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British Airways and Iberia this month signed a binding memorandum of understanding for a proposed merger, expected to be completed in late 2010. In the works since mid-2008, the intended cross-border cooperation would position oneworld partners BA and Iberia at the core of a third major European aviation entity, competitive with Air France-KLMand the Lufthansa Group.
The companies, which already cooperate on routes between Spain and the United Kingdom, said the combination would "enhance their strong presence in the international long-haul markets, while retaining the individual brands and current operations of each airline."
Should the deal receive the necessary shareholder and regulatory approvals--and if BA can resolve pension funding issues that reportedly complicated merger negotiations--corporate buyers likely would benefit from a single point of contact within the combined group, integrated pricing and contracting, and more seamless services for their travelers. It also would mark another milestone in European aviation consolidation by reducing by one the number of large competitors operating in the market. "We are laying the foundation of what will be one of the most important airlines in the world, a real global airline," according to a statement from Iberia CEO Antonio Vazquez.
"[Corporate buyers] can look at it two ways," said Carlson Wagonlit Travel U.K. director of public sector and industry affairs Nigel Turner. "Either they can see it as an advantage--less people to deal with and more control--or they can see it as less competitive. But there is still a huge amount of competition, especially in the European market in the form of no-frills/low-cost carriers."
BCD Travel vice president of supplier relations in the Americas David Mitchell, referring to competition concerns, said, "Particularly the larger multinational companies and the more educated travel managers are seeing that and starting to feel it a little bit. Everybody is still playing pretty nice right now as we are still on the front end of some of these joint ventures. But you are getting a little bit of a vision of the future, where there will be fewer options and [airlines] will work hard to leverage their positions."
But for corporate buyers today, "it is a pretty good time to be negotiating because everybody is trying to figure out their position," Mitchell said. Airlines "are hungry for revenue." Moving forward, he said, BA and Iberia once merged "can move quite quickly" in integrating corporate sales.
Size And Scope
CWT's Turner said BA and Iberia "want to create a similar model as Air France-KLM, keeping the identities of the two airlines while realizing the synergies and cost savings."
The new airline group would have 419 aircraft and fly to 205 destinations--including 59 new destinations for BA customers and 98 new ones for Iberia customers. The airlines described a "highly complementary network fit worldwide" that combines "BA's strong presence in North America, Asia-Pacific and Africa with Iberia's strong Latin American presence."
If corporate buyers have large volumes on Europe-Latin America routes, said BCD Travel's Mitchell, "then its going to be pretty important to them. It is a unique, strong position that Iberia has."
According to the airlines, the merged aviation group would offer customers a larger network with "better frequencies and connections, more competitive prices, access to more VIP lounges and enhanced frequent flyer benefits." They also pledged "continued investment in new customer products and services."
The carriers, which collectively recorded 2008 revenues of €15 billion (US$22 billion), expect to generate annual synergies of €400 million (US$598 million), one-third of which would come from "joint selling, network and revenue management benefits," and two-thirds from cost savings in "areas such as IT, fleet, maintenance and back-office functions." BA would maintain its London base, and Iberia would maintain its Madrid base, with future development focused around both hubs. Each airline for at least five years would maintain its own licenses, certificates, codes and brands, with airport slots "protected for the benefit of the combined group."
According to the two companies, the MOU calls for the creation of a new, Spanish-incorporated holding company, TopCo, that would own both airlines, with BA shareholders owning 55 percent and Iberia shareholders owning 45 percent. The operating and financial headquarters would be located in London, with a second management office in Madrid. TopCo would have seven directors designated from each airline. BA CEO Willie Walsh would serve as group CEO leading the combined business.
Already minority owners of each other (BA holds a 13.15 percent investment in Iberia and Iberia owns 9.9 percent of BA's share capital), the two airlines said TopCo's ownership and governance structure would "ensure that the existing route licenses and traffic rights of both British Airways and Iberia are retained."
BA and Iberia expect to sign a definitive merger agreement during the first quarter of 2010 and present the financial transaction for shareholder approval "at the latest in early November 2010, with completion expected to occur approximately one month following such approval." The companies also must obtain clearance from antitrust authorities, financial regulators and Spanish and U.K. civil aviation authorities.
Iberia also is entitled to terminate the agreement if, in its "reasonable opinion," BA is unable to satisfactorily resolve contentious pension issues.
Just days before the airlines announced the proposed merger, Walsh in New York told analysts and media that discussions "received some renewed impetus as a result of the change in top management at Iberia at end of July. The major issues that are outstanding between us have largely been addressed. The case for the merger is as strong today as it was when we first started talking to them in July 2008."
Meanwhile, BA and Iberia, along with oneworld partner American Airlines, await rulings from European and U.S. regulators on their antitrust-immunity application. "We continue to expect a positive outcome in the near future from [the U.S. Department of Transportation]," Walsh said. He also suggested that a merger with Iberia would neither affect BA's interest in acquiring U.K. carrier bmi from Lufthansa, nor prompt any extra regulatory scrutiny of such an acquisition.
A BA-Iberia tie-up evidently would include an ownership stake in Amadeus, operator of the leading European global distribution system. Along with Air France, Lufthansa and two equity partners, Iberia is a shareholder in WAM Acquisition, which is the majority owner of Amadeus. Amadeus is reportedly considering a public offering.
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