KLM shares soared as much as 20% on Tuesday, but Air France stock slid 7% after Europe’s second and fourth-ranked airlines revealed alliance proposals approved by their boards late on Monday after almost two years of talks. 

The share-swapping deal will see the creation of Air-France-KLM.
 
Some analysts said the 40% premium Air France would offer for KLM in the stock deal seemed high and that the tie-up would not bring all the benefits of a full merger because some parts of the two airlines would continue to operate separately.

“The offer premium seems a bit high,” said a Paris trader. “(Air France) is paying a lot for a company with a riskier profile.”

The deal would value the share capital of KLM at 784 million euros, representing a 40% premium over its closing share price on 29 September.

Air France Chairman, Jean-Cyrial Spinetta, forecast 600 million euros in annual long-term merger benefits and said no lay-offs were planned.

Current KLM shareholders will own 19% of the enlarged company, while the French state will see its stake fall to 44% from its current 54%. Other Air France shareholders would own the remaining 37%.

A successful Air France/KLM combination could serve as a model for other full-service airlines struggling with an economic slowdown and growing competition from no-frills carriers in an already overcrowded market.

Italian partner

Spinetta, who will head the merged Air France-KLM, said the two airlines had signed a trilateral accord with Alitalia, which would allow the Italian carrier to cooperate with the new entity.

Alitalia said in a separate statement that it would begin talks with Air France on joining the combination.

The two companies will maintain
brands, hubs and networks

If the Air France/KLM deal is completed, the merged company would take over from British Airways as Europe's largest airline, in terms of traffic, and become the world's third-largest behind American Airlines and Delta.
 
Many governments, which had once seen the existence of flag carriers as a matter of national pride, now recognise the need for consolidation.

The tie-up would bring KLM into the SkyTeam alliance, led by Air France and Delta, and is likely to lure KLM's US partners, Northwest and Continental, at a later date.

That would make SkyTeam bigger than the alliance led by British Airways and American Airlines, and narrow the gap between SkyTeam and the top-ranked Star Alliance grouping led by Lufthansa and United Airlines.