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British Air, KLM nix talks
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September 21, 2000: 4:49 p.m. ET
European airlines say the merger would have been too complex
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NEW YORK (CNNfn) - British Airways and KLM Royal Dutch Airlines Thursday ended prolonged merger discussions aimed at creating one of the world's largest air carriers, citing an inability to cut through the complexities of the large transaction.
In a joint statement issued after European markets had closed, Rod Eddington, chief executive of British Airways, and Leo van Wijk, chief executive of KLM, did not give a clear reason for the deal's dissolution. Instead, they cited several factors.
"We always recognized that this would be a complex transaction, involving not only commercial and economic issues, but also aeropolitical, regulatory and other matters," the companies said. "Although we made considerable progress, it has not been possible to resolve these."
The announcement ends discussions first disclosed in June. The merger would have united British Airways, Europe's biggest carrier, with KLM, a Dutch airline, creating Europe's largest airline by revenue and the global No. 2 carrier.
The companies announced plans in July to file their merger proposal with the European Commission's executive arm, the European Union, by the first week in August. But that filing never came, because officials were unable to rectify the many political and regulatory demands the deal would have faced.
 From the start, British Airways and KLM faced several hurdles, including competition concerns, strict regulations over international air rights, and price. The European Union has proved more wary of potential antitrust violations than officials in the United States, who are carefully reviewing the proposed United/US Airways marriage.
A British Airways/KLM deal would have had implications on both sides of the Atlantic. BA has a partnership with American Airlines and other carriers. KLM has close ties to Northwest Airlines Corp. Press reports last week indicated BA had opened discussions about forming an alliance with Northwest as well.
The news is a bit of a surprise given how much was on the line for KLM, said Jim Higgins, airline analyst with Donaldson, Lufkin & Jenrette. KLM stock tumbled Thursday afternoon, while British Airways shares rose.
"I know there were a lot of problems to overcome, but this is the third time they (KLM) couldn't complete a deal," Higgins said. "It's not a carrier with a strong home market. It's kind of surprising they couldn't find a way to get it done."
In fact, in a hastily called press conference Thursday evening, Wijk admitted his company still needed to find a European partner.
"In the long-run, we do need to find a partner within Europe, although that's the case with other airlines too," he said. "I would say consolidation will happen in the next, say, two years.
"It's a disappointment and a bitter pill for us to swallow."
AMR could emerge a winner
The announcement could be good news for American Airlines, the No. 2 U.S. airline and a unit of AMR Corp. (AMR: Research, Estimates), which risked losing British Airways as a partner if the combined European carrier had turned to KLM's U.S. partner, Northwest Airlines (NWAC: Research, Estimates).
"This can't have done anything good for their [BA's] relationship with American," said Higgins. "There may be some repairing needs to be done there."
 Shares of KLM (KLM: Research, Estimates), tumbled $3.37, or nearly 19 percent, to $19 Thursday while British Airways (BAB: Research, Estimates) gained $2.31 to $45.
In their joint statement, both companies said consolidation in the European airline industry is inevitable.
"In the meantime, we will continue to take steps to improve the performance of our company," BA's Eddington said. "Through our fleet and network strategy, through continued product improvement and by working with our established alliance and franchise partners."
The dissolution comes at a tough time for the airline business. Oil prices, the highest in a decade, have made it tougher for the companies to grow profits while keeping ticket prices low enough to draw passengers accustomed to inexpensive flights.
DLJ's Higgins said the drumbeat of airline consolidation -- which reached deafening levels this spring with the announcement of the BA-KLM talks and the proposed purchase by UAL Corp (UAL: Research, Estimates) of US Airways Group (U: Research, Estimates) -- has now died down to a pitter-patter.
"We may end this round of talks without any deals getting done," said Higgins. "The next round of talks may be more in the nature of niche acquisitions than broad combinations." 
-- from staff and wire reports
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