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Operating as International Consolidated Airlines, national carriers Iberia and British Airways signed their definitive merger agreement in March. With major hurdles including BA cabin crew strikes and Iberia concerns over BA pensions in the way, who stands to benefit if the merger is completed in December 2010 as scheduled? by Chris Dove
Making aviation history Though a year behind Iberia’s planned completion date, BA’s long-awaited €5.9 billion merger with Iberia will take air travel to a new dimension. Benefitting shareholders, customers and employees to become the world’s third largest airline, their combined capacity of 408 aircraft flying to 200 destinations and carrying more than 58 million annual passengers takes advantage of consolidation in the global aviation industry. The new entity will be known as International Airlines Group (IAG) and both airlines will retain their current operations and individual brands. Anticipating annual synergies of around €400 million five years into the merger, share allocations have been agreed and will be traded through the Mercado Continuo Español, the Spanish Stock Exchanges Interconnection System and the London Stock Exchange.
TIME-LINE TO TAKE-OFF 1999 February 12: Spanish State Company SEPI approves sale of 10% stake in Iberia to British Airways (BA) and American Airlines (AA) . February 15: Iberia joins “Oneworld” international alliance of airlines.
2003 December 10: European Commission approves Iberia and BA alliancez.
2004 December 16: BA and Iberia sign codeshare agreement for routes linking London Heathrow to Madrid and Barcelona.
2007 May 22: BA joins consortium of USA fund TPG Capital, Spain’s Vista Capital, Inversiones Ibersuizas and Quercus Equity (Barcelona) to study Iberia bid. November 26: Consortium waiver Iberia takeover.
2008 February 7: BA acquires 1.6 million Iberia shares, raising its capital to 10.135% . July 29: Iberia and BA announce merger talks . October 23: Iberia purchases 1.55 million BA shares to control 9.07% BA capital.
2009 February 3: Iberia sets March 2009 as merger completion date; BA indicates there is no deadline. June 6: Iberia says merger is “on track” referring to financial difficulties in the airline industry and problems with BA’s employee pension fund. July 31: BA says there are merger “issues to be resolved”. November 6: BA record net loss of €238 million in first half fiscal year. November 11: Iberia and BA stockholders analyse the merger. November 12: Both Boards of Directors sign Memorandum of Understanding.
2010 March 8: Iberia and BA announce a definitive merger agreement. Company to be operational by end 2010. June 29:BA, Iberia and International Consolidated Airlines Group sign merger plan document required under Spanish law to implement the merger. September 30: Latest dates for the UK Pensions Regulator to challenge the pension recovery plan agreed between BA and its pension trustees, and Iberia to approve the plan. November: Both airlines will hold shareholder meetings to approve the transaction. December: Merger completion expected subject to regulatory approval from the European Commission.
So, who stands to gain? The merger is a chance for both airlines to cut costs following two tough financial years for the industry. On announcement of the go-ahead, both airlines’ stock values rose, signalling welcome news for stockholders and investors. Rival airlines Ryanair and Virgin Atlantic, however, fear it will increase BA’s dominance at Heathrow Airport, the world’s busiest. Antonio Vázquez, Iberia’s Chairman and Chief Executive, said: “This is an important step in the process towards creating one of the world’s leading global airlines that will be better equipped to compete with other major airlines and participate in future industry consolidation. We look forward to concluding the deal before the year end.” Meanwhile, BA’s Willie Walsh said: “The merged company will provide customers with a larger combined network. It will also have greater potential for further growth by optimising the dual hubs of London and Madrid and providing continued investment in new products and services.” Passengers themselves have other views with comments ranging from the concerned: “Although the company will have its primary listing on the London Stock Exchange, it will be Spanish registered and known as a Spanish company in the press and financial community” to the complimentary: “BA flight crew to be predominantly Spanish?... Well, at least they’ll be easier on the eye!.”
Interim entanglements dragging the merger down The long-running cabin crew dispute between BA management and the trade union Unite could have led to further walkouts during the busy high season travel period this summer. Despite agreeing to postpone the strike ballot, Unite refused to back down over BA’s failure to reinstate staff travel arrangements to crew who’d taken part in strikes earlier this year. The union accused BA of fanning the flames of the dispute in “an act of provocation” by hiring 1,250 new cabin crew on “minimum wage” and worse terms and conditions. While BA has hit back saying it is under no obligation to consult the union over future recruitment plans, some have accused it of “dragging Iberia’s name through the mud.” This unseemly public bickering is having an impact on the reputations and share prices of both companies, while the pension recovery plan agreed between BA and its pension trustees has yet to be signed off by Iberia when both airlines hold shareholder meetings in November. December’s scheduled merger completion date looms on the horizon.
Learning lessons from the past and future In recent years, Europe has seen its fair share of mergers with Germany’s Lufthansa bidding for Austrian Airlines and the Air France collaboration with Dutch carrier KLM creating a “strategy of complementarity and generating synergy”, offering flights to 225 destinations, reducing costs and boosting revenues by optimising the network of powerful hubs at Paris-CDG and Schiphol. Another notable merger during the past year has seen Vueling Chief Executive Álex Cruz describe the successful amalgamation with bud- get Barcelona carrier Clickair as “the right step to address what was probably an over-capacity issue among two fairly recently born players” after consolidating two loss-making carriers into one profitable one. Vueling made €27.8 million net profit in 2009 which it expects to increase in 2010. In America, stalled merger talks between US Airways and United Airlines are back on track with promises to generate up to $400m annually in synergies while controlling more than 60% of departures in the Washington DC metropolitan area alone. According to the Wall Street Journal, “Even if a deal is reached, hurdles would likely remain including opposition from labour groups and antitrust concerns on items like market share.” Back on this side of the globe, Iberia workers’ unions CC. OO. and UGT issued a joint statement asserting: “The merger has the potential to strengthen both companies but its success will depend on its workers, who must be treated with respect,” while Unite commented: “We accept the logic of the merger in the challenging economic climate for aviation.”
Counting the cost: is the Vueling-Clickair merger for better or worse? It is plain to see Vueling’s performance uplift across all areas of operations reposition the merged company with a far better financial balance sheet than it had just one year ago; strategies Iberia and BA are closely eyeing:
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