British Air, KLM Propose Merger

BRITISH Airways and the Dutch airline KLM are planning to merge and have already laid their proposal before the European Commission (EC) in Brussels.Their aim is to create a "mega-carrier" twice the size of the German airline Lufthansa and able to compete with American carriers that are expanding their operations in Europe. A successful merger would also give British Airways a stake in the United States airline industry, as KLM already has a 20 percent stake in Northwest Airlines. The merger would be a joint venture, creating two legally separate entities using a common fleet of aircraft and sharing staff, computers, and ticketing systems, according to a highly placed British Airways source. BA, the dominant carrier at London's Heathrow airport, already shares Terminal 4 there with KLM. The merged BA-KLM would set out to expand operations in Amsterdam and in Detroit, a large "hub" airport through which to make inroads into the US market.

Expansion into US? BA currently has landing rights at 19 US airports, but no access to the American hinterland. A linkup with Northwest Airlines would open up numerous Midwest and East Coast cities. The KLM deal, BA sources say, would be modeled on the Royal Dutch Shell company, which has separate British and Dutch components united under a single holding company. There is a parallel too with Unilever, a consumer goods conglomerate with legally separate companies in Britain and the Netherlands. A City of London banker says that if the EC approves the deal, the new airline would have a market capitalization of around 2 billion British pounds ($3.6 billion). It would be Europe's biggest operator. News of the secret merger talks began to leak out last month when the Dutch transport union FNV said BA, currently operating at a profit, was planning a takeover of loss-making KLM. Brussels officials later confirmed that BA and KLM have made merger approaches to the EC. BA and KLM officials have agreed to make public only minimal details, however, because they do not want to upset Leon Brittan, the EC's commissioner for competition. They are also nervous about a possible political backlash in the Netherlands. Earlier this year, BA proposed to take over the Belgian airline Sabena, but Mr. Brittan insisted that the two carriers should give up some of their routes as part of the arrangement. BA backed off. Lord King, BA's chairman, and KLM chief Pieter Bouw hope the type of merger they have proposed to Brittan will not fall foul of EC competition rules. Lord King is counting on the financial health of his airline to give it an edge in negotiations with the EC, as well as with KLM and Northwest. According to the International Air Transport Association, the world's top 200 airlines are expected to lose 4 billion British pounds this year, but, despite the Gulf war, BA made pre-tax profits of 185 million British pounds in the first half of 1991 and held its 40 percent market share on the Atlantic run.

Political obstacles King has stuck to BA's policy of buying US-built aircraft, despite criticism from Europe's Airbus Industrie. John Campbell, a London airline industry analyst, says there are political obstacles to the proposed merger, but these might be minimized if the two companies could demonstrate to Brussels that existing route systems would be left undisturbed. In the Netherlands, trade union opposition might also be a factor, Mr. Campbell says. The Dutch government holds a 38 percent stake in KLM, whereas BA is wholly privatized. BA sources say one of the attractions of a deal with KLM was the cultural compatibility of the British and Dutch. English is widely spoken in the Netherlands, and both countries are trading nations with far-flung interests. If BA and KLM can get early EC backing for their deal, they will be in a stronger position to resist inroads into the European market planned by American Airlines and United Airlines once the current recession eases. They also want to position themselves for the single European market that will come into effect at the end of 1992. A BA source says perhaps only half a dozen European airlines will survive, and these will be ones that rigorously pare costs, achieve economies of scale, and are plugged into air networks linking Europe with North America and the Far East.