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NEWS ANALYSIS : European Air Carrier Shakeout Is Near

May 12, 1993|JOEL HAVEMANN | TIMES STAFF WRITER

BRUSSELS — The recent announcement that four mid-size European airlines plan to merge represents another major step on the way toward a long-overdue shakeout of Europe's fragmented air transport business.

KLM Royal Dutch Airlines, Swissair, Austrian Airlines and Scandinavian Airlines System announced their intent to form a single company, jointly owned by the four. Together, they would become Europe's No. 2 carrier after British Airways; they would be the seventh-biggest in the world.

Their goal is to create a world-scale European airline that could go toe-to-toe on more nearly equal terms not only with Europe's big three--British Airways, Lufthansa (Germany) and Air France--but also with the giant American carriers.

"To compete with the big European airlines and the American carriers, we need to attain a certain critical mass," said Hans Ollongren, general manager of SAS operations in Belgium and Luxembourg.

The four airlines gave no timetable for completing their merger; 16 working groups are thrashing out everything from the political implications of a merger to the nuts-and-bolts of combining cargo operations. Analysts said it would take years to work out the details. And first the airlines will need the approval of the European Community, which must investigate whether the merger would reduce competition among airlines in western Europe.

The EC is already in the process of stripping away some of the regulations that keep ticket prices relatively high and limit the number of carriers serving individual routes within Europe.

Regardless of the impact within Europe, analysts said the merger would leave American airlines competing with a new, formidable European mega-airline on transatlantic routes. The result, they said, could be lower prices and better service between the United States and Europe.

All four of the merging airlines are in deep financial difficulty in the wake of the worldwide cutback in air travel caused by the 1991 Persian Gulf War.

"Four cripples coming together don't necessarily make a whole man," said Richard O. Bond, a London-based analyst with the Canaan Group, an aviation management consultant firm. But he said a merger would allow them to achieve efficiencies of scale and to quit competing with each other on routes that two or more of them now serve.

Bond predicted that the merger would ultimately go ahead, although he listed some major obstacles that must first be overcome:

* National pride. Governments are part owners of each of the four airlines, and they must be willing to take a reduced stake.

* Cross-ownership. The airlines will have to sort out a complicated web of global partnerships. Among the four, Swissair already owns 10% of Austrian Airlines.

More than that, all but Austrian Airlines have relationships with American carriers: Swissair and Delta own 5% of each other; KLM has a 20% stake in Northwest Airlines, and SAS retains its operating links with Continental Airlines even though it has written off the value of its share in Continental, which recently emerged from Chapter 11 bankruptcy.

* Labor opposition. Efficiencies of scale mean fewer workers, and some SAS employees are voicing disapproval, especially if it means that SAS' Copenhagen hub would be moved to Amsterdam.

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