BA and Iberia to Merge, at Last

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The British and Spanish airlines also will have to reconcile two starkly different corporate cultures, especially a large salary gap between BA and Iberia employees. British Airways' pension liabilities, now $4.4 billion—roughly equivalent to the company's total market value—could become too costly to manage. And ongoing labor disputes, including potential strikes by both BA and Iberia employees before the end of year, may unhinge efforts at both airlines to weather the current economic storm.

Time Will Tell

The merger schedule allows plenty of time to sort out some of these issues. As the plan stands, BA Chief Executive Willie Walsh will lead a new holding company overseeing both British Airways' and Iberia's separate businesses. BA shareholders will own 55% of the new entity, with Iberia's investors holding the rest. A finalized merger agreement is expected during the first quarter of next year, with shareholders set to vote on the deal before the end of 2010.

"Everything rests on whether they can achieve costs savings," says Peter Morris, chief economist at aviation consultancy Ascend in London. "The whole aviation industry is declining, so it will be difficult to shrink their businesses back into profitability."

Investors weren't impressed by the meager cost savings outlined in the deal, which are projected in 2015 to amount to just 2.7% of the airlines' combined revenues last year. "For a merger of this scale, the cost savings proposed are conservative to say the least," said Chris Mills, a partner at London-based management consultancy PIPC in a statement released after the announcement. In afternoon European trading on Nov. 13, Iberia shares were down 4% and BA's stock was down less than 1%.

But while analysts question the potential synergies, BA and Iberia may have had little choice but to combine forces. The British giant, which once ranked as the world's largest airline, fell from record profit to its biggest-ever loss in its last fiscal year ended Mar. 31, and it reported on Nov. 6 that it lost an additional $185 million in the six months ended Sept. 30. Iberia followed suit on Nov. 13 with a $133 million loss for the six months ended Sept. 30, vs. a $77 million profit for the same period in 2008. Both carriers blamed the global downturn in airline traffic and tough competition for the losses.

While waiting for the deal to go through, BA and Iberia will have to focus on turning around their declining market share in short- and long-haul flights. Says Ascend's Morris: "Both carriers were perilously poised when the downturn hit. Since then, things haven't got much better."

Scott is a correspondent in BusinessWeek's London bureau.

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