BA and Iberia to Merge, at Last

The British and Spanish airlines will tie the knot after a multiyear courtship. But the deal could set back plans for a hookup with American

A British Airways plane taxis past an Iberia plane at Heathrow Airport west of London, on Nov. 13, 2009. CARL DE SOUZA/AFP/Getty Images

By Mark Scott

After more than a year of negotiations, British Airways (BAY.L) and Iberia (IBLA.F), two of Europe's largest airlines, are finally joining forces. Late on Nov. 12 the carriers agreed to a $7 billion merger that will create the world's third-largest airline by revenues and No. 7 by passenger traffic. Regulators must still green-light the deal, which is expected to be completed before the end of 2010.

For the two struggling carriers, the proposed marriage is a high-stakes effort to ensure the viability of their businesses. The global economic downturn has whacked passenger levels—especially for higher-margin business travel—while rising competition for inter-European flights from low-cost carriers such as EasyJet (EZJ.L) and Ryanair (RYA.L) has eroded revenues and profits at both airlines. At the same time, other European flag carriers, particularly AirFrance-KLM (AIRF.PA) and Lufthansa (LHAG.DE), are siphoning off market share for long-haul routes to North America and Asia.

Faced with these challenges, BA and Iberia have a stark choice: merge or continue to lose market share and money. The deal will combine British Airways' strength in transatlantic and Asian routes with Iberia's dominance in European flights to Latin America (and a growing presence across North Africa). Annual cost savings from the merger should amount to about $600 million five years after the deal goes into effect, the companies say.

"Iberia can't grow on its own, and British Airways is being left behind by Air France and Lufthansa," says a London-based analyst who declined to be named. "This is a make-or-break deal for both of them."

Awaiting Approval

There are plenty of potential problems that could scupper the merger, though. First and most important, it needs to be approved by the European Commission, which is also currently looking at a plan floated by BA, Iberia, and American Airlines (AMR) to collaborate more closely over schedules, fares, and operations. (The three airlines are already in the same marketing alliance, OneWorld.)

The proposed three-way tie-up would be similar to deals already approved between AirFrance-KLM and Delta (DAL) and between Lufthansa and United (UAUA). But in October the European Commission raised concerns over whether a partnership involving American, BA, and Iberia could limit competition. (Authorities have previously shot down two attempted partnerships between BA and American in the past.) Analysts now think the merger of BA and Iberia could worsen the likelihood of an American deal being approved. "The BA-Iberia merger could work against them if regulators think it will limit competition," says an equity analyst who asked not to be identified.

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