AMSTERDAM, 1 October 2003 — Air France and KLM Royal Dutch Airlines plan to create an aviation group that will surpass British Airways as Europe’s largest airline operator and could set new benchmark for the future of European aviation.

The deal announced yesterday would unite Europe’s second- and fourth-largest carriers under the same corporate parent to be called Air France-KLM.

Air France said the deal. approved unanimously by the KLM board, values the smaller Dutch carrier at 16.74 euros ($19.41) per KLM common share, or 784 million euros ($909 million).

The deal comes even as airlines are seeking to survive a downturn in travel that followed the Sept. 11, 2001, attacks, wars in Afghanistan and Iraq, and outbreaks of severe acute respiratory syndrome.

The new company would generate annual revenues of about 19.2 billion ($22.08 billion) compared with $12.4 billion last year for British Airways. KLM shareholders would get a 19 percent stake in the new company. Air France shareholders and the French government would own the rest.

The new group would serve 58.8 million passengers a year and 226 destinations worldwide, operating a fleet of 540 aircraft and employing about 106,000 people. The group will maintain two operating companies.

If completed, the deal would mark the first time two major European airlines had joined forces in such a tight alliance.

Alitalia, the Italian flagship carrier, also signed a cooperation agreement with the larger airlines, adding a southern tier to the proposed alliance that links two of Europe’s largest airport hubs.

“All airlines know that current setup of European aviation will have to change,” said KLM Chairman Leo van Wijk. “The dominant factor of national airlines will disappear.”

“It is a landmark day for KLM and for Air France, and a defining moment for the European aviation industry,” said Jean-Cyril Spinetta, Air France chairman and head of the new group, at the joint news conference at Schiphol Airport outside Amsterdam.

For Air France, the current structure “doesn’t create enough revenue for its shareholders,” he said. “The time has come to change.”

While Air France and KLM insist the deal will create substantial value for shareholders, Air France shares were down 3 percent at 13.28 euros ($15.40), while KLM shares were up 16.8 percent at euro13.97 euros ($16.20) in morning trading.

The two companies expect to sign the transaction agreement in the next few weeks. The deal would be closed next April.

The alliance, while stopping short of a full merger, will go significantly farther than the traditional airline partnerships by uniting two carriers under the same corporate umbrella.

National state-supported airlines in Europe have been under threat for years, and the Belgian and Swiss flagships were the first to collapse in the aviation recession. No-frills rivals cut further into market share.

“The key is in the implementation, but the overall result will be a positive and strong international airline company,” BNP Paribas analyst Nick van den Brul told Dow Jones Newswires. He said the two airlines have strong bases: At Paris’ Charles de Gaulle and Schiphol Airport in Amsterdam.

A thicket of European rules on air travel, such as about who may hold landing rights, have typically made merger possibilities between airlines tough. To get around that, Air France and KLM plan to maintain two separate carriers under a single holding company.

Van Wijk said the deal will be scrutinized by competition regulators in Brussels and Washington, and will be discussed in negotiations next week with the United States on an “open skies” accord. But “the inevitability of consolidation is clear on both sides of the Atlantic,” he said.

He said there were no plans for layoffs, and any job cuts would be done through attrition.

For the French government, which controls 54.4 percent of Air France, the alliance would dilute its stake to 44 percent — taking it a major step forward in plans to privatize the French airline. Air France shareholders would own 37 percent and KLM shareholders the remaining 19 percent.