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British Airways and Iberia merger completed; plan to add more airlines to group

26th January, 2011

The multi-billion-euro merger between British Airways and Iberia was completed on 24-Jan-2011 upon the listing of the shares in the International Airlines Group (IAG). The merger creates Europe’s third largest airline after Lufthansa and the world’s sixth largest carrier after Delta Air Lines, Lufthansa, United Continental, Air France-KLM and AMR.

Now that this merger milestone, which has been a two-and-a-half years in the market, has been reached, IAG plans to continue targeting acquisition to expand the scope of the carrier. IAG CEO Willie Walsh commented: “Our goal is for more airlines – but, importantly, the right airlines – to join the group. Today is the first step towards creating a multinational multi-brand airline group.”

He added: “IAG has a great future ahead of it. The first two airlines in the group, British Airways and Iberia, will retain their strong brands and have complementary networks that operate from two of the biggest hubs in Europe. The merger will lead to annual synergies of EUR400 million from year five and benefit IAG shareholders and British Airways’ and Iberia’s customers and staff. British Airways and Iberia are the first two airlines in IAG but they won’t be the last.”

IAG and Iberia Chairman Antonio Vázquez similarly noted: “Today a major new player in international aviation has been born and British Airways and Iberia have achieved their ambition of playing a full role in industry consolidation. Together, Iberia and British Airways fly to over 200 destinations on more than 400 aircraft. They have joint revenues of more than EUR14 billion and last year carried 55 million passengers. ”

International Airlines Group: key information

   

Size of combined entity

The new airline group is Europe's third-largest and the sixth-largest in the world by revenues (more than EUR14,000 million), with a fleet of 406 aircraft and 55 million passengers in 2010. The merger will create a combined network of 204 destinations. Joining with Iberia allowed British Airways to overtake Air France-KLM’s market value of USD5.4 billion and narrow the gap to Lufthansa AG, which is worth the equivalent of USD9.7 billion.

Synergies

The airlines expect annual synergies worth around EUR400 million starting the fifth year following the merger. Some 60% of these synergies will arise from cost savings, and 40% from larger revenues.

Network

For Iberia, the combination means more facilities for travel to Asia, where British Airways is well established, while British Airways customers will have more options for travel to Latin America, where Iberia is market leader operating from Madrid to 19 destinations. The carriers will also coordinate their services

Fares/FFP

It will be possible to combine fares of the two airlines. Passengers will also have access to more than 120 VIP lounges in airports while frequent flyers will also gain from the coordination between Iberia Plus and BA's Executive Club organisations. Benefits will be increased, though the two will remain separate

Headquarters

IAG is registered as a Spanish company with tax domicile in Madrid, where its board of directors and general shareholders meetings will be held. Its financial and operational headquarters will be in London. The IAG board, which has already been constituted, is made up of 14 members, seven from each airline. Three from each company will serve on the six-member group management team

Ownership

British Airways will hold 55% of IAG, while Iberia will own the remaining 45%. BA and Iberia will each retain their current operations and individual brands.

Shares

Shares in the new International Airlines Group (IAG) parent are listed for trading on the stock exchanges of London, Madrid, Barcelona, Bilbao and Valencia. The carrier made its stock market debut on 24-Jan-2011 at a valuation of GBP6.1 billion. The carrier’s opened at GBP288.10 on the Lodon FTSE 100 before closing the day at GBP285 pence, down 1.1%. In Madrid, the stock declined 1.22% to EUR3.31. Top investors in the company include Spanish savings bank Caja de Ahorros y Monte de Piedad de Madrid and investment and pension funds such as BlackRock, Standard Life, Janus Capital and Lloyds Bank’s Scottish Widows

History

Shareholders of BA and Iberia voted in Nov-2010 to approve the merger which values the pair at a combined EUR7.1 billion. British Airways and Iberia first started talks about an all-share merger in Jul-2008 and have had to overcome concerns about the size of the UK carrier’s pension deficit and disagreements about how the stock would be split between both sets of shareholders. The carrier continues to face industrial unrest following the merger with British Airways staff voting to strike again in a long-running battle over proposed job and pay reductions.

     

British Airways and Iberia to form 'multinational, multi-brand' group

The merger, which has coincided with the global economic downturn and the rise of LCCs in Europe, is part of efforts by the two carriers to increase their dominance, with the carrier seeing its future as a “multinational, multibrands airline group”. The carrier’s intention to be involved in further acquisition activity is part of the reasons the holding company’s name is deliberately vague.

Last year, Mr Walsh in Sep-2010 stated the carrier had drawn up a shortlist of 12 international carriers identified as attractive investment or acquisition targets (down from a list of 40), adding that Asia, Latin America and Europe offer the clearest opportunities.

