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France-KLM merger worries BA

British Airways, already reeling from record losses and a damaging strike, now faces a major new competitor after last week's Air France-KLM tie-up and must work hard to avoid trailing in its rivals' wake, analysts say.

BA was quick to welcome Tuesday's announcement of the deal, which sees Air France and KLM keep their separate public identities but otherwise combine to form a major new global player.

While also calling for European competition watchdogs to examine the tie-up, BA insisted that consolidation was needed in the aviation industry, and called the deal "a good thing."

Was this just brave talk from a carrier which in July announced record first-quarter losses -- compounded by a hugely expensive strike by BA staff at Heathrow airport -- and talked of "the most testing period" in its history?

According to Nicholas Van den Brul, an analyst with BNP Paribas Equities in London, the new Franco-Dutch giant is a problem for BA.

"It is threat for BA ... because both Air France and KLM derive quite a lot of their traffic from the UK, and they can accelerate competitive pressure," forcing prices lower, he argued.

However Commerzbank analyst Dominic Edridge said the implications were "not too bad in the short term."

"Air France and KLM have been very clear," he said.

"They are looking at any benefits that they gain from this merger, and this will be reflected in higher profits," not necessarily forcing prices down.

BA also remains Europe's leading carrier on lucrative trans-Atlantic routes, where it earns a large part of its profits, he added.

Attention is now turning to whether BA -- which twice tried in vain to form an alliance with KLM -- will leap into a shotgun marriage of its own.

The British airline's existing main European partner is Iberia of Spain.

Rumors of a full-blown merger went into overdrive on Thursday, when Iberia hosted a dinner for the BA board of directors in Madrid, although the Spanish carrier insisted this was purely "a social engagement."

Another potential partner is the ailing Swiss, which late last month joined the OneWorld alliance, in which BA and American Airlines are the main players.

Swiss's entry to the alliance saw BA acquire some of the airline's vital flight slots at Heathrow airport, which made it a good deal for BA, said Edridge.

"At the end of the day, Switzerland is a very rich country with a good traffic flow," he said.

"They can offer each other services and push traffic in each others' hubs. That will be good."

But for Van den Brul of BNP Paribas, Iberia and Swiss are no match for KLM, because they "are not the same type of airlines."

"Swiss is much smaller than it was and is in a very weak financial position, Iberia is a specialist in Latin America." he said.

Both analysts stressed the one thing that could help BA would be a completed "open skies" agreement between Europe and the US, allowing it to coordinate routes with ally American Airlines.

New negotiations on this began Wednesday at the State Department in Washington, but officials conceded that they could take years to conclude.

"The real big difference is going to be the shift on [BA's] ability to cooperate on the trans-Atlantic routes with American Airlines," said Van den Brul.

"At the moment they run a lot of bilaterals, with Qantas or Iberia, that run very well, but it isn't a global picture, it doesn't allow complete coordination of capacity."
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