PARIS -(Dow Jones)- The board of Air France Group approved the acquisition of smaller rival KLM Royal Dutch Airlines (NYSE:KLM - News) through a hybrid deal that will see the two carriers becoming pillars of a single corporate structure, board member Yvon Touil said late Monday.
The alliance of Air France and KLM will go significantly deeper than traditional commercial partnerships to create one of the world's largest airlines in terms of revenue and passengers.
It will stop short of a full-blown merger, however, because of knotty air travel regulations on landing rights and pressure from Dutch authorities - eager to safeguard the future of Amsterdam's Schipol airport.
The complex holding structure - which some analysts have described as a dolmen, in reference to the pi-shaped megaliths - could be simplified over time when some regulatory constraints are lifted, union officials said.
Board member Touil, also a CGT union official, said he voted against the proposed linkup, saying Air France is making too many concessions to the indebted, money losing KLM.
KLM's stance was still unknown, as the board of the Dutch airline was still in a meeting late Monday.
To acquire the Dutch carrier, the French company will issue new shares set aside for KLM shareholders, CFDT union official Francois Cabrera said after a briefing on the KLM linkup by Air France management earlier Monday.
The move will automatically dilute the French state's 54.4% interest in Air France to below 50%. The French government has said it would approve such a deal.
Board member Touil said Air France has pegged potential annual cost savings from the alliance at EUR400 million to EUR500 million within five years and EUR75 million in the first year, stemming mainly from joint procurement.
Under the proposed alliance, Air France and KLM would be lodged under a French-based corporate umbrella. The latter holding company would have a 16- strong board, consisting of 11 French, four Dutch and one Italian.
Cabrera and other union officials said Air France gave its employees assurance that the issue of KLM's landing rights in the U.S. "has been settled."
Under current airline industry regulations, the airline could lose some of its landing rights if it isn't majority-owned by Dutch investors.
Air France and KLM have imagined a system to help safeguard other landing rights - beyond the trans-Atlantic slots, Cabrera said.
Although KLM would be a wholly owned unit of the Franco-Dutch holding company, the latter would only hold 49% of the voting rights in the Dutch airline.
A special purpose Dutch-based foundation would be set up that would hold 51% of the voting rights in KLM. Created for a renewable period of three years, the foundation would vow not to veto key decisions by the holding company.
Beyond landing rights, the foundation also would allow the Dutch government to have a say on KLM's operations at the Schipol hub, a key asset for the Dutch economy.
French and Japanese car makers Renault SA (F.RNA) and Nissan Motor Co. (NSANY) used a similar tool - a Dutch-based foundation - to bring their operations closer without harming their national identities.