At this time, Mr Walsh commented: "With Iberia, we have had a number of meetings where we have looked at airlines around the world and identified those that would be attractive to us in joining IAG. We are creating IAG in a way to ensure that it is scaleable and attractive to other airlines that might want to join us. This is just to give us a focus. We have not had any discussions with any airlines. There is nothing going on at the moment, we would not pursue all 12.” 

He subsequently noted that the revelation provoked huge interest from industry leaders, stating: “I’ve had an incredible number of telephone calls from airline CEO’s asking if they are on the list. The pace of consolidation is going to accelerate."

In Europe, British Airways stated it was keen to bid on bmi should Lufthansa choose to sell the carrier, which is the second-largest holder of London Heathrow slots, while another Lufthansa unit, JetBlue Airways, is also an attractive candidate.

Finnair, TAP Portugal, SAS, Air Berlin, Kingfisher Airlines and easyJet have also been speculated as being on the list.  The carrier, however has abandoned merger talks with Qantas Airways with Qantas CEO Alan Joyce reaffirming the group has no plans to pursue a tie-up with BA. 

Meanwhile, Gulf Air CEO, Samer Majali, denied reports that the carrier is one of the 12 airlines being approached by British Airways for a possible merger, stating: "Gulf Air have not been approached regarding this initiative”. He however stated that it is “something the company would consider positively at the appropriate time".  Gulf Air is looking to join an alliance that would give it access to an enlarged global network.

Separately, Aer Lingus Group CEO, Christoph Mueller, has also sated it would step-up alliance talks with British Airways, with Aer Lingus also holding talks with Star Alliance and SkyTeam Alliance carriers to decide which alliance to join in 2011. The carrier has also reportedly held informal talks with a number of competitors to purchase the Irish Government’s 25% stake in the airline with the carrier also noted as a potential acquisition candidates for AIG. British Airways has also been noted as a potential interested party for the acquisition of a minority stake in LOT Polish Airlines in 2011.

IAG expects to be at fore as worldwide consolidation takes hold

In the creation of IAG, British Airways and Iberia plan to be at the forefront of global aviation consolidation activity, which is expected to increase due to rising oil prices according to Mr Walsh. “2011 will be a year of significant consolidation. It may accelerate a little as a result of the current high oil prices. 2010 was a busy year for mergers but 2011 will be busier. Our industry needs to consolidate. It is part of the solution to its structural financial problems, although it is not the only answer,” he said.

Similarly, IATA has noted the need for consolidation and the same commercial freedoms for aviation as other industries, stating: “If airlines get the opportunity to merge across borders, evidence from other industries suggests they almost certainly will. With the merger and acquisition (M&A) deals worldwide estimated in the trillions of dollars, it seems most companies see something of value in the model.”

IATA continued: “Airlines have never returned the cost of capital. Many cite consolidation as part of the solution. But this has never been viable internationally in a hyper-fragmented market governed by antiquated regulations. A global industry needs global rules.”

In his Vision 2050 speech, IATA Director General and CEO Giovanni Bisignani commented that aviation will eventually “be a consolidated industry of a dozen global brands supported by regional and niche players”.

He separately noted that “consolidation is beginning to re-shape the industry”. He continued: “Look at all that has happened in the last couple of years.  Air France and KLM; Lufthansa with Swiss, bmi, Austrian and Brussels Airlines; Continental and United; Northwest and Delta; Air India and Indian Airlines; TAM and LAN; Japan Airlines with Japan Air System; Cathay Pacific with Dragonair; and Iberia and British Airways. Some consolidations have been more successful than others.  Usually there is a direct relation between success and the freedom that the airlines have to make significant changes.  But the message is clear.  Airlines are eager for change.  And at some point, consolidation and relaxed ownership rules must give way to a normal industry.  That industry will have the commercial freedoms to take advantage of the global village that it made possible.”

IATA ‘Consolidation case studies’

Similarly, US Airways CEO Doug Parker has noted that “consolidation is good for this industry” adding: “It’s something that needs to happen, will happen, and will result in a much stronger industry.” Mr Parker added that a fragmented industry means higher costs, making profits hard to come by and putting jobs at risk.

Meanwhile, Air Seychelles CEO David Savy noted that “the lines are being drawn”.

“There will be some mega-carriers in Europe such as British Airways-Iberia, Air France-KLM, and Lufthansa. Partnerships will be formed in the Gulf and Asia will follow. The United States is already in this process. Other carriers will disappear or become smaller niche players,” he said. “Consolidation helps drive unit costs down and gives the customer a more seamless product and experience. If it pleases the end user, then it will work. So far consolidation has been airline to airline but one could envisage other related businesses, such as airports, joining the foray.”

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