As British Airways and KLM edge closer to concluding that their proposed merger makes sense from a business and strategic point of view, it is becoming clearer that progress depends on whether BA can stomach the regulatory price, which is likely to centre on opening up London Heathrow to more transatlantic competition.
On 10 August, in what the suitors see as a positive statement, BA and KLM announced an extension to the exclusivity period for their talks on combining their businesses: "Constructive discussions have taken place and important progress has been made. Parties recognised that a business rationale for a potential merger exists."
"They are not arguing over if it is a sensible thing to do," says a KLM insider, "they are looking at how it can actually work."
"It is absolutely good news that they are still talking," says Mike Powell of Dresdner Kleinwort Benson, "BA and KLM are the best match of any two carriers in Europe."
It is now likely that the parties have a good idea of what KLM is worth, with an equity figure of about 25% for KLM in a combined group being suggested.
However, this price is before the regulatory cost is factored in. "BA cannot announce a deal with KLM until it knows what the regulatory price will be - and this will not be known until the US and UK complete their [open skies]talks. If the US demands too much the deal will be off," says Powell.
Chris Tarry of Commerzbank agrees, but believes there is no rush to conduct a merger on this scale in Europe, and that the benefits of the deal to BA's shareholders are less clear cut. "The key point is that BA should not be tempted to give too much value away," he states.
KLM believes that the USA and UK need to have a timetable in place for introducing open skies for it to be comfortable with the deal. Sir Michael Bishop, executive chairman of British Midland, (see Airline Business August) is convinced that a new US-UK bilateral by the end of the year is looking more certain. This could pave the way for a phased introduction of transatlantic competition, with new entrants, like British Midland, coming in.
BA and KLM are planning to file full merger proposals with Brussels by the end of September, a month later than originally anticipated.
All sides agree that this is a complicated deal. "A combination of BA and KLM would be the most complex transaction in the aviation industry. BA and KLM have therefore agreed to allow for an additional several weeks to continue to review external as well as internal aspects of a transaction, "say the carriers. What each carrier wants to avoid is the merger deliberations dragging on too long and causing share price uncertainty over a lengthy period.
In addition to opening up Heathrow, another potential cost of a merger could be spinning off either one or both low-cost subsidiaries Go and Buzz.
Source: Airline Business