KLM Royal Dutch Airlines and Air France said Tuesday they are teaming up to form a powerhouse airline that will put it ahead of European competitors British Airways and Lufthansa.

The joint company will have annual revenues of about $22 billion US.

The new firm, Air France-KLM, will still operate as two distinct brands, meaning travellers won't notice much of a difference.

Air France will be the dominant partner in the new company. Air France shareholders will own 81 per cent of the new firm, while KLM shareholders will hold the rest. The French government's share of Air France will fall from 54.4 per cent to 44 per cent.

And the partnership could get bigger yet. Italy's Alitalia has said it would like to join the deal as well.

Consolidation in the airline business comes as the sector tries to cope with the downturn in business following the Sept. 11 attacks against the United States.

"The time has come to change," Air France chairman Jean-Cyril Spinetta said during a news conference, adding that the industry is too fragmented and not profitable enough.

"Since 1993 and the launch of the single European market with about 400 million customers, all the airlines know that the current set up of European aviation will have to change," KLM CEO Leo van Wijk said.

"The dominant factor of national airlines will disappear. The huge single European market obviously implies the setting up of truly pan-European operations," he said.