On Wednesday, both the European Commission (EC) and the U.S. Department of Justice (DOJ) approved a proposed merger between Air France and the Netherlands' national airline, KLM (NYSE:KLM). If the deal goes forward as planned and is ratified by the companies' shareholders in March, then by April or May a new airline will result -- the world's largest by sales, boasting annual revenues of $24 billion.
Rarely in the history of business has the creation of a No. 1 world anything had so little real significance.
You see, Air France and KLM are largely complementary organizations. The two airlines' routes only really overlap in about 30 destinations worldwide. This perhaps explains the relative speed with which the two obtained approval for their merger from the EC (the deal was first publicly acknowledged to be in the works by Air France as recently as September 2003). It may also explain why the DOJ approved the merger without requiring either airline to make any concessions in the interests of promoting competition.
Moreover, while this is technically a "merger," in fact it more resembles a "get-together." The plan, reportedly, is for both airlines to remain essentially separate, retaining their own names and even keeping their respective corporate colors. A French holding company will be created, which will own the two airlines as subsidiaries.
Neither company envisions huge cost savings either. Despite the repeated use of the word "synergies," savings from the integration of the two airlines are expected to amount to just $500 million after five years. Yet, by increasing its size, the new Air France-KLM should logically increase its bargaining power when purchasing everything from planes from Airbus and Boeing (NYSE:BA) to chicken and soft drinks for its onboard meals from Tyson Foods (NYSE:TSN) and Coca-Cola (NYSE:KO). With that kind of market power, one would expect the savings to be more substantial.
But remember, the new company's employee unions will fight layoffs and other cost-cutting measures tooth and nail, scuttling any savings attempts there. And hiking margins will be impossible if the business continues to be undercut on cost and outmaneuvered on quality by Europe's versions of JetBlue (NASDAQ:JBLU) and Southwest (NYSE:LUV) -- such as low-cost Irish airline Ryanair (NASDAQ:RYAAY).
In the end, I fear, the new Air France-KLM will just be bigger -- not better.
Rich Smith is a contributor to the Motley Fool. He owns no shares in any of the companies mentioned in this article.
