The Air France-KLM planned tie-up is not as straightforward as it seems: bilateral and control issues are high among problems still to be resolved
The plans for a merger between Air France and KLM have received blanket coverage around the world - but there is almost certainly less importance to the news than the column inches would suggest. The obstacles that remain in the airlines' path mean that any real changes, in as far as passengers and the wider industry are concerned, remain far off and extremely uncertain, with a lot of work still to be done.
First, and most obviously, there is the bilateral issue. Should KLM take the plunge and merge with Air France tomorrow, it would automatically lose its international flying rights. There is no way around this: KLM's flying rights, just like those of most other airlines, depend on it remaining majority-owned by citizens of its country of registration. No clever structure of holding companies or joint operating committees will obviate this.
The two airlines know this, and therefore under the merger plan, KLM and Air France will operate separately under a joint strategic committee, whose responsibilities are yet to be fully defined. This does not get round the ownership requirement, therefore the majority of KLM's voting rights will stay with Dutch investors and the Dutch government for three years.
This will allow KLM to keep its flying rights, but raises the question of what, exactly, will the airlines get out of a merger that leaves the two airlines operating separately and controlled by different people? Is such a deal actually a merger in any real sense?
True, the airline landscape is changing: last year saw the European Court of Justice give the European Commission power to negotiate a new US-European aviation treaty, which would treat all European Union airlines alike, and negotiations began last week. Such a deal would allow mergers between EU airlines without the loss of their US flying rights. It would also open up US carriers to increased domestic competition, unwelcome both to an industry still trying to recover from its worst-ever downturn and an administration whose belief in the value of free trade and international goodwill has been questioned. Believing, as Air France and KLM seem to, that the Commission can push a deal like this through in three years, is a feat of optimism of "over by Christmas" proportions. Six years seems a more realistic timescale, and there is still a chance that it will not happen at all.
The final shape of the deal is still uncertain: US negotiators are believed to favour an extension of existing open-skies deals to cover the rest of the EU nations, an outcome which the Europeans believe would give the USA an unfair advantage.
This aside, merging two airlines is never simple. Air Canada suffered for months after taking over Canadian Airlines. Even EasyJet's takeover of Go, a virtually identical airline with only four years of independent existence, has been less than straightforward. KLM is one of the oldest independent airlines in the world. The cultural barriers go beyond speaking different languages and operating under different laws. This will not be an easy union to achieve.
It is clear that employees on both sides sides of the proposed merger - particularly those of KLM, the junior partner - are now starting to worry about exactly where the promised €495 million ($567 million) cost savings will come from. Headquarters and maintenance divisions seem to be the obvious areas - and as both Air France and KLM have employee representation in their management, and in the proposed joint board, this could be a significant problem.
Northwest's status, too, remains in doubt: how long can it maintain its relationship with KLM once KLM enters the rival SkyTeam alliance?
Furthermore the French competition authorities (unlike their Dutch counterparts) have so far not indicated whether they are minded to approve the tie-up.
Airline consolidation is a good idea, and overdue on both sides of the Atlantic. But it is difficult to see how the Air France/KLM tie-up is going to contribute to this worthy goal in the near future. Any significant progress must await the signing of a new EU-US aviation agreement, and there is little that European airlines can do to accelerate this process that they are not (presumably) doing already. Even three years from now, with the effects of the current recession and aviation crisis long past, it is difficult to imagine the US government rushing to open up its domestic market - in which network carriers are already losing out to low-cost competition - to an influx of new foreign entrants.
Source: Flight International
