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British Airways and Iberia create airline group

April 8, 2010, London, Eng. - British Airways PLC and Iberia SA signed a long-awaited merger deal on Thursday, the latest bid by cash-strapped airlines to stay airborne in an industry broken by the global financial crisis and wracked by industrial unrest.


April 8, 2010
By The Associated Press

The deal to create Europe's third largest airline intensifies survival consolidation in the sector, coming as two major U.S. players — United Airlines and US Airways — are also locked in talks about a combination.

"The problem is that there's too many airlines,'' said Stephen Furlong, an analyst at Davy Stockbrokers in Dublin. "To be a major player in global aviation going forward, you are going to have to have size and scope and a network.''

BA and Iberia have structured their deal, which will create a new holding company majority-owned by BA shareholders, to leave room to capitalize on further tie-ups.

In a move that worries rival airlines and concerns consumer groups, they are hoping to extend their arranged deal to the United States by deepening their existing alliance with fellow Oneworld member American Airlines.

Future attempts to add carriers elsewhere in Europe and in Asia will surprise few industry watchers.

The two loss-making airlines are among many struggling to survive after a fall in demand from both business and leisure travellers in the wake of the global credit squeeze. Those who are still travelling have increasingly turned to the cheaper fares of no-frills carriers.

That has led many of the full service airlines to cut expensive services, leading them to more closely resemble their low-cost rivals. BA has already scrapped onboard meals on short-haul flights while some U.S. carriers have begun charging for drinks on long-haul flights.

Further attempts to cut costs by lightening staff pay packets and axing thousands of jobs have resulted in damaging strike action across Europe. BA's own acrimonious battle over pay and conditions with its 13,000 cabin crew cost it up to 45 million pounds when staff walked out for a total of 10 days last month. They have threatened further action if the dispute is not resolved.

BA and Iberia have been trying to hammer out an agreement that would form a carrier with a market value of around 7.5 billion pounds since 2008, seeking greater economies of scale. They are already lagging behind in Europe, following Air France's tie-up with KLM. That deal placed the combined Air France-KLM second behind Germany's Lufthansa as the largest European airline by revenue.

Iberia boss Antonio Vazquez, who will be chairman while BA head Willie Walsh takes the CEO role of the new holding company, to be known as the International Airlines Group, said the combined firm would "be better equipped to compete with other major airlines and participate in future industry consolidation.''

BA and Iberia plan to complete the deal, under which they will retain their individual brand names, by the end of the year. They anticipate cost savings of some C400 million ($530 million) a year by the fifth year.

But the proposed merger has been harshly criticized by rival carriers. Low-fare airline Ryanair Holdings PLC likened it to "two drunks trying to prop each other up,'' while Virgin Atlantic Airways said the deal would increase BA's dominance at Heathrow Airport.

Consumer groups have also been skeptical, suggesting that fares will rise as a result.

"At the moment, it's hard to see how this merger will benefit travellers, at least in the short term,'' said Bob Atkinson of travel Web site travelsupermarket.com. "Any cost savings will only be felt by passengers if the business integrate quickly.''

Yet both face obstacles to quick integration, Atkinson noted, pointing to BA's dispute with cabin crew.

The deal is subject to approval by the European Commission, but Furlong said he didn't expect any obstacles given the two airlines don't currently have much overlap.

British Airways shareholders will receive one new ordinary share in International Airlines Group for every existing British Airways ordinary share held and Iberia shareholders will receive 1.0205 new ordinary shares for every existing Iberia ordinary share held.

Stock market listings will be sought in London and Madrid, with the headquarters in London and major bases in both cities.

The pair's move to take advantage of the "Open Skies'' agreement that liberalized trans-Atlantic aviation by deepening the American Airlines alliance is of more concern to regulators.

The three airlines currently co-ordinate how they sell and operate flights between the 27-nation EU and the United States. They now want to expand their oneworld alliance to jointly manage schedules, capacity and pricing on flights from Canada, Mexico, Puerto Rico, Norway and Switzerland as well.

The trio have offered to give away takeoff and landing slots at London and New York airports to soothe antitrust worries.