UPDATE 1-Air France-KLM CEO sees upside to French airline bankruptcies

(Updates with Aigle Azur court decision)

By Laurence Frost

TOULOUSE, France, Sept 27 (Reuters) - Air France-KLM
boss Ben Smith on Friday defended his decision not to
fly to the aid of two collapsed French airlines, and said market
consolidation through bankruptcies would eventually benefit the
country's aviation industry and jobs.

Air France last week withdrew a rescue bid for Aigle Azur,
which was formally wound down on Friday, and has since rebuffed
overtures by XL Airways, another insolvent carrier.

"There is going to be consolidation," the Air France-KLM
chief executive told reporters at a ceremony in Toulouse marking
the delivery of Air France's first Airbus A350 jet.

"We believe positive results will come out of it, to ensure
that airlines that are based here in France will be stronger to
compete globally," Smith said. "The jobs associated with those
larger more powerful airlines will be created here in France."

While six airlines currently compete on London-New York
routes, the smaller Paris-New York market is contested by 10
rival carriers, the CEO said.

Air France now stands to pick up some of Aigle Azur's
valuable take-off and landing slots at Paris Orly airport, after
a bankruptcy court rejected the last two remaining bids for the
failed airline on Friday, effectively sealing its fate.

Smith was speaking at the end of a week marked by travel
firm Thomas Cook's failure, which affected 600,000 holidaymakers
and send shockwaves across the sector.

A long line of small European airlines have also run into
trouble faced with industry overcapacity, cut-throat competition
and high fuel prices. Germania, Flybmi and Iceland's WOW have
all failed this year, while Slovenia's Adria Airways has
cancelled almost all its flights this week.

Willie Walsh, CEO of British Airways parent IAG,
has also said that bankruptcies among competitors would help
support the group's growth next year.

STRANDED

Aigle Azur, which stranded 19,000 passengers when it
abruptly halted its services earlier this month, operated with
1,150 staff and a fleet of 11 Airbus jets serving Algeria and
other destinations in north Africa and beyond.

Air France had discussed a joint Aigle Azur bid with Air
Caraibes parent Dubreuil Group, but pulled out after concluding
that it would require a complex deal with its own unions.
EasyJet also withdrew an earlier offer.

The French flag carrier has also resisted entreaties by XL
Airways CEO Laurent Magnin to acquire the failed airline, its
570 staff and four Airbus planes.

XL Airways has been given a Saturday deadline to present any
rescue offers to a bankruptcy court north of Paris.

Franco-Dutch Air France-KLM remains sceptical of the
low-cost, long-haul market plied by XL, Smith said. "I don’t
believe today the XL model offers something that would
complement Air France."

While both Aigle and XL had some "interesting assets", Smith
said absorbing either would have endangered labour relations at
Air France, which last year lost 335 million euros ($366
million) to a wave of strikes.

"We have a stable social environment today in Air France,
and we've made it clear we're not going to jeopardise that," he
said.
($1 = 0.9152 euros)
(Reporting by Laurence Frost; Editing by Kirsten Donovan and
Sonya Hepinstall)