US embassy cable - 03THEHAGUE2733

C O N F I D E N T I A L SECTION 01 OF 03 THE HAGUE 002733 
 
SIPDIS 
 
E.O. 12958: DECL: 10/28/2013 
TAGS: EAIR, EU, NL 
SUBJECT: KLM CEO SAYS 'BREAKTHROUGH' MERGER TO SPUR MORE 
CONSOLIDATION; EXPECTS UK TO STALL U.S.-EU TALKS 
 
REF: SECSTATE 299649 
 
Classified By: AMBASSADOR.  REASONS 1.5(B) AND (D) 
 
 Summary 
------------------ 
1. (C) KLM's "breakthrough" merger with Air France sets a 
precedent that will spur further consolidation within the 
airline industry, KLM President and CEO Leo van Wijk told 
the Ambassador in an October 9 meeting.  Van Wijk likened 
the pact to the Netherlands' first-ever Open Skies 
agreement with the U.S., which also set a pattern for other 
such arrangements.  Van Wijk commented that the British 
would try to stall or block a US-EU Open Skies deal as long 
as possible to preserve BA's competitive edge at 
Heathrow.  He reported that the AF-KLM deal was greatly 
facilitated by the fundamental economic logic of the 
arrangement, since Air France would have been at a severe 
competitive disadvantage had KLM 
chosen to link up with either BA in oneworld or Lufthansa 
in the Star Alliance. As it is, the deal will 
preserve the most even competitive balance among the three 
principal alliances, since joining the 
KLM-Northwest-Continental group's nine percent market share 
to Skyteam's 12 will nearly match the 
Star Alliance's 22 percent and oneworld's 17.  The British, 
who could have merged with KLM years ago, appear to have 
chosen to preserve the status quo, especially regarding 
slot allocation at Heathrow, currently not served by either 
Northwest or Continental. Van Wijk did not expect US 
regulatory opposition 
to the merger.  Regarding the antitrust implications of a 
link-up of Northwest and Continental with Delta in Skyteam, 
he counseled that, with six principal international US 
carriers and only three alliances for 
them to join, the choice is between allowing such 
cooperation or potentially forcing the weaker carriers 
into bankruptcy. 
 
End summary. 
 
 
French understanding of GoNL concerns 
--------------------------------------------- --------------- 
---- 
2. (C) In an hour-long discussion October 9, KLM President 
and CEO Leo van Wijk told the Ambassador 
 that he was very satisfied with the deal with Air France 
announced September 30, which succeeded despite some 
last-minute issues thrown into the negotiations by the 
GoNL.  Although this caused some embarrassment, it did not 
prove to be a fundamental obstacle, as the French were 
relatively understanding of such state concerns.  Despite 
some media commentary to the effect that Air France had 
overpaid for the deal, said van Wijk, in reality the 
agreement had been facilitated by the fundamental economic 
logic 
 behind the merger.  (Note:  according to the KLM-Air 
France press release, the deal values KLM stock at EUR 
16.74, or a 40 percent premium over its September 29 level 
and at a 77 percent premium calculated on the basis of the 
average share prices of KLM and AF over the previous three 
months.  End note.)  Had KLM chosen to link up with either 
BA or Lufthansa, AF's competitive position would have been 
significantly disadvantaged; the French thus had a strong 
incentive to wrap up KLM for themselves, creating Europe's 
largest carrier in the process. 
 
3. (U) Note:  the Air France-KLM merger, which was signed 
October 16 but still requires regulatory 
 approval, creates a new holding company which will own and 
run the two airlines as separate operating companies.  KLM 
will have 19 percent of the shares in the new holding 
company, with the French portion divided between the GOF 
(44 percent) and other AF shareholders (37 percent).  To 
preserve KLM's international landing rights, 51 percent of 
the voting rights in the KLM operating company will be held 
 by two Dutch foundations and the GoNL for a transition 
period of three years.  End note. 
 
