Air France-KLM plays cupid on the U.S. tarmac
European airline would look kindly on Delta merger with Northwest, not United
MarketWatch
Last update: 10:50 a.m. EST Jan. 17, 2008
LONDON (MarketWatch) -- Air France-KLM is acting as a chaperon, albeit from a distance, to Delta Air Lines Inc.'s efforts to find a suitable mate, and from its European perspective, there's little doubt Northwest Airlines Corp. would make the best match.
Delta has started merger talks with both UAL Corp.'s United Airlines and Northwest Airlines, the Wall Street Journal reported Wednesday. James Oberstar, chairman of the House Transportation and Infrastructure Committee, confirmed those talks in an interview.
So why would Air France-KLM , Europe's largest airline, get involved in this all-American business?
As the main European partner of Delta, it has got a lot to lose from the wrong combination.
"The last thing Air France-KLM wants is to see Delta combine with United because it would then risk losing a key partner," said Peter Morris, chief economist of U.K.-based aerospace consultancy Ascend. United is a key ally of European rival Deutsche Lufthansa.
Such a loss would be a huge blow to Air France-KLM, coming as top European airlines scramble to form new alliances to take advantage of the "open-skies" deal between the U.S. and Europe, set to come into force in the spring.
So it's playing cupid -- on the tarmac. And it's rooting for Northwest.
Strong historical ties
So why the preference for Northwest?
For one, there's history. Air France-KLM, Delta and Northwest all belong to the same extended SkyTeam family. Within this commercial alliance, created in 1999, the carriers have learned to code share and, with time, developed deeper ties. KLM and Eagan-Minn-based Northwest go back even further, with a transatlantic partnership dating from before the SkyTeam alliance was born.
Such ties, if anything, are set to grow even tighter with the advent of the "open-skies" pact, which will allow European airlines to fly to any city in the U.S. and vice versa. Everyone wants to strike a deal and be positioned to benefit from the change.
So far, Air France-KLM and Delta have made the biggest commitment, with plans for a transatlantic joint venture that'll see them share costs and revenue on transatlantic routes.
And in late November they said they hope by 2010 to start a "four-way joint venture" with -- surprise -- Northwest. The carriers have already applied for antitrust immunity from U.S. and European regulators so they can coordinate marketing and pricing.
Delta's other love interest, United, boasts a less appealing heritage. Its main flaw, in the eyes of Air France-KLM, is that it belongs to the rival Star Alliance clan, home to European competitor Deutsche Lufthansa.
United is Lufthansa's heavyweight counterpart in the U.S. Should Delta and United merge, the relationship with Air France-KLM would likely unravel.
"There is no doubt that the deal that closes the circle most nicely for Air France-KLM would be a Delta deal with Northwest," Morris said.
A Delta exec in Paris
So Air France-KLM is taking preventive action.
According to a Wall Street Journal report published on Thursday, Delta Chief Executive Richard Anderson traveled to Paris after his meeting with the board last Friday, suggesting Air France-KLM is playing some part in the merger talks.
The airline could offer strategic or financial backing in a Delta bid for Northwest, in exchange for a sizeable stake in the combined carrier, the Journal reported, citing people familiar with the thinking of Air France-KLM's management team.
Without a doubt, the European airline, which boasted 6.2 billion euros in disposable cash as of late September, has plenty of the liquidity U.S. carriers are lacking.
But some industry observers questioned the wisdom of investing in a U.S. carrier at a time when the North American market is ailing.
"I've never understood why European airlines would want to burn money in front of their eyes by pouring it into a market where a lot of problems still exist," said Ascend's Morris.
He said the U.S. market continues to suffer from weak demand, due to high prices and an even higher hassle factor, and intense competition, particularly from low-cost outfits such as Southwest Airlines Co. and Jet Blue Airways Corp.
In addition, he noted that U.S. legacy carriers need to make major investments in their fleet, information technology and aircraft systems.
But it isn't obvious that such investments, and an overall stronger competitive position, can be achieved by pairing up.
"The question really is: how much more successful can a giant dinosaur be than two medium-size dinosaurs?" Morris said.
Alitalia may be a better financial bet
Morris says he believes Air France-KLM is likely to encourage a tie-up with Northwest, but won't stretch itself to a strong financial investment.
And should it decide to take a stake in a combined Delta-Northwest airline, in the hope of gaining better access to the U.S. market, its share would have to remain small. Federal law currently prohibits foreign investors from controlling more than 25% of the voting equity in any U.S. airline.
There is one final hurdle to consider: Air France-KLM's pockets may be deep, but they are not bottomless. And the airline has just started official talks to acquire struggling Italian airline Alitalia.
And in that case, at least, Morris believes there is money to be made, as the Italian market continues to grow and the airline's business model can be modified.
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