BA and Iberia merger plan, would create biggest europran airline

British Airways and Iberia announced a merger plan Tuesday in what would be the first major alliance between European flag carriers since the recent surge in oil prices darkened the outlook for the aviation sector.

The move could herald further consolidation in Europe - following recent deals in the United States - as the airline industry faces slowing growth and higher costs. The long-time partners British Airways and Iberia said they intended to join forces in an all-stock transaction.

Nick Cunningham, an aviation analyst with Evolution Securities in London, said that the consolidation process that began when Lufthansa took over Swiss Air in March 2005, and Air France merged with KLM in May 2004, was speeding up now under the pressure of events.

“The distressed environment - a combination of recession and oil price shocks - is effectively accelerating the process,” he said. There was further evidence Tuesday of possible upheaval in the sector as the chairman of Austrian Airlines said that a buyer for his company could be found by October if the government would agree to divest its entire 43 percent stake.

Lufthansa has often been cited in connection with such a deal. Also Tuesday, the government of Serbia announced the sale of a majority stake in its state-owned airline, JAT. Meanwhile, the troubled Italian flag carrier Alitalia is still searching for a solution to its financial woes.

British Airways and Iberia, already linked by cross-shareholdings, said Tuesday they were in talks, with the backing of their respective boards, about combining their holdings into a single entity with dual listings in London and Madrid. They said that they aimed to retain their two separate brands, in much the same way Air France has done with KLM.

British Airways owns 13.15 percent of Iberia, while the Spanish company announced Tuesday that it had acquired 2.99 percent of British Airways and held derivatives giving it the possibility to acquire 6.99 percent more. The two airlines, which are also linked through the Oneworld marketing alliance, already have agreements on 30 code-sharing routes and began a joint business operation between London, Madrid and Barcelona in 2005. The two have been cooperating in various ways for a decade.

“The aviation landscape is changing and airline consolidation is long overdue,” said the British Airways chief executive, Willie Walsh. “The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment.”

A deal would see British Airways’ strength in North America and Asia complement the Latin American reach of Iberia.

The chairman and chief executive of Iberia, Fernando Conte, said that a merger would “further develop Madrid’s position as the European gateway to Latin America.”

In comments suggesting that the tie-up with Iberia may be more than a European affair, Walsh said during a news conference in Madrid that he had discussed the merger plan with the head of American Airlines, Gerard Arpey.

“He has welcomed the move and thought it was positive,” Walsh said.

But Peter Morris, chief economist at Ascend, an aviation consultancy in London, was skeptical about the likelihood of a deal with Iberia, given that British Airways’ name has also been linked over the years with KLM, American Airlines, United and US Airways, with no transaction ever taking place.

“BA has gone through a whole series of interested parties and there have always been last-minute problems,” Morris aid, adding that British Airways would probably be reluctant, for instance, to divest precious landing slots at London Heathrow Airport - that were valued at some £20 million, or $39.5 million, before the oil crisis hit - to satisfy regulatory concerns.

Between them, British Airways and Iberia could end up controlling about 45 percent of the slots at Heathrow, which is the main European hub for flights to North America. But other specialists said that the increased urgency of the airlines’ situations now meant that regulators would not wish to see a deal buried this time.

“Common sense will prevail in Europe and the United States that this is a sensible deal,” said Howard Wheeldon, senior strategist at the brokerage BGC Partners in London.

Cunningham said the fact that British Airways and Iberia were in communication with American was a signal of the shape of the industry to come, thanks to the advent of the “open skies” agreement between Europe and the United States, which went into effect in March.

That accord, which allows European and U.S. airlines to fly any route between any city in Europe and any city in the United States, has lowered the barriers to competition and the resistance of regulators to trans-Atlantic deals.

Source: International Herald Tribune

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