Labor could be biggest obstacle to BA-Iberia deal

By Michael Fabey

It took years for British Airways and Iberia to come to mutually acceptable merger terms. Now comes the hard part: getting their governments and employees to go along with the deal.

The merger could also complicate the airlines’ bid for antitrust immunity on transatlantic service with Oneworld partner American Airlines. Most analysts predict that BA will have to give up takeoff and landing slots or routes to get the approval of European regulators for an immunized alliance with American.

It won’t be any easier for a merged BA-Iberia.

BA-777The European Commission said it was worried about antitrust issues in the Oneworld partners’ request even before the BA-Iberia merger was announced last month.

"There’s likely to be some carve-outs," said consultant Vaughn Cordle of consultancy AirlineForecasts.

In the end, though, most analysts agree the sticking point likely won’t be antitrust immunity concerns or other government approvals.

Labor concerns, especially those regarding BA’s pension burden, will likely be the biggest stumbling block.

Analysts estimate the funding gap for that pension fund to be about $5 billion, and it is such a big concern for Iberia that it negotiated a pullout clause in the merger deal should the shortfall wind up being much more than that.

BA trustees reviewed the pension plan earlier this year, but those results have not been made public. BA hopes to agree to a pension figure with trustees during the first quarter of 2010.

Britain’s Unite union says it will oppose the merger unless the airlines commit to avoid cutting significant numbers of jobs as they combine the companies.

BA recently posted dismal first-half results, reporting a $360 million net loss in the six months ended Sept. 30. Revenue for period fell by about 13.7%, to about $6.8 billion. The airline had reported a profit of $86.3 million for the same period a year ago.

Iberia reported a $133 million loss for the six months ended Sept. 30, reversing a $77 million profit for the same period in 2008.

Together, though, the airlines said they should be able to generate about $594.6 million in profit by the end of the fifth year of the merger, with one-third of the money coming from revenue-related benefits such as joint selling and network and revenue management.

Iberia A320The balance will come from cost savings in areas such as IT, fleet, maintenance and back-office functions, the airlines said.

But for the first five years, there won’t be any consolidation, as the carriers plan to maintain their separate brands and major hubs for at least that long.

The airlines plan to form a new holding company, TopCo, with joint revenue of about $22.3 billion and 419 aircraft.

TopCo will be incorporated in Spain with operating and financial headquarters in London. The TopCo board will have seven members from each airline.

Iberia Chairman Antonio Vazquez will be group chairman, and BA Chairman Martin Broughton will be deputy group chairman. BA CEO Willie Walsh will be group CEO.

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