The two carriers had officially been talking since shortly after KLM ended its merger with Alitalia in May. The end came in a brief joint statement from the two chief executives, Rod Eddington and Leo van Wijk. "We always recognised that this would be a complex transaction, involving not only commercial and economic issues, but also aeropolitical, regulatory and other matters," they said.
The issue of valuation, which had scuppered their merger talks eight years ago, was again key. The final straw appears to have been KLM's refusal to grant BA the level of control which it saw as necessary for a merger to work. Chris Tarry, analyst at Commerzbank, a chief sceptic of the negotiations, argues that the proposed deal was "simply undo-able" for BA shareholders on the current valuation of the two airlines. He adds that the regulatory price was not clear either.
The US authorities, anxious to gain leverage in opening up London Heathrow, also raised further regulatory obstacles, warning that KLM could lose its bilateral rights if BA took control and cautioning that BA would not be allowed to use KLM as a "back-door" to gaining greater US access. It also warned that KLM's open skies agreement with Northwest Airlines, and presumably therefore its anititrust immunity, would be at risk, if the BA deal went ahead.
That left some hard choices over a US partner, with BA facing the potential prospect of having to drop its alliance with American Airlines in favour of Northwest. Financial analysts were unimpressed. Robin Horne at HSBC commented that it was "hard to think of a weaker partner" for BA's US operations.
Meanwhile BA risked falling further behind in the transatlantic alliance race. Air France's partnership with Delta Air Lines is developing nicely through Skyteam, while Lufthansa and United, leaders of the Star Alliance, have begun to share revenue on five key routes, with additional destinations expected. At the same time, British Midland, newly signed up to Star, proposes to lead a campaign to bring alliance competition into Heathrow.
BA, meanwhile, having seen another potential partnership fall by the wayside, risks "becoming the Elizabeth Taylor of the airline industry," warns one commentator. Financial analysts believe that it now has the opportunity to take stock. Andrew Light at Schroder Salomon Smith Barney, says BA's priority is to "rally the troops" in the oneworld alliance.
Lufthansa buys into Eurowings
KLM's options, meanwhile, have narrowed. A further blow came on the day the BA talks ended, when Lufthansa confirmed speculation that it was about to take a stake in German regional carrier Eurowings. The German flag carrier plans to take an initial 24.9%, which may be raised with the regulatory authorities' approval. Eurowings, which has a codeshare agreement with KLM, is an important source of feeder traffic from the Rhine-Westphalia region into Amsterdam Schiphol -a role which must be under threat given Lufthansa's involvement. Days before the Lufthansa-Eurowings deal was confirmed, KLM appeared to be bracing itself, announcing a "shorter-term and more flexible" arrangement with Eurowings.
Source: Airline Business
