Home News BA says it needs Iberia merger to keep global status

BA says it needs Iberia merger to keep global status

Published on 14/11/2009

London -- British Airways needs to merge with Spanish carrier Iberia to retain its global ranking and avoid being sidelined as crisis drives airline tie-ups and cost cuts, its top manager said on Friday.

The deal will create a huge group, since Iberia is rich in routes to Latin America where several economies have strong emerging market status.

British Airways chief executive Willie Walsh said on Friday that his company did not want to be "left behind" after a series of crucial industry alliances from fierce European rivals Air France-KLM and Lufthansa.

BA and Iberia sealed a deal late on Thursday on a four-billion-pound (4.5-billion-euro, 6.6-billion-dollar) merger to create one of the world’s biggest airlines, as the two groups grapple with huge losses.

BA would be the dominant partner.

"This will create a much stronger entity. The concern has been that BA was being left behind as other airlines were starting to consolidate around us," Walsh told BBC Radio 4.

In another sign of the dramatic downturn, Spanish national carrier Iberia announced on Friday that it suffered third-quarter losses of 16.4 million euros (24.4 million dollars) as more customers shunned air travel.

"This is about taking the best out of both and creating a new group of airlines that can compete on a truly global scale," added Walsh, who will also become chief executive of the new company.

"I think that it is very important that British Airways is part of a development like that."

The sector has already witnessed the takeover of Dutch carrier KLM by Air France in 2003 and a series of major takeovers by Germany’s Lufthansa.

"BA staff recognise that the industry is consolidating around us, they’ve witnessed Air France/KLM get together, they’ve witnessed Lufthansa acquire Swiss, Austria, Brussels Airlines," added Walsh.

The merger news sent BA shares soaring 2.09 percent to 219.5 pence in late morning deals on Friday, after they jumped 7.5 percent the previous day in anticipation of the deal. But Iberia shares dipped two percent in Madrid.

Under the merger agreement, BA will have the upper hand and hold 55 percent of the new company, while Iberia will hold 45 percent.

"I think it’s a fantastic deal and I am absolutely delighted with it," said Walsh on Friday.

He added: "We believe over time that we can take the best of both companies and there’s no question that this is a really positive development for British Airways, for our shareholders, for our people, and for Britain."

The pair aim to complete the merger by the end of the year but it needs European regulatory approval.

Davy stockbrokers analyst Stephen Furlong noted that the merger was a crucial event for the sector.

"Cycle-defining events are happening right now in the European airline industry," Furlong said.

"Most of the major airlines are radically cutting costs and capital expenditure, consolidating and gearing up for the next upturn if and when it comes."

Last week, BA had revealed that net losses quadrupled to 217 million pounds in the group’s first half, or six months to September.

BA also said it would cut an extra 1,200 jobs, taking the total planned reduction to 4,900 by 2010.

Under the deal, Iberia chairman Antonio Vazquez will also be chairman of the new company.

Both airlines will retain their brands, while the new group will be based in London and listed on the London Stock Exchange. BA-Iberia will have 419 aircraft and fly to 205 destinations.

The deal will create Europe’s second biggest airline by stock market capitalisation, and third biggest by income, with around 60 million passengers per year.

"The companies cited the highly complementary network fit worldwide, combining BA’s strong presence in North America, Asia-Pacific and Africa with Iberia’s strong Latin American presence," added Furlong.

"In addition, there is greater potential for future growth by optimising the dual hubs of London and Madrid."

BA and Iberia had announced in July 2008 that they were in talks for an all-share merger. But discussions had stalled on differences over the balance of control and the size of BA’s pension-fund deficit.

Iberia reserves the right to back out of the merger deal if the pension deficit issue is not resolved.

Lufthansa, meanwhile, has been steadily acquiring other European airlines, starting with Swiss in 2005, and has added Austrian Airlines and British Midland (bmi) since June.

The German carrier also has taken a 45 percent holding in Brussels Airlines, and has an option to buy the remaining 55 percent.

Roland Jackson/AFP/Expatica