While the alliance across the Atlantic appears to have been scaled back, British Airways and American Airlines are moving ahead with their European and Latin American links.

BA and American are taking a 10% stake in Iberia, according to Spanish state industrial holding company SEPI, with BA taking at least 8.2%. The deal will tie in with American's acquisition of a 10% stake in Aerolineas Argentinas, in which Iberia already holds 10%. Aerolineas plans to expand codeshares with American and Iberia in the US and Europe.

The Iberia stake has been put at some $400 million, based on a valuation of Ptas520-580 billion for the whole company. BA and American each have a right to one seat on the management board, while Iberia has the option to buy into both carriers, earning a seat on their boards.

The government also wants to sell up to a 30% stake to Spanish financial institutions and to float 50% on the Madrid stock exchange; employees are set to own 10% of equity. According to SEPI, these ambitious plans will be completed by the end of 1999.

While American's purchase of equity in Aerolineas saw the replacement of senior management with executives from the Dallas-based carrier, analysts say such changes to Iberia management are unlikely. Under chairman Xabier de Irala, the Spanish flag carrier has become profitable after years of losses.

Iberia recently signed a labour agreement with its pilots for the acquisition of 11 Airbus A340-300s for long-haul services. The three-year pay deal, which covers 1996-9 and cost Ptas3.5 billion (against the Ptas5.7 billion originally demanded by the pilots) boosts productivity by allowing Iberia to expand flying time by 45,000h next year, one-third of which will be dedicated to route development in Latin America.

But many challenges remain. Iberia decided this October to close its unprofitable Viva Air charter subsidiary, citing its pilots' opposition to the use of the lower cost company for scheduled services. An opportunity to launch a low-cost operation has been lost, but Iberia still hopes to use Viva Air's nine aircraft for its main network. Although no date has been set, the carrier has ceased the costly rental of nine aircraft from Air Europa.

According to one Madrid-based analyst, cockpit costs are Iberia's main challenge - Iberia pilots earn on average some $175,000 annually.

The BA/American stake in Iberia will pave the way for entry into the oneworld alliance, which another BA European partner, Finnair, will join by year end. Polish carrier LOT, with which BA is expanding code share arrangements, is also hopeful of an early entry into oneworld.

Source: Airline Business