BA in pension deal to clear way for Iberia merger

A British Airways aircraft stands in front of a hangar at Heathrow Airport, west of London May 24, 2010.

LONDON (Reuters) - British Airways BAY.L said it had agreed a recovery plan for its 3.7 billion pound ($5.5 billion) pension deficit, potentially removing a final obstacle to its planned merger with Spain's Iberia IBLA.MC.

BA and Iberia signed in April an $8 billion merger to create the world's third-biggest airline after months of negotiations during which the British airline's pension deficit had been one of the main stumbling blocks.

Iberia had reserved the right to back out of the deal -- which will see BA shareholders take a majority 56 percent stake in the combined group -- if the funding hole turned out to be too big.

"Iberia has three months to reach a decision on the pension recovery plan," BA said in a statement on Tuesday.

The two companies hope to complete the merger by December and a spokesman for Iberia told Reuters the pension agreement was "a positive step forward in this process."

The British airline, however, faces a third wave of industrial action, disrupting the peak holiday season, after the Unite union said on Tuesday it would ballot its cabin-crew members in its long-running dispute with BA.

Cabin crew have walked out for 22 days so far this year, costing the airline around 150 million pounds ($220 million).

Unite, which represents 90 percent of BA's 12,000 cabin crew, said the ballot would run from June 29 to July 27, so walkouts could begin on August 3 if voted for.

The union has given BA until the start of the ballot period to demonstrate that it is willing to find a solution.

The two sides have made headway on pay and crewing levels, but Unite said it wanted the reinstatement of travel allowances removed from striking crew and the withdrawal of all disciplinary action against its members.

A third sticking point is BA's use of temporary cabin crew and employees from other areas within the company to staff flights during previous strikes, Unite said.

"Their apparent wish to target the summer holidays of tens of thousands of families is deplorable," a BA spokesman said.

PENSION DEAL

BA said it had reached a deal with the trustees of its Airways Pension Scheme (APS), which last December had a deficit of 1 billion pounds, and its New Airways Pension Scheme (NAPS), which had a 2.7 billion pound black hole.

The airline said the proposals would avoid closing the schemes and maintain BA's annual contributions at the current level of 330 million pounds, plus agreed annual increases in line with inflation expectations averaging 3 percent.

BA will, however, make additional contributions if its year-end cash balance exceeds 1.8 billion pounds. BA's accounts showed a cash balance of 1.7 billion at March 31.

The two schemes will also get 250 million pounds of additional security over the company's assets which would become payable in the event of BA becoming insolvent.

Under the agreement, the pension schemes will continue to be funded by British Airways and not Iberia or the merged holding company, International Airlines Group.

Analysts at Citigroup said they now expected the merger with Iberia to go ahead, given that BA had avoided having to pay an additional lump sum into the pension schemes.

"We had penciled in 500 million pounds as a precautionary measure but this is now not necessary. Given the absence of additional immediate lump sum contributions, we would expect Iberia to confirm its merger agreement with BA by the deadline of September 30, if not before," they said in a research note.

BA said it would submit the recovery plan to Britain's pensions regulator, which has until June 30 to approve it. A spokeswoman for the company said the regulator's initial response on the deal with the trustees had been positive.

"BA has kept the pension regulator informed with ongoing negotiations, so we do not expect any difference of opinion," said Citigroup analysts.

Shares in BA closed up 0.3 percent to 214.5 pence with Iberia shares up 1.3 percent at 2.5 euros.

(Additional reporting by Sonya Dowsett and Cecilia Valente; Editing by Paul Hoskins and Will Waterman)

($1=.6743 Pound)