British Airways and KLM are planning to file full merger proposals with Brussels in August. Industry analysts say the would-be partners are keen to sort out a merger before BA reaches a critical stage in the "open skies" talks between the USA and the UK later in the year.

Colin Baker/LONDON

KLM chairman Leo van Wijk has gone on record as saying that agreement on open skies and the continued presence of Northwest are necessities if the deal is to go through. However, analysts say both sides are anxious for the merger to happen and expect the airlines to address these issues after completion.

An equity figure of about 25% for KLM in a combined group is being talked about, which is down from the 30% that the Dutch carrier was believed to have been asking for.

A report by Dresdner Kleinwort Benson says that the chances of a deal being reached this year are 60% and that the combined group could make savings of £494 million ($740 million) in the first three years - a sum it describes as "conservative" considering it represents less than 4%of the combined revenue base.

The report predicts that BA and KLM will cut back significantly on their loss-making London Gatwick operations if the deal goes ahead, with 40%of short-haul and 10% of long-haul routes being axed. This would bring a cost saving of £439 million.

With the expansion of Amsterdam Schiphol as a transfer hub, however, the report estimates that network rationalisation will be only 3% (4.4% short-haul and 2.6% long-haul). Expansion at Schiphol is estimated to be 20%for short-haul and 5%for long-haul.

The report estimates that only 6,000 employees will go, on top of the 6,700 already earmarked for redundancy. Although this is less than some estimates, report author Mike Powell says BA has already seen 2,500 jobs go through its sale of Air Liberté, and it will be wary of the adverse effect of redundancies on staff morale.

On the issue of regulatory approval, Powell says: "There is no difference from a competition point of view from the Lufthansa-SAS alliance, which is openly run as a single business."

It would be "completely bizarre" to stop the BA-KLM deal on these grounds unless the Lufthansa-SAS deal was reopened, he adds.

Cumulative benefits of BA/KLM merger

£ million

FY 2002

FY 2003

FY 2004

Revenues

-220

-270

-163

Costs

331

508

597

Interest charges

10

30

60

Total (pre-tax)

121

268

494

Source: Deutsche Kleinwort Benson estimates

Source: Airline Business

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