BA–Iberia tie-up would create world's third largest airline

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If the proposed merger between British Airways and Iberia is given the go-ahead, it will create the world's third largest revenue carrier and give the two carriers a combined 13.5% share of the transatlantic market based on capacity.

The oneworld alliance partners announced on 29 July that they are in talks with a view to carrying 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.

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 (see table).

BA is obviously keen to play catch-up with Air France-KLM and Lufthansa, with BA 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 on 29 July, Iberia chairman Fernando Conte said the tie-up 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 continents with more than 120 million passengers a year". The combined group would operate a fleet of 443 aircraft.

Europe-Transatlantic market share
 

ASK share September 2008

British Airways & Iberia
13.5%
British Airways
8.7%
Lufthansa
8.4%
Air France
7.9%
Delta Air Lines
7.4%
American Airlines
5.1%
Iberia
4.8%
United Airlines
4.7%
Continental Airlines
4.6%
KLM
4.2%
Virgin Atlantic Airways
4.1%
Northwest Airlines
3.5%
Air Canada
3.3%
US Airways
2.8%
Alitalia
2.2%
Others
28.4%
NOTES: Transatlantic includes: North America, Caribbean, Central America, South America. SOURCE: Innovata.
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, although it has financial exposure to a further 6.99% through contracts for difference linked to BA's share price.

BA last year considered launching a takeover bid for Iberia as part of a consortium with TPG, but withdrew its interest because the necessary "consensus and friendly terms" were not in place. The latest BA/Iberia combination plan, however, is being described 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 learned from what carriers such as Air France-KLM had done and that it would consider combining with another European carrier, but only if it achieved something "transformational".

BA has confirmed that it is in talks with oneworld partner American Airlines over forming a transatlantic joint venture agreement and expects the two carriers to file a fresh antitrust immunity application with US regulators by mid-August. This could certainly achieve something transformational. American also has strong links to Latin America from its Miami hub, from which Iberia reduced its activity several years ago in order to establish new regional hubs in Central America. Even more transformational would be the possibility of folding American into the combined BA/Iberia group, but this would require changes to the US foreign ownership and control laws.

Carriers in the other major global alliances have also been co-operating more closely since the European Union-US Open Skies agreement came into effect, with Continental and United Airlines having recently announced a pact that will see Continental leave SkyTeam for Star. Meanwhile, SkyTeam partners Delta, Northwest, Air France-KLM, Alitalia and Czech Airlines recently won approval for antitrust immunity. Airlines are increasingly seeking safety in numbers as they face the dual challenges of record high oil prices and economic slowdown, and the transatlantic market seems to be a hotbed for this type of activity.