BA's Iberia tie-up nears lift-off

Analysis By Robert Plummer Business reporter, BBC News

At long last, the most anticipated merger in airline history is finally set to lift off, with the signing of a deal between British Airways and Iberia.

Iberia and BA have co-operated for nearly a decade

Both carriers have been slowly taxiing towards an agreement since 1999, when BA began working with Iberia during the first phase of the airline's privatisation by the Spanish government.

In July 2008, BA and Iberia said they were holding talks on a possible merger, with both brands to be retained as part of a combined group.

Then in November last year, a binding memorandum of understanding was signed.

The latest announcement means that a full merger agreement is in place, with a completion date of late 2010 and a new name - International Consolidated Airlines.

Even now, there are still a number of safety checks to perform before BA and Iberia can fly united.

As the press release puts it, there will be "a series of steps" including:

• A transfer of the Iberia business to a new Spanish subsidiary
• The insertion of a new British Airways holding company via a UK court approved scheme of arrangement
• And the merger of Iberia with the new British Airways holding company.

On top of that, the deal has to be approved by BA and Iberia shareholders, at general meetings to be held in November.

Still a while to go before it all gets off the ground, then - and there remains one big obstacle on the runway.

BA's two final-salary pension schemes have a combined deficit of £3.7bn, which proved to be a major issue in the merger talks.

Members' pension contributions will be going up as a result, but if the plan is judged to be "materially detrimental to the economic premises of the merger", Iberia can still call the whole thing off.

Long-haul success

Iberia had a number of suitors circling around it after 2007's "open skies" agreement between the US and Europe, which made consolidation in the airline industry inevitable.

The carrier, Europe's fourth-largest, attracted attention from Lufthansa and Air France-KLM, both of whom saw Iberia's strong presence in the Latin American market as a way of enhancing their respective transatlantic offers.

But ultimately, British Airways was the one potential partner that was in it for the long haul.

BA first set up a code-sharing agreement with Iberia in 1999, when it took an initial 9% stake in the Spanish carrier.

In 2007, BA sought to increase its ownership to 40%, with backing from a consortium of private equity groups.

But the deal fell through, leaving BA with a slightly higher holding than before, but no controlling interest.

The remaining shares in play were acquired instead by another Iberia shareholder, savings bank Caja Madrid, which will retain a key stake in the new merged company.

Existing BA shareholders will get one share in the new firm for each BA share they now have, while Iberia shareholders will get 1.0205 shares for each Iberia share they own.

Stumbling blocks

Despite the company's new name, the intention is to imitate the model of Air France-KLM, allowing both Britain and Spain to continue having a national carrier.

Since BA walked away from a more straightforward takeover bid in 2007, the fortunes of both firms have fallen, as the global recession and high fuel costs take their toll on the air industry.

Some analysts feel BA may have turned the corner after it announced a smaller-than-expected pre-tax loss of £50m ($79m) in the three months to December 2009.

This was down from the £122m it lost in the same period in 2008.

But BA's pre-tax loss in the nine months to December rose to £342m from £70m in the same period in 2008.

And casting a pall over the airline's future prospects is the bitter dispute with cabin crew, which has already cost the airline between £40m and £45m.

However, further strikes are on hold while talks continue between BA and the Unite union.

For its part, Iberia reported a worse-than-expected loss of 273m euros ($368m; £240m) last year, against a 32m-euro profit in 2008.

BA and Iberia face severe competition in domestic and European markets, both from budget airlines and - in Iberia's case - from high-speed train services.

However, the Spanish carrier remains unrivalled in its services to Latin America, a region where BA has cut back flights in recent years.

BA has already applied to US and European regulatory authorities for anti-trust immunity for the deal.

But it is likely to have little trouble clearing hurdles in Brussels, since the European Commission has already smiled on BA and Iberia's earlier courtship.

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