The carriers expect that the European Union will take the lead over US authorities in settling the competition issues in any combination between British Airways and KLM.

The airlines' chief executives discussed their possible move with EU Competition Commissioner Mario Monti, although the meeting - like all others that had been conducted so far - had been only informal, the source said."It was more of an informal courtesy briefing rather than anything more substantive," the source said, describing such consultations as an ongoing process.

KLM and British Airways, Europe's largest airline, announced on June 7 that they would discuss a possible combination of their businesses - which was taken to mean some kind of equity link, since KLM had previously said that was what it wanted.

The source confirmed that CEOs Rod Eddngton and Leo van Wijk - from British Airways and KLM, respectively - had discussed with Monti more than a mere alliance of the sort that airlines have traditionally formed from time to time.

The carriers received an encouraging response when they first approached the European Union several weeks ago, a source told Reuters on June 20.

The initial contacts had revealed a view in Brussels that the combination might be useful in facing a challenge to level competition from the large and growing Star airline alliance.

Another source said on June 16 that the two carriers were exploring an arrangement in which British Airways would acquire slightly less than half of the voting rights in KLM - to satisfy international air traffic treaties - but almost all of the economic interest.

KLM and British Airways would constitute the biggest cross-border combination in aviation history, and might lead the way for more international consolidation, if they can find a way to do it.

But to achieve the combination they would have to overcome great barriers that have always prevented such moves, and analysts have warned investors not to regard this as a normal merger or acquisition.

Some believe that a combination would take years to implement, not just for the usual competition concerns - Monti's responsibility - but also because the international system of aviation treaties is set against carriers changing their nationality.If KLM became British, it would no longer be entitled to fly services negotiated for Dutch airlines by the Dutch government.

So the airlines' phrase "combination of their businesses" is evidently meant to include deals less than a straightforward, 100 per cent merger of equity.A spokesman for British Airways said on Saturday that the talks were continuing.

Sources have said the carriers set out to negotiate within an eight-week timetable, at the end of which they hoped to know whether the combination would be feasible.

But the schedule is not regarded as rigid. It might take longer to work things out, sources have said, or a breakthrough might appear earlier than expected.

-- (Reuters)