British Airways said on Thursday it had ended talks over a possible takeover of KLM after the Dutch flag carrier could not agree to lose its national identity.
The two had been in discussions since June, when KLM Royal Dutch Airlines approached Europe's largest carrier about being acquired. Since then, they have been trying to overcome several hurdles, including competition concerns and differences over price.
But the fundamental reason for the breakdown of talks centred - as many other attempts at airline mergers have - on a byzantine set of international treaties that govern airlines' rights to fly across borders.
If KLM fell under British control, it would lose its rights as a Dutch airline.
"It was our sense that they were uncomfortable that this would literally be a single company and that we would have complete ownership and control," British Airways chief executive Rod Eddington told Reuters.
"All the pieces of the jigsaw had to fit together properly, but if we couldn't get control of KLM as it is today, then the other bits of the jigsaw were not relevant."
The end of talks is visibly a greater setback for KLM, whose search for a European partner is set to continue after its failure - for the third time - to join up with British Airways. KLM failed earlier this year to agree on a merger deal with Italian airline Alitalia.
But BA will also have to go back to the drawing board in its battle to fix up its European operations and restore profitability after plunging into the red last year for the first time since privatization in 1997.
"This creates just as many issues for British Airways as it does for KLM," said Damien Horth, airline analyst at ABN Amro.
KLM shares fell sharply in New York on the news, which came after the European close of trading. KLM dived 16.8 per cent in American depository receipt (ADR) form. British Airways ADRs rose 4.54 per cent.
British Airways and KLM were well aware of the difficulties that aced them when they started talks several months ago.
Competition concerns loomed large, especially because a combination of the first and fourth largest airlines in Europe would control services between London and Amsterdam and gain a formidable position in the overall European market.
The two airlines had started talking to the European Commission about possible remedies to competition concerns, but several rival European operators had written to Brussels saying the hypothesized remedies were not enough.
A price for the deal had also not yet been agreed.
Because of rules governing international aviation that date back to 1944, an airline's right to fly an international service stems from a bilateral treaty between its home country and the destination country.
Routinely, such a treaty would not grant those rights to a carrier from a third country - which is that the airline would become if it were taken over by a foreign carrier.
So if British Airways bought KLM, it would not be able to fly as a Dutch carrier under treaties between the Netherlands and other states.
The United States had warned that it would not have let BA use KLM as a loophole to bypass a new bilateral aviation treaty between Britain and the United States - hinting that KLM might lose the right to unrestricted transatlantic travel that it now enjoys.
Sources close to the talks had said early in the discussions the two airlines were discussing a structure whereby British Airways would control less than 50 per cent of KLM but have access to all the Dutch airline's economic interests.
The United States had also warned, however, that it would define what "control" meant when it was considering whether to strip KLM of its rights to fly to U.S. cities.
"We tried very hard to find a way through this web, very hard indeed and it was a complex process," Mr. Eddington said.
"At times we thought we had found a way through but at the end of the day, we weren't able to."