BA and Iberia begin mating game

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British Airways and Iberia aim to propel themselves into the world's top three by joining forces

If the proposed merger between British Airways and Iberia is given the go-ahead, it will create the world's third largest carrier by revenue and give the two airlines a significant share of the transatlantic market based on capacity.

The oneworld alliance partners announced in July that they are in talks to carry out an all-share merger, which would see both airlines retaining their brands as part of a combined group.

A BA/Iberia merger would mark the next chapter in the European airline consolidation story, and would create the world's third biggest carrier by revenue, after Air France-KLM and Lufthansa, which have so far been ahead of BA in the ­consolidation game. According to the Airline Business World Airline Rankings, Air France-KLM topped the table in 2007 with ­revenues of $34.4 billion, followed by Lufthansa at $30.8 ­billion. The combined revenues for 2007 of BA and Iberia amounted to $25.2 billion, which would elevate the two carriers to the number three spot ahead of FedEx and American Airlines.

willie walsh - fernando conte
 © Iberia

The merger would also give the two carriers a strong transatlantic position, cashing in on BA's extensive North American network from London Heathrow and Iberia's significant Latin American network from Madrid. Including North America, the Caribbean, Central and South America, a combined BA/Iberia would have a 13.5% share of the transatlantic market from Europe, based on ASKs.

BA is obviously keen to play catch-up with Air France-KLM and Lufthansa, with the carrier's chief executive Willie Walsh ­saying: "I don't see the merger with Iberia as the end game. This positions us very well for future consolidation. This is not the end game by any means."

Announcing the merger plans in Madrid in July, Iberia chairman Fernando Conte said the ­combination would result in "one of the most important air ­transport groups in the world, with more than 200 different destinations in 100 countries in all five continentswith more than 120 million passengers a year". The combined group would ­operate a fleet of 443 aircraft.

ba-777
 © British Airways

Conte added: "Our prospects are excellent as both British and Iberia are very complementary companies, probably the most complementary airlines within Europe: Iberia leads the Europe-Latin America market, while ­British Airways is the leader on routes between Europe and the United States, and has an ­important position in Asia."

Walsh called the proposed merger "the next logical step in our 10-year relationship", adding that "by joining together, British Airways and Iberia would be a stronger force, better able to ­compete in today's tough market environment". BA has held shares in Iberia since 1999 and in March it increased its stake to 13.15%. Iberia has since acquired a 2.99% stake in BA, with financial exposure to a further 6.99% stake through contracts for difference linked to BA's share price.

The merger is expected to be completed "within the six- to 12-month timeframe", says Walsh. ABN Amro analyst Andrew Lobbenberg does "not foresee major obstacles" to the deal being given the go-ahead, given the precedent set by the mergers of Air France-KLM and Lufthansa-Swiss.

BA last year considered launching a takeover bid for ­Iberia as part of a consortium with TPG, but withdrew its ­interest because "consensus and friendly terms" were not in place. The latest BA/Iberia combination plan, however, is billed as a "merger on an equal basis" rather than a takeover.

In an interview with Airline Business earlier this year, Walsh said BA had been "too cautious" in its approach to European ­consolidation in the past and had not "fully appreciated the opportunities for revenue synergies in the way that Air France-KLM has clearly managed". He said BA had watched and learned, and would consider combining with another European carrier, but only if it achieved something "transformational".

ANTITRUST IMMUNITY

BA, Iberia and American in mid-August filed for antitrust immunity with the US Department of Transportation for a joint agreement on flights between North America and Europe. What would really be transformational would be the possibility of ­folding American into the ­combined BA/Iberia group, but this would require significant changes to the US ­ownership and control laws.

"Together with American, if the three-way antitrust were approved, it would build a strong triangle between Europe, North America and Latin America, leaving oneworld very strong in Latin America," notes Lobbenberg. Walsh describes the Iberia deal as positive for oneworld, adding: "It's clear the alliance ­structures are maturing and the importance of competition between alliances is increasing and this is clearly a significant boost for oneworld, as are the discussions we're having with American."