Air France in link-up talks with KLM

Air France is in talks with the Netherlands-based airline KLM about a wide-ranging collaboration, to be underpinned by the French group taking a stake in its Amsterdam-based rival, the French business paper Les Echos has learnt.

An outline agreement could be signed before the end of the year. The deal would underpin plans by the French government to reduce its majority stake in Air France and would take effect after the French government’s shares sale.

A deal with Air France would bring a successful conclusion to KLM’s long-running search for a continental European partner. The company has held unsuccessful merger talks with both British Airways and Alitalia.

KLM has a market capitalisation of just €455m ($442m). Air France, capitalised at €2.44bn, is quoted but the French government retains a majority stake, which it intends to sell down to about 25 per cent.

Launched in 1919, KLM is the world’s oldest carrier. But lacking a large domestic market, it has been squeezed by its larger European rivals – Air France, British Airways and Lufthansa of Germany – in the battle for long-distance traffic.

KLM has a long-standing link-up with the US airline Northwest Airlines. However, combining with Air France could open the door for KLM to Skyteam, the smallest of the big three global airline alliances. Skyteam is led by Air France and Delta Air Lines of the US, and includes Korean Air, Alitalia and CSA Czech Airlines. It carries 221m passengers a year in a network offering 8,000 daily flights.

BA is tied with American Airlines in the Oneworld grouping, which also includes Iberia, where BA has a minority stake.

Lufthansa is a leader of the Star Alliance, along with UAL’s United Airlines, which has been weakened by the collapse last year of its Australian partner, Ansett.

The pressure for alliances has been increased by the downturn in civil aviation since the terrorist attacks in the US last year. Analysts are now forecasting that the US airline industry will lose $7bn this year.

The collaboration being discussed between KLM and Air France should be much larger in scale than the partnership arrangement struck between Air France and Alitalia this year, under which each is to take a 3 per cent stake in the other.

Any deal is likely to require the consent of the Netherlands government, which retains a 13 per cent stake in KLM.

The French government, however, appears to be enthusiastic about the talks, which have been under way for several months.

Gilles de Robien, French transport minister, said on Saturday in an interview with the French daily Le Figaro that “the time of big alliances has come”.

Mr de Robien also said that “the notion of national flag carriers will lose its importance”. And that “it is necessary to give Air France the means to make itself felt so that it can participate in the process of European air transport consolidation”.