Deals, strikes loom for IAG after BA-Iberia merger

LONDON (Reuters) - International Airlines Group ICAG.LICAG.MC, formed from British Airways and Iberia, began its first day of trading on Monday with unresolved issues, such as industrial unrest, facing it.

Deal-hungry IAG, Europe's second biggest airline group by value behind Lufthansa LHAG.DE, was, however, seen as a major player in any further industry consolidation and well-placed to benefit from global economic recovery.

UBS has rated IAG shares, which trade in London and Madrid, a ‘buy’ with a price target of 360 pence. The stock was little change at 286.4 pence in London by 1015 GMT, valuing the group at 5.3 billion pounds ($8.4 billion).

Bank of America Merrill Lynch also said it saw upside potential, valuing the stock at 315-350 pence or 3.8-4.2 euros. IAG traded 0.5 percent higher at 3.367 euros in Madrid.

“The macroeconomic backdrop and new capacity growth will be key drivers of revenue performance this year,” Bank of America Merrill Lynch analysts said in a research note. “On the cost side, we see fuel as a greater potential risk in 2011. Labor and merger execution are also potential risks.”

IAG, which will continue to operate the British Airways and Iberia brands, aims to shave 400 million euros ($559 million) off annual costs within five years.

Analysts noted potential for adding new routes because while prime long-haul slots are like gold dust at Heathrow, Madrid airport suffers fewer capacity constraints.

Also, an anti-trust immunity (ATI) transatlantic joint venture agreed with American Airlines AMR.N in September should ensure flights are as full as possible.

“We think IAG represents an interesting play on traffic recovery, synergies from the merger as well as ATI and potentially a vehicle for further airline consolidation,” UBS analysts said.


IAG, with 419 aircraft flying to 205 destinations, was also seen as a key player in industry consolidation and has drawn up a list of 12 airlines it is interested in buying.

Asia was likely to be the focus for any deal, complementing strength on routes to North and South America.

Indian carrier Kingfisher Airlines KING.BO, with whom BA signed a codesharing agreement last year, was seen as a prime target along with Australian group Qantas QAN.AX while a number of Chinese carriers may also be open to investment.

“British Airways and Iberia are the first two airlines in IAG but they won’t be the last,” chief executive Willie Walsh said on Monday. “Our goal is for more airlines but, importantly, the right airlines to join the group.”

The carrier still has a list of longstanding issues to deal with, including repeated industrial action by BA cabin crew and a big pension deficit.

BA staff voted on Friday to strike again in a long-running battle over proposed job and pay cuts.

The companies highlighted employee harmony as a key risk in merger documents published earlier this month, noting a protracted dispute could drive customers to rival carriers.

Iberia chairman Antonio Vazquez Romero will chair the new company with BA chairman Martin Broughton serving as his deputy.

Top investors in the company include Spanish savings bank Caja de Ahorros y Monte de Piedad de Madrid and investment and pension funds such as BlackRock, Standard Life, Janus Capital and Lloyds Bank’s Scottish Widows. (Additional reporting by Simon Falush and Rhys Jones; Editing by Dan Lalor) ($1 = 0.6274 pound = 0.7158 euro)