Ready for take-off?

Sian Hickson looks at how the proposed merger between British Airways and Iberia Airlines could face some turbulence

After sixteen months of boardroom back and forth, a merger has been provisionally agreed between British Airways and the Spanish standard-bearer Iberia Airlines.

The airlines will retain separate operations under a single holding company called TopCo. It will have a combined total of 419 aircraft (flying to 205 destinations worldwide) and the capacity to get 13.5 billion of us off the ground each year. If the deal goes ahead, TopCo would become the third-biggest global carrier behind Delta Airways and American Airlines. However, the proposed alliance could yet stall on the runway over the issue of BA's considerable pensions deficit, which is currently estimated at £2.6 billion (coincidentally, the precise value of BA's total assets). So far the two companies are only acting under a "binding memorandum of understanding", which Iberia states would terminate should the British company fail to ring-fence this debt. BA must produce a firm plan of action on pensions by the end of June 2010. The Spanish airline has said it will not provide guarantees that could prove detrimental to its own business.

Some might suggest that beggars can't be choosers - Iberia made a loss of just under €73 million in the period between April and June of this year; the profitable peak-flight season. It seems that neither airline can afford to operate alone much longer and a merger would appear to make sound financial sense.

On the surface, the match seems equally advantageous - BA rules the skies in Europe and has a solid hold on the lucrative transatlantic routes, whilst Iberia's strength lies in its South American connections. A merger would create a wide-ranging and frequent flight network, with TopCo accounting for around 44 per cent of global take-offs. Virgin, BA's long-standing competitor, has already raised objections to the deal, saying it will create an "unreasonable" monopoly and skirts dangerously close to breaching anti-trust legislation. But competition clearance is unlikely to be a significant obstacle given that a similar merger between Air France and KLM was sanctioned in 2004.

What effect though will this have on the punters in the reclining seats? Behind the fleet of lazy tabloid jokes about paella on the in-flight menu and pilots on siesta lie some genuine concerns. TopCo's hefty market share means less choice for the customer and therefore less pressure to rein in ticket costs. On the other hand, the merger may actually keep fares down as the increased bargaining power of the company would mean they could push for cheaper fuel and runway costs. BA has stated that benefits to passengers could include more routes, as well as indispensables such as new first-class lounges.

The most likely victims of the proposed deal are the staff. Aviation economist Peter Morris says more job losses look certain. In recent months BA has already been pushing for voluntary redundancies and reduced hours. Trade union Unite stated on Friday that they would not support the merger unless firm commitments were made to guard against severe cutbacks.

Additionally, there is the political aspect to consider. British Airways has long modestly referred to itself as "the world's favourite airline", but the merger marks the subsumation of another home-grown brand into a multinational corporation. The jazzing-up (or de-Britishifying) of the emblazoned Union Jack tailfin design famously upset Margaret Thatcher back in 1997, and there has already been some red-top hand-wringing over this supposed aerial Armada. Iberia too is a prominent national symbol. Current reports suggest that both BA and Iberia will retain their respective headquarters and that much of the operational synergy will take place in back-office operations such as administration and IT, with overt practices remaining largely unchanged. Willie Walsh, current chief executive of BA, assured questioners that "most passengers will hardly notice the difference". He himself will become CEO of the merged company, with Iberia's Antonio Vaquez taking the post of chairman. BA and Iberia will retain 7 seats each on the 14-strong board, but BA shareholders will keep the majority share of 55%.

The importance of both companies retaining face should not be underestimated. BA may be taking the larger share, but the shareholders at both ends will be pushing for influence, possibly to the detriment of the much-touted "synergy". This might have grave implications for the profitability of the venture. Any duplication of services will need to be avoided, as both airlines are currently running on empty, but the cost savings could be as low as £350 million over the first year (a figure that, it is suspected, has been published to mollify the fears of those monitoring the possibility of cost-saving redundancies in either camp). Optimists point to the fact that the Air France-KLM alliance of 2004 has so far proved profitable, although it was forged back in the heady days of economic confidence.

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