Air France should be worried - its competition just got stronger

On Friday, French low-cost carrier XL Airways announced that it had merged with boutique business-class upstart La Compagnie.

The two Paris-based airlines will form the new XL Airways-La Compagnie Group and will continue to specialize in low-cost, international, long-haul service.

The newly merged company will be led by XL Airways CEO Laurent Magnin while La Compagnie founder Frantz Yvelin has resigned from his post and will not participate in the newly merged venture.

The financial terms of the deal were not released.

The new XL Airways-La Compagnie Group will be better-positioned to capitalize on the cost advantages of a larger operation. This is especially the case for La Compagnie, which operates only two aircraft.

The combined company is expected to boast 800 employees and €400 million ($425 million) in annual revenue.

"It was inspiring to see how favorably the two airlines' employees received the news and underscores the shared spirit and mission,"Magnin said in a statement.

"Our companies will join forces under our French flag, in the premiere tourist destination in the world."

In the same statement, the departing Yvelin added, "I am very proud and grateful to have created and run La Compagnie and to have successfully contributed to this new group. Most importantly, I would like to thank my wonderful teams, on the ground and in the air, for their outstanding dedication and hard work."

This is the second airline the serial-aviation entrepreneur has launched and sold an airline. In 2008, Yvelin sold L'Avion to British Airways for £54 million. L'Avion now operates under BA's OpenSkies brand.

XL Airways is expected to continue to focus on budget economy-class travel with its fleet of Airbus A330 aircraft, while La Compagnie's pair of Boeing 757s will remain business-class-only. (Business Insider sampled La Compagnie this past spring and found the service to be worth the $1,800 for a Paris-to-New York, round-trip excursion - if only to enjoy the business-class experience when you aren't a frequent customer for that level of pampering.)

Both Parisian brands will compete with Air France in the traditionally lucrative, but currently struggling trans-Atlantic market. In a bid to lower costs and become more competitive, Air France announced in November that it will launch an experimental airline called Boost.