Image: British Airways-Iberia merger
Bernat Armangue  /  AP
British Airways PLC and Spanish airline Iberia SA announced late Thursday a preliminary deal for a long-awaited merger.
updated 11/13/2009 12:12:40 PM ET 2009-11-13T17:12:40

British Airways PLC and Spain's Iberia SA talked up the benefits of a proposed $7 billion merger on Friday, dismissing criticisms that the deal could increase fares, reduce competition and drag down service standards at Britain's flagship carrier.

The agreement ends more than a year of talks between BA and Iberia aimed at finding a way for the two loss-making carriers to share resources amid slumping demand for air travel.

But while they argued that combining BA's North American routes with Iberia's Latin America services would be good for shareholders and travelers alike, there were questions about BA's growing dominance given its also waiting for the green light on a tie-up with American Airlines.

Unions also warned that they were not prepared to back the merger, which the airlines aim to close by late 2010, without commitments to avoid layoffs.

Under the preliminary deal signed off by the BA and Iberia boards late Thursday, the two carriers will continue as separate brands and operating divisions under a holding company registered in Madrid but with its main offices and primary stock exchange listing in London.

BA will take the majority 55 percent stake in the holding company, TopCo — Walsh suggested the unimaginative name would likely be changed over the coming year — with Iberia holding the remaining 45 percent.

"This is good news for BA, our customers and our shareholders," said BA Chief Executive Willie Walsh, who will take the same position at the combined company. "We recognize we have strong brands and these will be retained."

Walsh also dismissed suggestions that fares would increase on some routes, like the London to Madrid service both airlines already operate, as "total nonsense."

The combined company would consolidate BA's rank as Europe's third-largest airline behind Germany's Lufthansa and Air-France KLM with anticipated annual revenues euro15 billion ($22.5 billion) and result in expected cost savings of around euro400 million a year.

Analysts expect the two airlines to lose more than that figure combined this year as high fuel costs and sliding demand eat away at revenues.

Vazquez, who will become chairman of the TopCo, said the merger's expected synergies should help both carriers return to profitability.

"This project represents a very significant potential benefit for the stakeholders of both companies," he said during a conference call after Iberia's third quarter results in Madrid.

Collins Stewart analyst Andrew Fitchie said that the revenue environment appeared to be stabilizing and both management teams had solid plans to cut costs.

Iberia plans to freeze hiring through 2012, hold salaries steady in 2010 and 2011 and offer early retirement for flight attendants over 55. BA's plans, meanwhile, for sweeping job cuts and pay curbs have raised the threat of strike action by its 14,000 cabin crew. The British carrier has already slashed 2,500 positions between June 2008 and March 2009 and plans to cut another 1,700, freeze pay for current staff and offer lower wages for new hires.

"To turbo-charge a return to economic returns we have long held that BA and Iberia both need this merger and need the antitrust immunity with American Airlines," said Fitchie.

BA and Iberia are still waiting on U.S. and European regulatory approval for that proposed revenue-sharing deal with AMR Corp.'s American that would see the trio set prices together and share seat capacity on lucrative trans-Atlantic flights.

Trans-Atlantic rival Virgin Atlantic Airways has bitterly opposed that alliance, with boss Richard Branson arguing that it would lead to price-fixing and force travel agents to send business to the pair.

But the deal, which is subject to shareholder and regulatory approval, could yet be scuppered by BA's massive pension deficit. Iberia has the right to pull out if BA doesn't reduce the anticipated 3 billion pound black hole.

The Unite union, Britain's biggest union in aviation said it had written to Walsh calling for an urgent meeting.

"We need assurances from the outset from BA and Iberia that compulsory redundancies will be avoided and that the new airline will be the best in the business in terms of passenger service," said Unite spokesman Steve Turner.

Virgin Atlantic Airways Ltd., which has already expressed opposition to the American Airlines deal, said the merger would increase BA's dominance at Heathrow with 44 percent of take-off and landing slots this winter.

"It is impossible for any other airline to replicate their scale," Virgin Atlantic said. "Regulators in Europe and the US need to be alert to BA's growing dominance through proposals such as its monster monopoly with American Airlines — proposals which will not be in the consumer interest."

European budget airline Ryanair Holdings PLC was more dismissive.

"I would characterize it as two drunks ... holding each other up on the way home," Ryanair CEO Michael O'Leary told CNBC. "All you get when you put two high-fare, loss-making airlines together is even higher fares and even bigger losses."

After big surges in both companies shares on Thursday in anticipation of a deal, BA shares closed 0.5 percent higher at 216 pence in London, while Iberia's stock dropped 3.6 percent to euro2.14 in Madrid.

There has only been one other merger of this kind — the tie-up between Air France and KLM. BA also held talks with Australian airline Qantas Airways Ltd. last year about a potential merger, but the discussions ended in December after the pair failed to agree.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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