ANALYSIS: Price still unclear for IAG's BMI move

This story is sourced from Pro
See more Pro news »

International Airlines Group's preliminary deal to buy Star Alliance carrier BMI from Lufthansa provides the opportunity for British Airways to expand at Heathrow, though the details of how it plans to do so and the regulatory price remain unclear.

IAG and Lufthansa today announced a preliminary deal had been struck for the sale of BMI, though few other details beyond a target completion date of the first quarter of next year have been released.

CTAIRA analyst Chris Tarry said: "BMI has long been an acquisition target for BA and the deal would give it the store of slots to provide for growth. Issues are the price of the deal, the cost of implementation and transition, and whether the routes it creates can be profitable."

The deal provides the opportunity for Oneworld carrier BA to grow at Heathrow, crucially through the addition of BMI's much prized slots at the airport. For the winter 2011-12 season BA is scheduled to hold 43.1% of Heathrow slots, while BMI has 8.7%, and the acquisition is set to give BA more than half of the slots available.

This though is likely to come under the scrutiny of competition regulators. Rival bidder Virgin Group - which insists it remains in the race to acquire BMI despite Lufthansa's deal with BA - has already today outlined its competition concerns.

"British Airways' hold over Heathrow is already too dominant and we are very concerned - as the competition authorities should also be - that BA's purchase of BMI would be disastrous for consumer choice and competition," the airline.

IAG chief executive Willie Walsh, speaking on a third quarter results conference call today, was upbeat on the chances of regulatory approval, insisting neither IAG nor Lufthansa would have progressed the deal if they were not confident of approval.

"The UK domestic market is where the greatest competition is [between BA and BMI]," suggests Tarry. "The deal will mean that there is a diminution of competition and the regulators will want to know what sort of remedies there might be."

Tarry believes another key challenge is how the airlines are brought together into a single entity. He said BMI has "a significant labour cost advantage" and wonders if BA can retain this: "Look at all the other examples of BA acquisitions in the UK - eg BCAL, Dan Air - their costs have migrated up to the BA level."

IAG has said little of its plans for BMI should it complete a deal, though Walsh noted: "The BMI of the future will look very different from the BMI of today." But he did suggest the deal would give BA the opportunity to expand its long-haul network to emerging-market destinations in locations such as Asia.

"We do have flexibility within the existing long-haul fleet so we could quickly move to expand the long-haul network," Walsh said, though adding accommodating the growth at the airport would be a "pleasant headache" for both IAG and Heathrow Airport.

"Current capacity at T5 would not allow us to move any activities in there," said Walsh. "There is very little, if any, excess capacity at T5, T3 is in a similar position, but as Heathrow East starts to come online [in 2013], that will change the landscape at Heathrow."

Lufthansa acquired BMI group under a long-standing agreement in 2009, but has been looking at the airline's future as it continued to bleed money. In the nine months to the end of September, BMI made an operating loss of €154 million on turnover of €658 million. Lufthansa Group chief financial officer Stephan Gemkow said it does not expect BMI to meet last year's operating result.

BMI comprises mainline, regional and low-cost operations. Separately investors are close to finalising a deal for BMI Regional, but the future of BMIbaby remains unclear.

According to Flightglobal's ACAS database, BMI mainline operates 25 aircraft, mostly Airbus narrowbodies together with a pair of A330s. BA is also an A320 family operator.

BMI itself flies to destinations in six European countries - Austria, France, Germany, Ireland, Italy and Russia - as well as nine destinations in the Middle East and central Asia, and six destinations in North Africa.

British Airways and BMI in numbers:

• 2010 Revenues: British Airways $13.1bn; BMI $1.2bn

• Fleet: British Airways 229 aircraft; BMI 25 aircraft

• Share of Heathrow slots winter 2011: British Airways 43.1%; BMI 8.7%