Mergers and Shakers

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Shareholders who attended last week's annual general meeting of KLM Royal Dutch Airlines hoping to hear about the company's merger talks with British Airways went away disappointed. CEO Leo van Wijk discussed KLM's quarterly results, the Airbus A3XX superjumbo and even his efforts to learn Italian during his company's failed alliance with Alitalia. But on an eventual Anglo-Dutch union he said only that he was "cautiously optimistic."

The problem lies with regulators on both sides of the Atlantic. That's no surprise since the merger would create the world's biggest airline in terms of sales. The main hurdle is the restrictive bilateral aviation treaties that have long held the international airline industry in a time warp. These agreements still vest route rights in national carriers, require airlines to be majority-owned by home-country nationals, and in some cases can specify frequency of flights and even veto fare cuts.

U.S. and British airline regulators each have something the other wants, but isn't likely to get without an effective bargaining chip. The U.S. wants BA to hand over some of its lucrative slots at Heathrow, out of which only two of its airlines, United and American, currently operate. The U.K. wants the U.S. to give up some of its protectionist practices, such as limiting foreign ownership of its airlines to 25% and reserving internal services for U.S. carriers.

The proposed BA-KLM merger may strengthen Washington's hand in next month's negotiations for an "open skies" agreement. Dorothy Robyn, a senior White House official, spelled out the consequences of a failure to break the impasse in no uncertain terms in June, saying that if BA takes over KLM, under the terms of the old treaty "KLM will immediately lose the benefits of the U.S.-Netherlands open skies agreement." That means the merged entity couldn't necessarily use KLM slots at U.S airports.

That tough stance could prove harder to overcome than opposition from the European Commission, says Andrew Light, aviation analyst at Schroder Salomon Smith Barney in London. Brussels may insist that some slots at Heathrow be offered to competitors, that the carriers' discount operations BA's Go and KLM's Buzz be spun off and that some transatlantic routes be carved up. Yet the Commission would "like to get things done," says Light, whereas "the U.S. authorities are not predisposed to approve any merger within Europe." They may not be able to block the deal, but their opposition could mean that the first-ever transnational airline merger will have to wait up to two years to be cleared for takeoff.