British Airways, Iberia in talks over tie-up

Image: Spanish carrier Iberia's planes on the tarmac in Madrid Barajas airport
Planes of Spanish airline Iberia are parked on the tarmac of Madrid’s Barajas airport in May.© Sergio Perez / Reuters / REUTERS
/ Source: The Associated Press

British Airways PLC and Spain’s Iberia SA said Tuesday they are in talks about combining, signaling a potential deal that could also form the basis of a three-way trans-Atlantic combination.

BA and Iberia, which are long-term partners in the oneworld alliance, said agreeing on terms of a planned all-stock deal could take several months but that it has full approval of both boards.

The pair said combining forces was the best way to deal with anticipated slowing earnings amid higher fuel costs and the deepening economic downturn.

“The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment,” said BA Chief Executive Willie Walsh.

BA and Iberia have also been in discussions for several months with American Airlines to potentially form a trans-Atlantic joint venture, and Walsh said the two airlines saw the tie-up as a positive move within those ongoing three-way talks with American.

“I have spoken with Gerard Arpey — chairman and chief executive of American and parent AMR Corp. — and he has welcomed the move and thought it was positive,” Walsh said in Madrid.

Media reports earlier this month had suggested that BA, Iberia, and AMR Corp.’s American, the world’s largest carrier, were close to applying for U.S. antitrust immunity to form a trans-Atlantic joint venture.

BA and American have failed in the past to win an exemption from U.S. antitrust laws to work more closely together because of their dominance at London’s Heathrow Airport, where the pair have more than half the capacity to and from the U.S.

Word of the BA-Iberia talks could spur consolidation in the European airline industry following already feverish activity in the U.S., where airlines have moved to combine or form new alliances since Delta Air Lines Inc. and Northwest Airlines Corp. announced plans to merge earlier this year.

“We don’t see this as the endgame; we see it as the start of a new era,” Walsh said.

Under the proposed deal, BA and Iberia would retain their own branding.

Walsh said the combination would create the world’s third-largest airline in terms of income, valued at more than 16.5 billion euros ($25.9 billion), with the fifth-largest fleet of nearly 450 aircraft.

Iberia Chairman Fernando Conte said that a deal would strengthen the pair’s existing cooperation under the oneworld alliance “and further develop Madrid’s position as the European gateway to Latin America.”

The two carriers, which have been part of that alliance for more than a decade, said they were confident of securing regulatory approval, noting the European Union has already granted the two carriers approval to cooperate widely.

BA has increased its stake in Iberia, from 9 percent in 1999 to about 13.2 percent currently.

Iberia revealed Tuesday that it recently acquired a 2.99 percent direct stake in BA and financial exposure to a further 6.99 percent through “contracts for difference” linked to BA’s share price.

A contract for difference is an agreement to exchange the difference in a share’s value between the time a contract is opened and the time it is closed. Holders of CFDs are financially exposed to the share price but do not own the shares and therefore have no voting rights.

The pair said that the corresponding shareholdings “reflect the mutual interest of both companies in each other.”

A deal would have to win approval from Iberia’s 23 percent shareholder Caja Madrid. The Spanish savings bank last year successfully disrupted an approach for Iberia from BA and U.S. private equity firm TPG Inc. by increasing its stake in the carrier.

Shares in BA surged 8 percent to 253.5 pence ($5.04) on the London Stock Exchange after the announcement. Trading in Iberia was halted on the Madrid Stock Exchange, with the stock up 4.3 percent at 1.71 euros. Trading later reopened and Iberia ended the day up 20.73 percent at 1.98 euros.

The carriers said a new holding company would be a member of the London Stock Exchange FTSE100 and would also be quoted on the Madrid Stock Exchange.