BA plays catch-up with merger

London - It still refers to itself as "the world's favourite airline" but there is little grandeur about British Airways these days as the once-proud, now-struggling airline pursues a merger with Iberia.

The tie-up is an effort to catch up with the likes of Air France and Lufthansa, which have led a wave of consolidation in the global airline industry brought on by the economic crisis and the rise of low-cost carriers.

But the terms of the deal may say more about the state of British Airways.

"Though BA may have claimed to be global... it was far short of being the all things to all men airline that the glossy marketing sometimes claimed it to be," said Howard Wheeldon, senior strategist at stockbroker BCG Partners.

British Airways is far bigger than Iberia but would only be getting 55% of the combined company, while Iberia has the right to walk away from the deal if BA does not resolve its huge pension fund deficit problem.

Iberia's "industrial relations problems and its own share of the torrid effect of global recession are far less severe than those suffered by the much larger BA. Thus the risk in Iberia is lower," Wheeldon said.

Investment firm Killik & Co said the deal was "not a foregone conclusion."

BA's pension deficit of £2.6bn "is still a controversial point and Iberia maintains a 'get-out' clause if it is not happy with the triennial review" of the retirement fund.

Along with the financial losses and the thousands of job cuts, it is all a far cry form the heady 1990s when British Airways became very profitable after its privatisation while many other large airlines were in financial trouble.

British Airways earlier this month posted a net loss of £217m during the six months to September 30 compared with a loss of £49m during the equivalent period in 2008.

Iberia on Friday meanwhile reported third-quarter losses of €16.4m - a sharp turnaround from last year's profits.

Wheeldon said the all-share merger's "real underlying potential is revenue enhancement and the eventual ability for BA and Iberia to play on a more level competitive playing field with Air France/KLM and Lufthansa."

The merger would make BA-Iberia the third biggest airline in Europe by capitalisation after Air France and Lufthansa, while a deal to cooperate on flights with American Airlines is being questioned question from EU regulators.

The proposed tie-up would also give British Airways a greater global role through access to Iberia's Latin America network, as more established airlines give ground to budget carriers on short-haul routes.

"Presumably, the process continues which should see further capacity cuts at both airlines on their short haul offering," said Dermot O'Leary, chief economist at Goodbody Stockbrokers in Dublin.

"This must be manna from heaven for the likes of Ryanair and EasyJet," the two biggest low-cost airlines in Europe which have undermined the likes of BA by grabbing ever greater market share on European routes, he added.

Ryanair itself crowed over the tie-up on Friday, saying: "This merger is the latest in a long line of European high fares airlines merging because they can't compete with Ryanair's lowest fares and no fuel surcharge flights."

Referring to the financial troubles at British Airways and Iberia as well as the increased competition from low-cost carriers, Ryanair spokesperson Stephen McNamara said the merger was "like two drunks trying to prop each other up."

- AFP