Air France and KLM to merge

After months of discussions, Air France and KLM have agreed to merge their companies to create a leading European airline group. The merger will be done through a share exchange offer by Air France for KLM shares.

The new group will be called Air France-KLM and will capitalize on two well-known brands, strong hubs and complementary networks. This major strategic step is unprecedented in the European airline industry and is expected to create substantial value for shareholders. The Boards of both companies believe that this proposed combination is in the best interest of customers, shareholders and employees of both groups and represents a significant opportunity for further growth.

Jean-Cyril Spinetta, Chairman and Chief Executive Officer of Air France, said: "We have always been convinced of the necessity of consolidation in the airline industry. Today, we announce a combination with KLM that will create the first European airline group, which is a milestone in our industry. This will bring significant benefits to customers, shareholders and employees. Capitalizing on the two brands and on the complementary strengths of both companies, we should, within SkyTeam, be able to capture enhanced growth opportunities."

Leo van Wijk, President and Chief Executive Officer of KLM, said: "KLM has been pointing out the need for consolidation in light of the challenges facing our industry, and we have not made it a secret we were looking for a strong European partner. Through this innovative partnership with Air France and our subsequent expected participation in the SkyTeam alliance, we are confident that we have secured a sustainable future for our company. Our valuable Schiphol hub will be an integral part of the dual hub strategy of the new airline group, allowing us to build on what KLM and its staff have achieved over nearly 85 years."

Jean-Cyril Spinetta (Air France) and Leo van Wijk (KLM)

The transaction values the common share capital of KLM at approximately EUR 784 million (including the theoretical value of the warrants) and the exchange offer represents a premium of 40 per cent over the closing share prices of KLM at September 29, 2003 and 77 per cent based on the average closing share prices of Air France and KLM shares over the last three months.

Assuming 100 per cent acceptance of the offer and before exercise of the warrants:

• Current KLM common shareholders would own 19 per cent of the enlarged group.
• The shareholding of the French State in Air France would mechanically be diluted from 54 per cent to 44 per cent.
• The other Air France shareholders would own 37 per cent of the enlarged group.
  

One Group - Two Airlines - Three Core Businesses

Combined, Air France and KLM have EUR 19.2 billion in aggregate annual revenues, serve 226 destinations worldwide, operate a fleet of some 540 aircraft and employ approximately 106,000 people.

In creating one group, while maintaining two operating companies and building on the strengths of their respective brands, hubs and networks, the group will continue to focus on three core businesses: Passengers (77 per cent of aggregate revenues), Cargo (14 per cent) and Maintenance (4 per cent).

The proposed transaction will strengthen the SkyTeam alliance, which will become the second largest alliance worldwide. In most areas, the group will also continue to benefit from ongoing cooperation with the respective partners of both airlines. Furthermore, in the medium term, the combined group could be reinforced by the potential integration of Alitalia.

Both airlines will keep their identity, at least for eight years

Synergies

Air France and KLM have identified and evaluated a number of areas for potential synergies. These are expected to gradually increase and have a positive impact on the consolidated operating income of at least of EUR 385-495 million as of the fifth year on an annual basis. Synergy benefits should be realized through network optimization, improved deployment of assets (both for the passenger and cargo businesses), better offerings in maintenance and cost savings in the fields of procurement, sales and distribution, maintenance and information technology. Customers can expect to benefit from these synergies through an extended route network with increased flight frequencies, attractive pricing and seamless service throughout the network.

The KLM restructuring plan announced in April 2003 will not be impacted by the implementation of the above-mentioned synergy plan and KLM management remains committed to delivering the EUR 650 million improvements in operating income by April 1, 2005.

Structure of the New Group

Following the proposed combination of Air France and KLM and as soon as legally possible, it is the intention that all Air France assets will be contributed to a newly created operating company. The currently listed Air France Company, renamed Air France-KLM, will then hold two operating companies: Air France and KLM.

The combination is structured to ensure and protect KLM's international traffic rights going forward. Notably, 51 per cent of voting interest in KLM will be held by two Dutch Foundations and the Dutch State during a transitional period of three years. The current option agreement with the Dutch State will remain in place, subject to certain amendments.

Keeping KLM alive

To protect specific interests of KLM for a negotiated period of time, Air France will agree to grant certain assurances to KLM and the Dutch State, whilst preserving the interests of the new group and its shareholders. A separate KLM assurance foundation has been established whose board will have general powers of oversight concerning these assurances. The duration of these assurances will be five years with respect to the KLM assurances and eight years with respect to the Dutch State's assurances.

Assurances given to KLM and the Dutch State:

Passenger/ Cargo/ Network/ Hubs: Multi-hub system around Paris-CDG and Amsterdam Airport Schiphol and fair long-term development of long-haul and medium-haul services at the 2 hubs Maintenance: Long-term sharing of "centres of excellence" Identity and brand: Safeguarding the national identities of Air France and KLM, logos and brand Human Resources: Maintain and further develop "centres of excellence"; no discrimination in promotion decisions Air-political status: Air France and KLM retain their respective home bases, operating licenses, Air Transport Certificates and traffic rights. Passenger/ Cargo/ Network/ Hubs: Multi-hub system around Paris-CDG and Amsterdam Airport Schiphol, and fair long-term development of long-haul and medium-haul services at the 2 hubs.

Transatlantic Impact

The merger will also have an impact on the aviation industry on the other side of the pond. While Air France is partnering with Delta in the Skyteam Alliance, KLM has a long-established relationship with Northwest Airlines. As Delta is already doing code-shares with Northwest Airlines and Continental Airlines, the impact is minimal, at least for the moment.

Northwest Airlines President Doug Steenland said: "We welcome today's announcement as it is consistent with KLM's long held view that it needed to partner with a larger European airline. Today's announcement indicates that KLM will strengthen its market position in Europe and protect the interests of its stakeholders and its hub at Amsterdam's Schiphol Airport."

Michael Meier

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Photo Copyright: Capital Photos for KLM