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British Airways Seeks a Bride to Regain Altitude


After taking on its unions, the airline needs a global partner to grow

British Airways Chief Executive Officer Willie Walsh, the tough 48-year-old Irishman known for his uncompromising stance in BA's first cabin crew strike in 13 years, has spent more than a year battling his restive flight attendants in an attempt to trim costs. That would make BA a more attractive partner in the coming round of global airline mergers Walsh believes is both necessary and inevitable. Yet the two carriers Walsh wants most to wed, AMR's (AMR) American Airlines and Qantas Airways of Australia, now seem out of reach. That's pushing him to consider a series of smaller acquisitions to piece together the global network he so desires.

In July, European regulators approved Walsh's $7 billion takeover of Spain's Iberia. He's formed a task force at BA to identify intercontinental merger targets. "We want to make sure we're capable of pursuing further consolidation immediately," Walsh says. Earlier this summer, BA and American won antitrust approval for a joint venture that would allow them to coordinate fares and schedules and share revenue on their transatlantic flights. That's far short of the benefits the pair would realize in a full merger, currently barred by the 25 percent cap placed on foreign ownership of a U.S. airline. Walsh says he'd "like to go further" with American, but he doesn't see the ownership cap changing within five years.

He says BA is also unlikely to revisit a deal with Qantas, with which it held talks in 2008, since CEO Alan Joyce is less merger-minded than predecessor Geoff Dixon, who conducted merger discussions with the U.K. airline before retiring in November 2008. Under Joyce, Walsh says, the Australian carrier is focused on growth in Asia through its low-cost Jetstar Airways unit rather than the kind of globe-spanning expansion Walsh covets.

With his preferred partners off the table, Walsh says he'll seek other merger partners among fellow members of the Oneworld alliance, a consortium of airlines that combines their route networks, marketing efforts, and frequent-flier programs to offer greater choice of destinations and frequency to their customers. Oneworld has 11 member airlines, including BA, Cathay Pacific Airways, Finnair, and Lan Airlines (LFL) of Chile, as well as American and Qantas.

Chris Tarry, an independent airline analyst, says Walsh's biggest problem may lie in convincing allies of the merits of a merger with a carrier rooted in the mature markets of Europe and the U.S. "I can't see who is going to come to the party," Tarry says. "Why would an Asian airline give up some of its growth in a faster-expanding market? They would want to merge with somebody in their own region with better prospects."

Walsh says British Airways would be interested in bidding on two Lufthansa affiliates if they come up for sale: bmi, the U.K. carrier that's the second-biggest holder of takeoff and landing slots at London's busy Heathrow Airport after BA, and New York-based JetBlue (JBLU), 16 percent owned by Lufthansa. The German carrier declined comment.

For now, Walsh is busy identifying possible savings from the BA-Iberia marriage. He said he'll seek about €400 million ($508 million) in annual benefits, one-third from revenue gains and the rest from savings, such as combining computer systems and joint purchasing of new aircraft and spare parts.

Still, the merger hasn't won universal acclaim within the industry, and Maurice Flanagan, executive vice-chairman of Dubai-based Emirates, the largest airline by international traffic, says it will be tough to achieve the targeted economies of scale. "The route structures complement each other, with British Airways flying to places that Iberia doesn't and vice versa," Flanagan says, "but complexity is the bugbear of our business, and this merger looks rather too complex."

The bottom line: Walsh has fought to reduce employee costs. He may have waited too long to win a global merger partner.

Jasper is a reporter for Bloomberg News. Rothwell is a reporter for Bloomberg News.

Steve Ballmer, Power Forward
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