The decision by British Airways and Iberia to pursue a merger has re-ignited the debate on airline consolidation and its merits - or lack thereof.

Proponents of consolidation point to the chaotically fragmented state of the airline market and the economies of scale that can arise from increased bargaining power and sharing of overheads. Certainly, the travails of Aer Lingus, SAS and too many others would suggest that the airline business is, as Davy analyst Stephen Furlong puts it, "a big boys' game".

Yet the history of airline mergers is a fraught one, marred by clashes of corporate culture and management egos, not to mention the simple reality that joining together two beleaguered operations can amount to a mere doubling of problems.

BA chief Willie Walsh offers a sober view on what the BA-Iberia merger can achieve. "Consolidation is part of the solution, but it is not THE solution," he told analysts. "I would say that 80% of the solution comes from internal restructuring within the operating airlines, the merger is 20% of the solution." BA and Iberia intend to keep their airline operations and brands discrete, and will separately execute painful cost-cutting.

By the airlines' own calculations a merger can deliver annual synergies of €400 million. Between them, they lost almost exactly that amount in the first half of 2009. No wonder Walsh is keeping cautious.

Source: Flight International