Bloomberg News

BA-Iberia Halt Takeover Plans as Euro Crisis Clips Travel

June 12, 2012

International Consolidated Airlines Group SA CEO Willie Walsh

International Consolidated Airlines Group SA Chief Executive Officer Willie Walsh said IAG is “highly unlikely” to bid for TAP. Photographer: Nelson Ching/Bloomberg

British Airways parent IAG has put one of the aviation industry’s most ambitious acquisition plans on hold as the European debt crisis hurts demand for travel.

Chief Executive Officer Willie Walsh, who identified 12 takeover candidates before IAG’s formation last year, said the attraction of mergers has faded and that consolidation is most likely to be achieved through the collapse of weaker carriers.

“We aren’t looking at any acquisitions,” Walsh said today in Beijing. “I don’t see that there’s anything likely to be available in the short term that would be of interest. What I think we’ll see in 2012 and 2013 is airline failures.”

IAG’s enthusiasm for buying Portugal’s state-owned TAP SGPS SA in particular has “significantly waned” because of the economic slump, Walsh said. The International Air Transport Association yesterday almost doubled its 2012 loss forecast for European carriers, citing recessions in countries including the U.K. and Spain and concerns that the debt crisis may widen.

IAG, as International Consolidated Airlines Group SA is known, traded 0.6 percent lower at 144.70 pence as of 11:41 a.m. in London, where the company is based. Shares of Europe’s third- biggest carrier, founded through a merger of British Airways and Spain’s Iberia, have slipped 1.9 percent so far this year.

‘Cold, Heartless’

“I’ve always said I believe in consolidation, and there are many forms,” Walsh told Bloomberg Television. “One is M&A. Another is development of joint businesses. And probably the chief form of consolidation is to see weak airlines disappear.”

While in the past governments have often intervened to shore up flagship carriers, European austerity programs are making that less common, with casualties this year including Spanair SA, which had been backed by the Catalonia regional government, and Hungarian national carrier Malev Zrt.

“If you look at Barcelona and Budapest that’s exactly as we’ve said it should happen,” Walsh said. “I think from an overall industry point of view the time has come for a proper cleanout. You can say that’s very cold and heartless, but we’re in business and the reality is that the weak fail.”

IAG, which had indicated on several occasions it might bid for TAP as Portugal seeks a sale, is now “highly unlikely” to compete for the Lisbon-based carrier, Walsh told reporters in the Chinese capital, where he attended IATA’s annual meeting.

Changing Picture

“Even if competitors in Europe express interest in it, it wouldn’t change my view,” he said. “We’ve got a different economic environment. Portugal is in a different environment.”

Europe’s airlines are likely to lose $1.1 billion in 2012, IATA reckons. Spain requested a 100 billion-euro ($125 billion) bailout for its banks this week, becoming the fourth nation in the region to seek support since the debt crisis began.

While TAP’S routes to Brazil might be especially attractive should Lan Airlines SA of Chile quit IAG’s Oneworld alliance after merging with Sao Paulo-based Tam SA, a member of the rival Star group, Walsh’s acquisition of U.K.-based BMI from Deutsche Lufthansa AG (LHA) means he now has the slots needed to add flights to growth markets direct from his company’s London Heathrow hub.

Portuguese politicians also expressed concern that TAP might be folded into Iberia and its Lisbon base downgraded under IAG ownership, with CEO Fernando Pinto cautioning in April that there would be alternative bidders. That disquiet and government “delays” with the sale also colored IAG’s view, Walsh said.

‘Cool Reception’

“It was disappointing that the public expression of interest from IAG was met with a pretty cool reception,” he said. “We’re not interested in doing anything hostile. We were genuinely interested because of the attractive nature of TAP’s network, but the world has moved on and we’ve moved on as well.”

IAG may separately exercise options to buy more Boeing Co. (BA:US) 777-300ER long-haul planes, Walsh said, without suggesting a number. BA operates six of the jets, according to its website.

“It’s been a great success in our fleet, so we are very encouraged by that,” the executive added.

Walsh also said he’s not concerned about cooperation talks between Qantas Airways Ltd. (QAN) and Dubai-based Emirates. BA and Qantas have worked together on Australia-Europe flights since 1995, and a planned merger collapsed in 2008 after the pair failed to agree on who would control the enlarged business.

Qantas tying up with Emirates would make “commercial sense” and would be the strategy that Walsh would pursue if he ran the Australian carrier, he said. The CEO added that IAG wouldn’t buy into Qantas and that he doesn’t think the Sydney- based airline will seek an equity investment.

Emirates is a major competitor to IAG, Lufthansa and Air France-KLM (AF) Group on routes from Europe and North America to Asia as it seeks to lure passengers to travel via the Gulf.

On AMR Corp. (AAMRQ:US), parent of IAG’s trans-Atlantic partner American Airlines, Walsh said CEO Tom Horton is right to focus on reorganizing the carrier and exiting bankruptcy rather than looking at potential mergers. US Airways Group Inc. has won support from American unions for a combination.

“First you need to try and fix the problem,” Walsh said. “Then you say, ‘is there a better option?’”

--Stephen Engle, Andrea Rothman and Jasmine Wang in Beijing. Editors: Chris Jasper, Neil Denslow, Vipin V. Nair.

To contact Bloomberg News staff for this story: Andrea Rothman in Paris at aerothman@bloomberg.net; Jasmine Wang in Hong Kong at jwang513@bloomberg.net

To contact the editors responsible for this story: Neil Denslow at ndenslow@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net


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