February 9, 2004

The European Commission is likely to approve Air France's takeover of Dutch rival KLM by Wednesday to create the world's biggest airline by revenue, a person familiar with the situation said on Monday.

The Commission had been dissatisfied with the deal and had made tough demands, the source said, asking the airlines to give up more take-off and landing slots than they had initially offered to preserve competition in the sector.

But it would appear that disagreements between the European regulators and the airlines have been resolved, the source said.

It also means that the carriers will not have to face a four month in-depth investigation, which should allow them to complete their merger in April, as scheduled.

The US authorities are expected to rule on the Air France/KLM combination as soon as this week and analysts are also betting on a favorable response.

The deal, the largest cross-border airline merger, will move the combined Air France/KLM ahead of Japan Airlines System as the world's biggest carrier by turnover and into third place globally in terms of the number of passengers carried and kilometres flown.

Many analysts say the deal should encourage other airlines to seek partnerships as the European Union moves towards securing a continent-wide open skies trade agreement with the United States.

And the merger could also reshape the transatlantic market, they say, if it brings KLM and its current US alliance partners Northwest Airlines and Continental Airlines into the broader SkyTeam alliance led by Air France and Delta Air Lines.

SHRINKING DISCOUNT

KLM shares closed 1.5 percent higher at 15.52 euros, while Air France was up 2.2 percent at 14.10 euros. KLM shares now trade at a 10-percent discount to the French carrier's EUR800 million buyout offer.

The discount has been shrinking in recent weeks with most investors now betting the deal will take off.

The European Commission declined to say whether it has decided to back the EUR3.8 billion (USD$4.8 billion) combination.

"There will be a decision by the end of Wednesday and we will make it known as soon as the companies are informed," said Amelia Torres, a spokeswoman for the Commission in Brussels. "For the time being I have nothing else to say."

KLM spokesman Bart Koster said the airline would not confirm or deny whether it had received an approval for the tie-up. Air France was not immediately available for comment.

Newspapers have reported that the two airlines were willing to give up at least 27 daily flights to European and US destinations to satisfy the European Commission.

KLM and Air France will maintain separate national identities at least for the next few years, largely in order to protect the Dutch airline's international flying rights. They will continue to use their hubs in Paris and Amsterdam.

Several airlines, including current European leader and KLM's former suitor British Airways, had called on the regulators to look at the position the combined airline and its US partners would have on key transatlantic routes.

KLM and Air France shareholders are scheduled to vote on the tie-up in March.

Meanwhile KLM announced on Monday that it would offer "outrageous" discounts of as much as 50 percent on fares on 62 European routes for bookings this month for travel before May.

(Reuters)