Airlines: BA and Iberia in £3.9bn merger talks

A report in The Guardian in the UK says that the painful restructuring of the European airline industry entered a consolidation phase yesterday after British Airways confirmed talks with Spanish rival Iberia over a €5bn (£3.95bn) merger.

The move prompted speculation that Air France-KLM or Germany’s Lufthansa might launch a counter-offer for Spain’s flag carrier as Europe’s leading players circle smaller rivals. Texas Pacific Group, the private equity firm that joined BA in bidding for Iberia last year, was also considering its response last night.

BA chief executive Willie Walsh described the proposed all-share merger as “the start of a new era” for the industry but denied that it was driven by a quest for survival as airlines struggle with high fuel costs.

“It is not just about survival.”  “We would have pursued this very positively regardless of the external environment.”  “It’s a happy coincidence that it comes when the industry is facing such challenges,” he said.

Walsh, whose own position in the merged entity is undecided, added that the new business will adopt the structure of Air France-KLM. The world’s leading airline by revenues was formed by the combination of France and the Netherlands’ national carriers under the ownership of a holding company led by a unified management team.

Under that structure, BA and Iberia would retain their brands and cooperate on fares and routes, with BA providing a dominant position on north Atlantic routes and Iberia on the lucrative Spain-to-Latin America market. “We have got networks that complement each other and position us in a way that competes more effectively with Lufthansa and Air France-KLM,” said Walsh.

A combined BA and Iberia would carry 65 million passengers a year – the sixth largest in the world – with 443 aircraft and 64,500 staff, and a combined market capitalisation of €5bn, though Iberia would be a junior partner with its current market cap of €1.5bn.

BA shares yesterday closed up 6% at 248.5p. The airlines said the negotiations were “supported unanimously” by the boards of both companies. BA owns 13.5% of Iberia, and its Spanish counterpart announced yesterday that it had acquired a 2.99% stake in BA, which could rise to just under 10%.

Andrew Lobbenberg, analyst at ABN Amro, said the deal would reduce BA’s reliance on the New York to Heathrow market and would boost the effectiveness of a proposed marketing alliance with American Airlines, which BA said was close to being put before regulators. BA is a member of the Oneworld alliance with Iberia and American Airlines.

“Together with American, if the three way anti-trust were approved, it would build a strong triangle between Europe, North America and Latin America, leaving Oneworld very strong in Latin America,” Lobbenberg said.

Walsh also played down expectations of a merger with a US rival, thought to be his main corporate ambition, owing to prohibitive ownership guidelines. “It’s not the ultimate goal. The ownership control restrictions still exist. We are not getting hung up on that.”

The merger talks are taking place against a backdrop of unprecedented cost pressure on airline businesses, with fuel costs reaching unsustainable levels. The effect of the cost squeeze, which has grounded at least 25 carriers so far, is being exacerbated by a downturn in sales. BA’s head of sales Drew Crawley said financial services customers – BA’s most profitable segment – are cutting back on travel. The airline will present first quarter results on Friday, when it is also expected to announce cuts to some flights over the winter.

A Report by The Mole from the Guardian