The planned British Airways/Iberia merger: a viewpoint
Airneth column
November 2010
By Professor Peter Morrell
As each of the possible obstacles to the proposed British Airways (BA)/Iberia (IB) merger fall away it looks increasingly likely that it will be consummated early in 2011. With anti-trust approval and BA’s pension funding approved by both boards it is now up to the shareholders to give their agreement at special meetings to be held in the last quarter of 2010.
Each of the airlines’ senior management sees this as the best option for them. BA is based in a large but maturing market and opportunities for growth are practically difficult (eg BA’s Paris base) or restricted by ownership regulations (at least outside the EU). This merger gives each effectively a second hub to expand through, especially across the Atlantic. Iberia’s markets have more growth potential but its ability to exploit them alone, and even through the oneworld alliance, are limited. Both airlines see two major EU airlines, Air France and Lufthansa, making early consolidation moves, leaving Iberia as one of the few attractive partners left for BA.
Shareholders may think differently. It is frequently argued that they do not take a longer, strategic, view, and would thus place less weight on the management case above. BA’s share price has been held back by continuing unresolved labour disputes and its pension liability. Neither of these is likely to be permanently resolved by the merger. Industrial relations will be dealt with in the planned operating companies (OpCos), but IB also has a poor record in this respect. Furthermore, the merger does little for BA in terms of Europe/Asia-Pacific capacity share where the merged company will still be far behind Air France-KLM and Lufthansa in size, and no larger than Singapore Airlines or Thai Airways. It would rank number six on Europe/Middle Eastern routes, far behind Emirates. It could also be argued that US’s provisional immunity for the oneworld joint venture earlier this year (with limited slot divestment) gives many of the revenue advantages of the merger. But IB’s shareholders have the attraction of having a slice of a global carrier (and its very valuable slot portfolio at Heathrow), offset by the baggage that comes with it, especially some aggressive unions and large pension liabilities.
The planned synergies that BA reported look modest: incremental revenues reaching €150m or just under 1% of combined turnover by year five. This is partly because the estimate was after any gains from alliance joint ventures. Cost savings are more than double revenue synergies, estimated to reach €250m after five years, almost half coming from IT (28%) and maintenance (23%). The latter’s contribution includes joint inventory procurement which might benefited more if the two fleets were better aligned. Combining head office functions such as finance and sales/commercial in the IAG holding company saves a further 14%, although each of the nationally based OpCos would be expected to need their own HR and other ‘central’ services.
At the beginning of October, British Airways’ market capitalisation was €3,267m compared to Iberia’s €2,707m. Allowing for the agreed one share in the new ICA holding company for each BA shareholder and 1.0205 shares for each IB shareholder would give BA shareholders a 54% share of the new company. This has yet to be accepted by the shareholders and has been a major sticking point in the past, when for example BA tried to merge with KLM in 2000. But recent share price movements suggest that investors favour the merger. Adding further attractive partners, however, will be much more challenging.
