Air France-KLM set for take-off

A DATE was set today for a marriage that will create the world's third-biggest airline, worth £2.7bn, as French flag carrier Air France and KLM of the Netherlands finally agreed to tie the knot after last-minute haggling over ownership and jobs.

KLM has set a 15 October deadline to sign a final agreement under which the Dutch will own a 19% stake in the new combination, to be called Air France-KLM.

Air France is paying e784m (£540m) in an all-share deal that will not involve job losses, the chief executives of both airlines said today.

The new airline could quickly grow with the addition of Italy's Alitalia. The Italian airline said that it had agreed to start talks with Air France immediately but would join only once the Italian government had sold its control.

The merger will also strengthen international alliance SkyTeam, to which Alitalia is already signed up.

Other members include Delta of the US, CSA Czech, Korean Air and AeroMexico. Air France said it would swap 11 of its shares and 10 warrants for every 10 KLM shares. This will also cut the French government's stake in the new group to 44%.

Both companies have been involved in wide-ranging consultations with union delegates representing ground staff and technicians.

The two airlines today said they were targeting between e385m and e395m of annual synergies from the fifth year of the merger, out of a total of £650m. Air France chief executive Jean-Cyril Spinetta said 60% of that figure would be from cost savings with the remainder coming from additional revenues.

Analysts said, however, that they were worried the merger is not creating sufficient cost savings in the face of the worldwide slump in demand for air travel.

Chris Tarry, airlines analyst with CTAIRA, said: 'Size does not guarantee it will make money. The guarantees given to unions and the airports over staffing mean insufficient costs are coming out to generate a return on the new company attractive to investors.'

Much of the savings from the merger are expected to come on procurement of new aircraft spare parts and fuel.

Air France reported a 97% drop in first-quarter profit to e4m. KLM's loss for the same period rose to e54m.

European airlines have been slashing workforces in an attempt to lower costs. BA said it will reduce its workforce by 23% to save e650m by March 2004 while Lufthansa has lowered investments by e200m, frozen hiring and grounded planes.