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British Airways and Iberia, the Spanish flag carrier, are holding talks they hope will lead to a merger before the end of the year, the two airlines said yesterday.
A deal between the two companies, whose boards have both already approved the merger talks, would create the world's third largest airline and is also likely to kick-start a new round of consolidation in the global airline industry.
BA, which has had code-sharing agreements with Iberia for 10 years, already owns 13.15 per cent of Iberia, and the Spanish airline said yesterday it has taken a 2.99 per cent direct shareholding in its partner. Iberia also now owns contracts for difference that give it exposure to a further 6.99 per cent of BA's shares.
The British airline considered making a takeover bid for Iberia last year, as part of a consortium fronted by Texas Pacific Group, the US private equity concern, but eventually changed its mind and ruled out any further investment in the Spanish company.
Yesterday, however, Willie Walsh, BA's chief executive, said the aviation industry had changed significantly. In particular, the cost of jet fuel has soared since the beginning of the year.
Although BA, with a market capitalisation of £2.9 billion ($7.8 billion), is significantly larger than Iberia, which is worth around €1.6 billion ($3.4 billion), the two companies billed the deal as a merger of equals. The deal is to be structured as an all-share merger, with no cash changing hands.
A single holding company will list on both the London and Madrid stock exchanges, but the two airlines will retain their brand identities and their separate managements for day-to-day operations. BA and Iberia said yesterday that no decisions had yet been taken on who would take the role of chief executive in the combined entity.
Walsh, however, as the man in charge of the larger of the two companies, would have a stronger claim to the job than Iberia's chairman and chief executive Fernando Conte. "We share a common vision," Walsh said. "You're not going to find any clash of personalities here."
BA and Iberia envisage some cost savings from combining IT systems and procurement, for example, but the two airlines are more interested in their geographical fit.
Iberia has particularly good traffic to South America and Africa, while BA brings a strong presence on North American, Middle Eastern and Far Eastern routes.
BA is also attracted to Iberia because that airline's Madrid base has much more potential for expansion than BA's Heathrow headquarters. The deal would also be a boost to the Oneworld alliance, of which BA and Iberia are both members, as well as American Airlines, Qantas and Cathay Pacific.
However, the merger will have to be planned very carefully to avoid infringing their rights to landing slots and routes in many parts of the world. While the Open Skies agreement has liberalised traffic between the European Union and the US, other areas of the globe are not covered by any such agreement.
"We must structure this is in a way that secures the existing traffic rights we both have," said Walsh, who believes the model adopted by AirFrance-KLM, which merged in 2004, could be a suitable template. The merged company operates through a trust company set up in such a way as to preserve the two airline's pre-existing rights.
- INDEPENDENT
