BA and Iberia Plan to Merge

Posted by: Kerry Capell on July 29

It’s a marriage long expected within European aviation circles but never consummated. Now it seems British Airways and Spain’s Iberia, long-term partners in the Oneworld alliance, are finally ready to take the plunge.

On July 29, the two European airlines announced they were in discussions with the aim of securing an all-share merger. Signficantly, the proposed deal has the unanimous support of both carriers’ boards and is likely to meet with the approval of European Union regulators, too.

If the deal goes ahead as analysts and the airlines expect, the new airline would become one of Europe’s and the world’s largest. Together, it would carry more than 65 million passengers a year and have a combined market value of nearly $8 billion.

More importantly, it will have a sizeable presence on both North and South American routes. Iberia has an extensive network in Latin America while BA is dominant at Heathrow. The deal would be “good news for customers and enhance our existing relationship,” Iberia’s Chairman and CEO Fernando Conte said in a statement.

It’s a relationship that has spanned nearly a decade. In 1999, BA aquired a 9% stake in its Spanish rival, recently upping that position to 13.15%. Today, Iberia announced it had acquired a 2.99% stake in BA, rising by a further 6.99% through a “contracts for difference” agreement—effectively an option on buying more shares.

Almost exactly a year ago, BA CEO Willie Walsh claimed he wasn’t interested in a full scale takeover and preferred to maintain a minority stake in Iberia. So what happened to change his mind? The soaring cost of fuel. Walsh admits that airline consolidation is long overdue. “The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment,” he said on July 29.

According to the statment issued by the two airlines, BA and Iberia would retain their brands as part of a combined group (similar to what Air France and KLM did) and would be owned by a holding company, listed in London and Madrid, with a unified management structure. Agreeing on merger terms could take months, the statement said, and no details were given on who would be calling the shots.

The big question now is whether this will trigger further consolidation on both sides of the Atlantic.