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2011 Articles

FEB 01 2011
The British Airways-Iberia Merger

At 8am on 24 January the London Stock Exchange and its Madrid equivalent both started trading shares in a new company, the International Airlines Group (IAG). This was a significant event in the European airline industry - it was start of business for the newly merged British Airways and Iberia.

BA and Iberia joining forces is the latest instance of the consolidation that's swept through the airline industry in recent years. Air France and KLM merged back in 2004 and more recently Lufthansa has been notably prolific, acquiring BMI British Midland International, Swiss International Air Lines, Brussels Airlines and Austrian Airlines. In the US Delta acquired Northwest and United and Continental have merged under the United brand.

On the surface there isn't much change, as the BA and Iberia brands will both continue. But the merger, with IAG being the holding company, is significant nonetheless. The newly merged airline is now the world's sixth largest airline group by revenues. With a fleet of 400 aircraft it will offer a route network of 200 destinations and carry 60 million passengers per year. Current BA chief executive Willie Walsh moves on from BA to become IAG's chief executive, while Iberia CEO Antonio Vázquez is the new company's chairman.

BA and Iberia first started co-operation and code-sharing on routes in 2003, BA having earlier acquired a 13% stake in the Spanish flag carrier in 1998. In 2007 BA made a bid for Iberia but later withdrew the offer. The impact of the recession on both airlines led to merger talks opening in 2009, leading to the tie-up being formally announced in March 2010 and approved by shareholders late last year.

The airline industry's consolidation explains why the merger has happened. BA and Iberia on their own began lagging behind the other major European legacy carriers. Lufthansa's acquisitions have made it Europe's biggest and the world's fifth largest airline by passenger numbers - in 2010, it carried 90 million people. Another rival, the combined Air France-KLM, carried 70 million passengers last year. By comparison BA carried 31 million passengers and Iberia 27 million in 2010. The BA-Iberia merger is therefore about both airlines strengthening their position against the other big beasts of the airline industry. Better together than alone.

But it's not simply about the European carriers. The newly enlarged Delta and United and the cash-rich Middle Eastern carriers Emirates, Etihad and Qatar Airways are potent forces. And the oneworld airline alliance of which BA-Iberia is part is significantly smaller than the other two alliances, Star and SkyTeam. Star currently has 27 members and carries 623 million passengers, and SkyTeam with 13 members (plus a further five pending) carries 385 million. Oneworld, with 12 member airlines, carries 335 million. BA-Iberia's big European and North American rivals are members of Star and SkyTeam, so there's also a case for seeing the BA-Iberia merger as a step in bolstering oneworld's competitiveness.

Simon Calder, The Independent newspaper's respected travel journalist, put it starkly during a web chat about the BA-Iberia merger. He said: "Everything about it is focused 10, 20, 30 years down the track. BA and Iberia HAD to team up, in order to have any hope of competing with the European giants, and more to the point the global challenges. In particular, the US airlines are resurgent after their consolidations, and the Gulf-based carriers are focussing on US-Asia traffic at the expense of European carriers."

How will the merger bed down? Industry analysts say BA and Iberia are well matched. With complementary route networks seen as vital in airline mergers and alliances, the idea being that the traffic strengths of the respective airlines feed into the other, BA and Iberia do complement one another. BA's strength is North America and Asia and Iberia's is South America.

But of course mergers aren't just about route networks. IAG says the merger should enable BA-Iberia to make €400 million in cost savings by 2016. Professor Peter Morrell, Professor of Air Transport at Cranfield University, explained: "They've come up with various cost savings that they can get out of the merger of the companies. These are on things like procurement, IT, maintenance. These are the things they can get from a merger which aren't really available from alliances."

Here the wider strategic alliance between BA, Iberia and fellow oneworld member American Airlines comes into play. This alliance, approved by European Commission and US Department of Transport regulators in summer 2010, allows the three airlines to share revenues on transatlantic flights. Morrell explains that costs savings are a major driver behind the merger: "In fact BA do admit that the revenue benefits of a merger are less. They've already taken them through the [BA-Iberia-American] immunised strategic alliance so that puts the focus on the cost side."

With BA's ongoing dispute with its cabin crew, and further disruptive strike action expected, the achievement of the planned synergies could potentially be a thorny issue. Antonio Vázquez estimates that two-thirds of the cost reduction in the new merger will be borne by the workforce. Labour relations look likely to be a key issue for IAG.

Away from the business side of the merger, some believe the airline will have challenges in other areas. Adrian Pring, a consultant analyst at branding agency The Brand Union, points out that BA and Iberia have dissimilar ratings on the surveys undertaken by research consultancy Skytrax, with BA being a four-star carrier and Iberia having three. Pring thinks that managing the service differences between the two airlines will be a "key challenge" for BA-Iberia.

Simon Calder goes further. Responding to a question posed by Global Aviation Resource during The Independent web chat, Calder said: "From my experience [Iberia's] short-haul service is sub-easyJet (at least easyJet has shiny new planes and staff who smile), while after my last long-haul flight (12 hours Montevideo-Madrid in a packed A340) I now pay a substantial premium to avoid Iberia. We can only hope that BA shows Iberia how to improve, rather than BA adopting Iberia's bad habits."

Pring also believes that BA-Iberia "needs to communicate more clearly" about what exactly the merger will mean for passengers. "Willie Walsh has said to passengers 'you won't notice any difference' because BA and Iberia both have strong brands, and that's true, but that's not great from a customer point of view," Pring told Global Aviation Resource. "As a customer you want to know the differences. Ultimately, though, if they can manage to do that then I think they can do something that'll be strong."

Certainly IAG has designs on becoming bigger. Walsh told the media on the company's stock exchange listing last week that "British Airways and Iberia are the first two airlines in IAG but they won't be the last". He said: "Our goal is for more airlines-but, importantly, the right airlines-to join the group. Today is the first step towards creating a multinational, multi-brand airline group."

Media speculation in recent months has listed other oneworld alliance partners such as Finnair and Cathay Pacific as possible future partners. IAG has refused to comment so far, only saying it's identified about a dozen airlines it thinks would be suitable. Analysts are in broad agreement that IAG is looking at Asian and possibly US carriers to complement the network strengths of BA and Iberia. Peter Morrell says that "it seems to me unlikely they'll be able to have a nice, perfect fit candidate", though he notes that TAP Portugal, another rumoured IAG target, "would fit in better" alongside BA-Iberia with its Latin American and African focus complementing BA's northern hemisphere strengths and Iberia's routes to South America.

For all these reasons - how the merger beds in, how the cost savings will be achieved, how the ongoing staff disputes will affect the business and how IAG evolves in the future - it will be interesting to follow what will happen to the newest player in the ever-changing airline world.

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