Kevin O'Toole/LONDON Julian Moxon/PARIS

The tie-up between Northwest and Continental Airlines has been welcomed by European partners Alitalia and KLM, offering the prospect of a global alliance within five years.

"The deal opens the door to a much wider co-operation," says Fausto Cereti, chairman of Alitalia, which already has a successful link with Continental on the Rome-New York route and which chose KLM as its European partner at the end of 1997.

Cereti suggests that the deal could form a platform to create a rival to the Lufthansa/United-led Star Alliance. "We expect to have concluded a four-way alliance by 2002," he says. KLM also welcomes the news from its long-standing USpartner Northwest, claiming that the grouping now forms "one of the world's strongest aviation alliances".

The deal is likely to come under scrutiny, however, by the European Commission's competition directorate, which is studying KLM/ Northwest, and has suggested that it will now take the Continental link into consideration.

Under the new US deal, Northwest will link its route network with that of Continental and seek broad codesharing, although this is subject to approval by Northwest's pilots' union. The pilots have linked their consent to success in their long-running contract negotiations, but say that they are willing to work "expeditiously" to bring the talks to a conclusion.

Northwest will also acquire the 14% stake in Continental owned by David Bonderman's Air Partners investment house, for a mix of $311 million in cash and new shares, but will not seek management control.

Northwest, which itself had an acrimonious boardroom clash with KLM over issues of ownership and control, has agreed that its Continental stock will be placed in a voting trust for at least six years "to guarantee the independence" of its new partner. It must vote as directed by Continental's management, except on matters involving future merger proposals.

Northwest chief executive Dasburg apparently did not seek a merger, saying that the smaller stock purchase did not require "the human and capital costs which other transactions would have incurred".

Delta Air Lines, which has previously held talks with Continental, offered a rival deal based on a full merger, but this was rejected by Continental, and could have met labour problems because of fears of lay-offs. Continental chief executive Gordon Bethune calls the Northwest offer "a gold mine" and "vastly superior" to the Delta bid.

Continental estimates that the alliance will generate an extra $500 million in annual profits for the two airlines after the first three years, and expects to receive around 45%of the benefits.

Bethune says that the deal will cause no cutbacks, as networks are largely complementary. Continental is American Airlines' main rival in Texas and offers access to South American markets, while Northwest's stronghold is in the USMid-West. It also has a mature trans- pacific network and access to Japan and beyond.

Source: Flight International