COLIN BAKER / LONDON
Financial analysts are talking up the likelihood that British Airways will follow up on last year's failed merger talks with KLM by taking a minority 10-15% stake in the Dutch carrier.
Some even believe that BA could opt to go as high as 49%, although the consensus is that the aim would simply be to put down a marker on the struggling carrier rather than seek to revisit negotiations over a full-blown equity link. The obstacles which scuppered the last merger proposals remain. KLM is tied to Northwest Airlines and will be hit by stiff penalties if it terminates the deal before 2008. There is also a three-year notice period on either side. BA, meanwhile, has been making great efforts to strengthen ties with oneworld partner American Airlines, although antitrust immunity is still no nearer.
That said, analysts see sense in BA taking a position in KLM if for no other reason than to block other potential suitors such as Air France. It would also bypass the thorny issue of valuation which has dogged previous attempts at a BA-KLM merger. KLM's reluctance to cede management control was one of the major sticking points both last year and in 1992 when the two carriers previously held serious merger negotiations. "If BA is just buying shares, then all these discussions on management control go out of the window," points out Damien Horth, an analyst at Dutch bank ABN Amro.
This could anyway be a good time for BAto pick up shares in KLM, whose stock price is in the doldrums with a market capitalisation which now stands at below c1 billion ($900 million). Latest financial figures for the June quarter show KLM with operating profits of only €23 million, down from €100 million a year ago. Passenger traffic was at a standstill and cargo slipped by 6%. Passenger yields too were down by a point.
KLM's beleaguered management may now be more willing to compromise, believes Chris Tarry, analyst at Commerzbank. "I think they are coming round to the realities of life," he says. KLM faces a huge increase in capital expenditure in two years time as it is forced to undergo a wholesale fleet replacement, and analysts believe that this is likely to be playing on the minds of senior management.
BA would also gain some respite from the capacity constraints in the UK, with Amsterdam Schiphol effectively becoming London's third airport. "Given this background, and the uncertainties around the situation with American and the USA, a stake might make sense, particularly at the price at which KLM is trading at the moment," says Horth.
Although a full merger could theoretically provide major cost savings for both carriers, the problem has been putting the theory into practice. Tarry, a sceptic during the last merger round, estimated that 16,000 jobs would have to go if a merged entity were to operate effectively: 6,000 from KLM and 10,000 from BA.
BA is reported to be considering a review of Deutsche BA. The German subsidiary, which operates a fleet of Boeing 737s out of Munich, has been losing money, and analysts point out the recent downturn in the German economy is unlikely to help.It has struggled to make inroads into Lufthansa's dominant market position despite having a cost structure around 30% lower than its rival. "How much money it makes is totally at the whim of Lufthansa," says one London-based analyst.
With a pan-European bilateral likely at some point in the future, analysts say that BA must weigh up the benefits of a long-term strategic position in Germany against the short-term cost.
Source: Airline Business
