Airline deregulation

[Jurriaan Bendien <bendien@xxxxxxxxxxxx>]

The airline industry expects to lose about $10 billion this year, as global
travel continues to feel the pressure of an economic slowdown. Air France is
now leading consolidation in Europe's crowded airline sector, hoping to tap
economies of scale and expand as the EU expands to 25 nations in May 2004.
Ten years ago, Air France nearly went bankrupt, and received $3.8 billion
bailout from the French government. Now, Air France has been cleared by the
European Commission to buy Dutch KLM for 784 million euros (US$900 million)
in stock, and thus create Europe's biggest airline.  This is the first time
that one European national airline has merged with another.

According to the blurb, "The airline industry is fragmented and its current
competitive structure, with national carriers for each individual country,
is an inheritance from a former era. This has contributed to low
profitability and lack of value creation for shareholders.'' Air France-KLM
aims to generate revenue of 19.2 billion euros a year, serve 226
destinations worldwide, operate a fleet of about 540 aircraft and employ
106,000 people. The new group claims it will create cost savings of about
400-600 million euros a year, rescheduling routes and improving fleet
utilisation,  resulting in profits of $450-$550 million after five years.
Whether this is fast enough to keep up with the competition is a moot point.

While other major European carriers had sought to overcome restrictions on
routes and landing rights by entering into coalitions, KLM tried to fuse
with a larger group. In 1989, KLM bought a stake in US Northwest Airlines.
Then it started talks with British Airways, SAS, Swissair, and Austrian
Airlines but was unsuccessful in making a deal within the network of
regulations. KLM tried to merge with Alitalia in 2000, but pulled out at the
expense of $200 million.

The French government in effect uses its own shares to take over KLM, and
the two airlines will be owned by a Paris-based joint holding company, Air
France-KLM. Specifically, the French state will own 44%, other Air France
shareholders 37% and current KLM shareholders 19% of the enlarged company.
Air France and KLM will keep their identities, brands and hub airports. The
Dutch government and other entities retain 51% of its voting rights for
three years. The merger deal means that Air France offers 11 shares and
other securities for every 10 shares of KLM.

The deal creates the world's largest airline by sales income, the world's
third-largest airline behind AMR's American Airlines and Delta Air Lines,
andthe fourth largest by traffic volumes after American Airlines, United
Airlines and Delta Air Lines.
While Paris's Charles de Gaulle and Amsterdam's Schipol airports rank 3rd
and 4th behind London's Heathrow and Frankfurt International, they have
better facilities and possibilities for expansion, being less congested and
thus less costly than their rivals. Schiphol's spare capacity is expected to
lead to France scrapping its costly plans for a third Paris airport.

By merging with Air France, KLM joins the SkyTeam alliance (Air France,
Delta,  Aeromexico, Alitalia, CSA Czech Airlines and Korean Air), a step
towards further possible mergers with Continental Airlines and Northwest.
Then SkyTeam's share of world air travel would increase from about 12
percent to over a fifth, and be larger than British Airlines-Oneworld and
second only to Star alliance. The Italian government previously announced
that it will sell part of its stake in Alitalia. Air France-KLM is larger
than Japan Airlines  in terms of revenue, and third behind American Airlines
and United Airlines in terms of in passenger traffic.

KLAM and Air France will continue to operate as separate companies to
safeguard KLM's international traffic rights
under its 1992 agreement with the US aviation industry. Under current rules,
governing covering routes and landing rights for national carriers,
ownership and control must be the same nationality as the aircraft's flag or
registration.

Initially KLM shares rose 12.5 percent when the deal was announced, while
shares in Air France fell by
4.2 percent. Air France shares then rose 1.79% to 15.39 euros on Wednesday,
while KLM ended up at 16.89 euros, its highest finish since May, 2002.  The
offer price of 16.74 euros a share represents a premium of 40 percent over
KLM's closing price on Monday. KLM shares soared 18.2 percent to 14.15 euros
in early trading in Amsterdam, while Air France dropped 2.5 percent to 13.35
euros in Paris and Alitalia gained 3 percent to 0.298 euros in Milan.

The deal probably means further challenges for workers' jobs, wages and
conditions in the aviation industry, the emergence of a few mega-carriers
and ferocious competition with British Airways, Lufthansa and US airlines.
KLM and Air France said little about the impact on workers' jobs, in order
to avoid jeopardising the deal. SNPL, the main French pilots' union, is
actually the second largest shareholder in Air France. They said previously
there will be no compulsory redundancies-code for job cuts with union
approval. KLM will shed 4,500 jobs from its 30,000 workforce, while
another13 percent after the present merger.

Tens of thousands of jobs have been lost in the airline industry, and
working conditions have changed enormously, provoking numerous industrial
action throughout Europe. The EU and the US aim for a bilateral "open skies"
agreement, a free market in air transport in which the airlines fight for
dominance and the extinction of their competitors, at the expense of their
workers, passengers, transport and society at large. British Airlines
outsourced key services, including crews, carriers, Internet sales, and call
centres. The airlines have trouble with (1) EU regulations restricting state
aid, which means jobs and conditions are axed (2) low-cost carriers offering
highly discounted tickets on popular European routes (3) recession, the war
in Iraq and epidemics like SARS.

J.