April 8, 2010
British Airways and Spain's Iberia on Thursday signed an USD$8 billion merger to create the world's third-largest airline by revenue, bringing a tie-up with American Airlines a step closer.
The merger, which the pair hope to complete by December, is designed to help BA and Iberia stem over USD$1 billion of combined annual losses following the worst industry downturn in decades.
The combined group, to be majority owned by BA shareholders, ends the British company's long pursuit of Iberia and positions the companies for further consolidation.
BA, Iberia and American, members of the Oneworld alliance, want to deepen the pact to take advantage of the US/EU "Open Skies" agreement, which liberalises transatlantic aviation.
"The tie-up with American is the next thing on BA and Iberia's agenda now and this agreement brings that closer but they are probably looking at European and Asian carriers too," said Davy Stockbrokers analyst Stephen Furlong.
"There are too many airlines in the world and bigger will be better in the future. BA will hope that this is the start of many more tie-ups."
Iberia boss Antonio Vazquez, who will chair the merged International Airlines Group, said the combined firm aimed to "participate in future industry consolidation."
"The name itself reflects a longer term intention to add more airlines without favouring any one company," said Societe Generale analyst Jonathan Wober.
COST SAVINGS
The merger will combine BA's strong position in north Atlantic traffic with Iberia's Latin American business, which could be reinforced by the planned American Airlines alliance.
BA and Iberia's target to save EUR€400 million of annual costs by the end of the fifth year will involve cutting jobs and less profitable short-haul flights.
BA cabin crew recently went on strike over pay and jobs, threatening the company's future, the airline said.
"I'd imagine the EUR€400 million is a low-ball figure, but with BA union action they can't be much more aggressive at this point. The whole reason behind this merger is revenue and cost synergies," said an analyst in Spain who asked not to be named.
BA's USD$5.6 billion pension deficit, which was one of the main stumbling blocks in merger talks, could still scupper the deal, after Iberia reserved the right to walk away if BA's pension recovery plan is not satisfactory.
POWER SHARING
The merger will create a company with a combined market capitalisation of USD$8 billion and will give the two loss-making airlines the scale they need to ride out the industry downturn and compete with larger rivals Lufthansa, Air France and budget carriers such as Ryanair.
According to details hammered out last November, BA shareholders stand to receive 55 percent of the new company and Iberia shareholders 45 percent. When the deal is finalised however, the two airlines' cross-shareholdings will be cancelled, giving BA 56 percent and Iberia 44 percent.
Each airline will appoint seven members to the board. BA chief executive Willie Walsh will be CEO of the new company.
The new firm, to be headquartered in London with annual revenues of around USD$20 billion. The merged entity, which will fly with 408 aircraft and 200 destinations by the end of 2010, could cut less profitable short-haul flights and compete better on the routes it retains.
(Reuters)
Source: http://news.airwise.com/story/view/1270726756.html