BA, Iberia deal eyes future consolidation

By Rhys Jones - Analysis

LONDON (Reuters) - British Airways' merger with Spain's Iberia will give the two loss-making airlines the scale they need to ride out recession and compete with larger European rivals Lufthansa and Air France.

The agreement, which will create a group with a combined market value of $7 billion if it goes through next year, ends the British carrier's two-year hunt for Iberia, and will allow it to emulate rivals who have successfully acquired smaller peers.

BA shareholders will have 55 percent of the combined firm, to be headquartered in London with 419 aircraft flying to 205 destinations, while Iberia shareholders are to get 45 percent.

BA's Chief Executive Willie Walsh, who will be CEO of the new group, wants to take on Air France-KLM -- formed from a Franco-Dutch merger in 2004 -- and Lufthansa, which has successfully combined with Swiss International Airlines and Austrian Airlines in recent years.

"The deal will give them the potential to grow in a tough market that low-cost rivals can't match without losing money," Joaquin Garcia-Romanillos, analyst for Portuguese bank BPI said.

NATURAL FIT

The new firm, which will have annual revenues of 13.5 billion pounds, combines BA's strong position in Europe-to-North America traffic with Iberia's Latin American business, and will potentially be reinforced by a planned alliance with American Airlines.

The merged entity could also cut less profitable short and medium-haul flights and compete better on the routes it retains.

BA already has a code-sharing agreement with the Spanish carrier under the One World alliance, and the new company's enlarged global network will appeal to corporate customers.

"One day, BA hopes that the barriers to cross-continental mergers will be removed, and the real prize here is the scale to participate in the ensuing consolidation process from a position of strength," said Astaire analyst Douglas McNeill.

Analysts see BA and Iberia, who have targeted annual synergies of about 400 million euros by the end of the fifth year, as a "natural fit."

One third of the synergies will be revenue-related and the remainder from cost savings in areas such as information technology, fleet, maintenance and back office, they said.

RIVAL MERGERS

Deutsche Lufthansa bought Swiss in 2005, a takeover that is still seen as one of Europe's most successful.

Swiss's finances spun out of control when demand for air travel suddenly dropped following the September 11, 2001 World Trade Center attacks. By the time it tied up with Lufthansa, it had already taken great strides in restructuring its business and shortly after, the general economy picked up again.