ANALYSIS: How might Air France-KLM co-operate with Etihad

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Confirmation by chief executive Jean-Cyril Spinetta that Air France-KLM is in talks with Etihad Airways over possible partnership agreements has ignited speculation on the form this may take. Speaking at Air France-KLM's annual results announcement in Paris, he says the Abu Dhabi-based carrier has been seeking negotiations over potential cooperation for some time and both parties recently entered talks.

While some arrangements were easy to agree on, such as codeshares between Abu Dhabi and Paris, and Abu Dhabi and Amsterdam, which mutually benefit both parties, Spinetta says more "innovation and creativity" is required in other areas. "The major difficulty in terms of a Gulf airline is that they have a very limited domestic market. It's very difficult to imagine benefits in terms of traditional cooperation," says Spinetta, who has been an outspoken critic of Gulf carriers in the past.

Peter Morris, chief economist of Flightglobal's data and consultancy division Ascend, says: "In certain markets I can see synergies, particularly in Australasia, that make sense. Everybody's got something to gain and they aren't stealing each other's traffic."

He says the SkyTeam carrier could benefit from Etihad's network in areas such as Indonesia, Philippines, Australia and New Zealand, where its own presence is minimal.

On the relationship between Etihad and SkyTeam, Morris says: "I don't think Etihad needs to join SkyTeam, also these things work when there's a mutual reciprocity". But Morris does not rule out the possibility of a Gulf carrier joining an alliance. In particular, he sees a need for Etihad to adopt a different strategy to other Gulf carriers such as Emirates, which has long stated it is not interested in joining an alliance.

"There is a pecking order there [in the Gulf] and without a doubt Etihad is number three, so they've got to try something different. It can't just do what Emirates has done and hope that's going to work as well," he says. Looking at what an alliance would stand to gain from Etihad joining, he says: "Given the quality of Etihad's service and the quality of their aircraft, you'd rather have them inside the tent than outside."

Neil Glynn, head of transport equity research at Credit Suisse, asks whether Spinetta would have mentioned the talks with Etihad if Air France-KLM had not announced a $1.05 billion net loss for 2011. He argues that what "may simply take the form of a standard codeshare" was perhaps "designed to give the market some kind of comfort in terms of where it's going strategically".

Glynn says that he thinks Etihad is keen to invest in further airlines beyond Air Berlin and Air Seychelles, "but you've got to ask how keen the French government would be on this?"