Mergers: British Airways and Iberia

LIKE two drowning men Iberia and British Airways have long eyed each other as potential means of mutual buoyancy. The rate at which the airlines have been sinking at last forced them into each other's arms on Thursday November 12th. BA made big pre-tax losses in the year to the end of March as it suffered from the credit crisis and the global economic slump. Iberia actually managed to eke out a slender profit for 2008. But as the terms of the merger were thrashed out Iberia announced a loss in the latest quarter, which includes the usually profitable summer months.
A week ago BA said that it had lost £292m ($466m) in the first half of the year, which includes the summer period. These airlines are not alone in their travails. The International Air Transport Association, an industry body, estimates that total losses for the world’s airlines this year will be some $11 billion. By agreeing to merge the two firms will belatedly join the trend for big European airlines to bulk up. This has become an attractive means to make substantial cost savings as they compete against low-cost rivals and try to cope with a precipitous fall in numbers of lucrative business passengers. The pair reckon that by the fifth year the new group will save some €400m ($595m)annually by cutting overlapping routes, and by combining maintenance, office functions and business-class lounges. The pair may also have more heft when it comes to negotiations to buy new planes from Boeing and Airbus.

But saving money by laying off workers and changing conditions of employment may prove troublesome. Iberia’s cabin crew have just finished one round of strikes and are promising more in a dispute over changes to their jobs. BA’s attempts to cut cabin crew and freeze pay could also result in strikes over Christmas. Ground staff and pilots are equally willing to use industrial action to get their way.

The deal will see BA’s shareholders take 55% of the new company to Iberia’s 45%. It will also propel the pair back to the big leagues of European aviation. Their combined revenues will put them closer to Air France-KLM, the product of a similar deal in 2004 and Germany’s Lufthansa, which has expanded its operations with a series of smaller takeovers of Swiss and Austrian airlines since 2005. And like Air France-KLM, while the pair will combine their businesses they will maintain separate corporate operations. This will allow both to maintain their roles as the national flag-carriers while keeping valuable bilateral international landing rights that go along with that status.

Willie Walsh, the BA boss, will take control of the combined airlines while Iberia’s chief executive, Antonio Vázquez, will become chairman. The deal is expected to be completed by the end of next year, but Iberia can still pull out if BA’s pension scheme, currently with liabilities of some £2.7 billion, becomes “materially detrimental” to the merger. Iberia may fear that the British holding company, which will have full responsibility for the pensions, may not deal with the pension problem successfully.

One reason for keeping apace with European rivals is that size will become an important factor if consolidation among airlines goes global. The two airlines are already seeking antitrust immunity in America and in Europe for a tie-up with American Airlines, which would see all three co-ordinating over costs and revenues on transatlantic routes. After an “open skies” agreement between Europe and America in 2008 Air France-KLM has been granted similar immunity for its tie-up with Delta-Northwest, as has Lufthansa with its American partners. But BA may be required to give up landing slots at Heathrow, a price it has been unwilling to pay in the past.

Despite “open skies” a protectionist stance in America over the country's troubled airlines has left in place a law that prevents foreign airlines form owning more than 25% of an American counterpart. The European Union is pressing for this restriction to be lifted, though there is little sign that it might happen soon. But were the Americans to have a change of heart, and if international consolidation took flight, a combined BA and Iberia may just be strong enough to stay afloat.

source: The Economist