Chris Jasper/LONDON

British Airways and KLM have confirmed they are discussing a possible merger. The deal would strengthen BA's position as the world's third-largest airline and allow it to make huge cost savings. Access to KLM's Amsterdam Schiphol hub would also help ease BA's headache over congestion at London Heathrow and Gatwick, while allowing KLM to achieve ambitions which have outgrown its status as Dutch flag carrier.

Should the merger take place, the most likely scenario would be for the new airline to focus transfer traffic on Schiphol, allowing Heathrow - and to an extent Gatwick - to exploit fully the lucrative point-to-point market centred on London, with its higher yields. The relatively small size of the Dutch market has already led KLM to establish Amsterdam as an effective transfer hub.

BA and KLM came close to a merger in the early 1990s, but the deal fell through. The pair now say they have again "agreed to conduct talks on a possible combination of their business", while adding that "talks are at a preliminary stage", and that "there is no assurance that they will result in any transaction between the parties".

A BA-KLM merger became a possibility when the Dutch carrier jettisoned previous partner Alitalia in May, complaining that delays in the Italian carrier's privatisation and problems at the alliance's new Milan Malpensa hub had become intolerable. New BA chief executive Rod Eddington, meanwhile, had signalled a change of policy for the UK flag carrier, saying he wanted it to play a full role in any European merger activity.

BA would inevitably dominate any entity formed with KLM, controlling at least 60% of the new business. Whether this would be reflected in the new airline's branding is unclear.

A BA/KLM deal would leave Swissair, which is believed to have had talks with the UK airline, in the cold. The SAirGroup carrier recently announced a major takeover of its own, agreeing to acquire 100% of Belgian flag carrier Sabena, although the two will remain separate. Alitalia is also partnerless, but could be a target for the Air France/ Delta Air Lines group, which has set a provisional date of 22 June for the launch of its global alliance.

The transatlantic ramifications of a BA-KLM merger are most intriguing. Having so far failed to win regulatory approval for even a codesharing deal with oneworld alliance co-leader American Airlines, BA needs a transatlantic partner and could find one in Northwest Airlines, KLM's ally.

This could threaten the BA-American axis, although the latter is itself believed to have launched a takeover bid for Northwest in response to the planned takeover of US Airways by Star alliance rival United Airlines (see related article).

With no ownership caps standing in the way of a BA/KLM deal and little direct overlap between the two, a merger should in theory meet comparatively little regulatory opposition. Competition would be affected on UK-Netherlands routes, however, while low-cost rivals Go and Buzz would presumably combine operations.

The European Commission might also choose to examine any merger in terms of its impact on inter-hub competition.

Joint UK-Dutch ownership might also cause problems with respect to bilaterals which cover flights beyond Europe. Unions have already expressed concerns over possible job losses.

Source: Flight International