would be left with enough choice.
BA, whose repeated attempts to merge some operations with partner American Airlines have been thwarted by regulators, was quick to urge competition authorities to be look hard at the impact of the deal, especially on lucrative transatlantic routes.
The merger will bring KLM into SkyTeam, the global airline alliance that includes Air France, Delta and Alitalia, and is likely to lure KLM's US partners, Northwest and Continental, at a later date.
That would make SkyTeam bigger than the oneworld alliance led by British Airways and American Airlines and narrow the gap between SkyTeam and the top-ranked Star Alliance grouping led by Lufthansa and United Airlines.
Air France and KLM estimated merger benefits would build up over time in sales and distribution, network and fleet management, maintenance and information technology. Some analysts said savings on aircraft maintenance might be limited because, while KLM flies mostly Boeing planes, Air France has a mixture of Boeings and Airbuses.
The two airlines forecast an annual improvement in combined operating income of €385 million to €495 million after five years, with 60 per cent of total synergies coming from cost savings.
"I don't think they are really overpaying in order to create the world's largest international airline in terms of international business, which is the value business," Nick van den Brul, aviation analyst at BNP Paribas in London, told Reuters Television.