Competitive implications 
--------------------------------------- 
4. (C) As it turns out, continued van Wijk, the AF-KLM 
merger will create a more balanced competitive situation 
than had KLM merged with either BA or Lufthansa.  With the 
addition of KLM, Northwest, and Continental, Skyteam's 
market share will rise to 21 percent, just short of the 
Star Alliance's 22 percent 
and ahead of oneworld's 17.  That should allay US 
regulatory concerns about the linkup of Northwest 
and Continental with Delta in Skyteam.  In fact, he argued, 
with six major US international carriers (American, United, 
Delta, Northwest, Continental, and USAir) and only three 
alliances for them to choose from, the options for the US 
authorities were to allow such intra-alliance cooperation 
or to face the 
possible bankruptcy of excluded carriers.  Van Wijk 
reported that he had discussed the possible merger with Air 
France with USDOT some months ago and encountered no 
fundamental opposition, provided that such cross-border 
mergers were done between the national carriers of 
countries with which the US has Open Skies agreements 
(i.e., excluding the UK). 
 
UK to stall US-EU talks? 
-------------------------------------- 
5. (C) Thus far, said van Wijk, the reaction from both BA 
and Lufthansa had been complete silence.  While KLM had 
engaged in merger discussions with BA several years ago, 
the deal was not concluded because BA evidently felt that 
gaining regulatory approval for such a merger could have 
upset the status quo at Heathrow.  BA's preference for the 
status quo led van Wijk to expect that the UK would be a 
delaying 
force in the current US-EU civair negotiations.  Although 
the UK also had to consider the interests of 
Virgin and British Midland (which cooperates with Lufthansa 
and has ordered long-range aircraft to fly transatlantic 
routes out of Heathrow), van Wijk said, the Brits would 
probably try to delay or block agreement by, for example, 
pushing for intra-US service rights or increases in the cap 
on foreign ownership of US carriers.  European carriers 
were really not interested in serving the US domestic 
market, in light of their codeshare arrangements, thought 
van Wijk.  But pushing for reciprocal intra-domestic 
rights, which had some resonance among members of the 
European Parliament, 
could be an effective delaying tactic, he thought.  As the 
only EU country without an Open Skies 
agreement, the UK would have extra influence with 
Commission negotiators, he added. 
 
Preserving KLM and Schiphol 
--------------------------------------------- --- 
6. (C) Van Wijk was pleased that the merger with Air France 
would preserve KLM's corporate identity, at least for an 
initial transition period, and would also preserve the 
position of Schiphol, Europe's 
4th-busiest airport, as an important international hub. 
The terms of the deal called for both Schiphol and Charles 
de Gaulle to be operated as co-equal hubs of the merged 
company, and for adjustments in 
service to be implemented proportionately.   The agreement 
also specified 35 long-range routes that 
would continue to be serviced from Schiphol, at least 
initially; any decision to cut such services would have to 
be taken jointly. 
 
More mergers to come? 
------------------------------------ 
7. (C) Van Wijk also thought that the deal would clear the 
way for other, similar deals involving the smaller and 
weaker European carriers, which, he implied, were not 
viable as independent entities in the long run.  He also 
thought that such mergers would increase pressure to revise 
or reform the 1944 Chicago Convention governing landing 
rights, since in a world of steady consolidation of 
carriers across national borders, the current system of 
granting landing rights on a binational basis would become 
increasingly unworkable. 
 
No pressure to buy Airbus 
------------------------------------------ 
8. (C) In response to the Ambassador's question about the 
effect of the merger on KLM's fleet, van Wijk said that KLM 
would not be pressed to replace its current aircraft with 
Airbus equipment.  KLM was taking delivery of some 10-20 
new Boeing 777 aircraft over the next few years and would 
stay with 737s for its regional operations.  There was no 
economic sense in trying to combine or replace those 
aircraft with Air France's all-Airbus short-range fleet. 
 
Security concerns 
----------------------------- 
9. (C) On security issues, van Wijk said that his major 
concern was the impact of increased screening on the rapid 
and efficient flow of air cargo, which could have a 
significant effect on business supply chains.  On PNR, he 
said that, although KLM is continuing to cooperate with the 
US, it would eventually have to comply with whatever stance 
the EU takes.   He also raised the competitive impact of 
security measures, arguing that USG compensation to US 
carriers for security-related costs would have negative 
competitive implications for non-US carriers. 
 
COMMENT 
----------------- 
10. (C) We have reported van Wijk's comments at length 
because we believe him to be particularly well-positioned 
to offer insights into the current state of play among the 
major national carriers in Europe, as well as how their 
interests might shape the current US-EU civair talks. 
Embassy would appreciate any similar commentary that other 
posts might pick up. 
 
 
SOBEL