British Airways to Merge With Iberia as Fuel Rises

British Airways to Merge With Iberia as Fuel Rises

July 29 (Bloomberg) -- British Airways Plc, Europe's third- biggest carrier, plans to merge with Spain's Iberia Lineas Aereas de Espana SA to reduce expenses as slower economies and higher fuel costs wipe out earnings.

The airlines are in talks about an all-stock transaction that would create a new company with two fleets and a dual listing in London and Madrid. Iberia rose 21 percent in Madrid, giving the carrier a market value of 1.89 billion euros ($2.94 billion). British Airways climbed 6 percent.

A deal would be the largest in Europe since Air France acquired KLM for $826.9 million in 2003. British Airways, which owns 13.2 percent of Iberia, said two weeks ago it will cut passenger capacity and stop hiring. At least 24 carriers have stopped flying or filed for bankruptcy protection this year.

``There are some real revenue synergies here,'' said Gert Zonneveld, a London-based analyst at Panmure Gordon. ``There will be a level of costs that can be taken out of the business anywhere from finance to HR operation to looking at the fleet and engineering and maintenance costs.''

Record oil prices have made fuel the industry's single biggest expense. Crude oil traded in New York has advanced 58 percent in 12 months, crimping airline earnings and causing many carriers, including British Airways, to increase fuel surcharges. The world's airlines may lose more than a combined $6.1 billion this year, according to the International Air Transport Association.

`Long Overdue'

``The aviation landscape is changing and airline consolidation is long overdue,'' British Airways Chief Executive Officer Willie Walsh said in the statement. ``The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment.''

Iberia's network complements that of British Airways, with the Spanish carrier offering routes to Latin America that its larger rival doesn't. BA's Walsh also said at a conference in Madrid that the new company would have an advantage in financing the purchase of new planes.

Record oil prices and slowing economies have prompted airlines to merge or strengthen partnerships. Madrid-based Iberia's route network includes the highest density of services between European and Latin American cities such as Buenos Aires and Rio de Janeiro.

U.S. Combinations

Delta Air Lines Inc. agreed to buy rival Northwest Airlines Corp. in April in a $3.63 billion stock deal that would create the world's largest carrier. The two companies forecast that the purchase will produce $1 billion in additional revenue and savings. Continental Airlines Inc. said July 23 that it's seeking U.S. antitrust immunity to join the Star Alliance, the world's largest airline grouping.

British Airways gained 14 pence to 248.5 pence in London trading. Iberia jumped 34 cents to 1.98 euros.

The U.K. airline in November dropped a plan to bid for Iberia with U.S. buyout firm TPG Inc. after banks including Caja Madrid built up stakes in the Spanish airline. Caja Madrid now holds 22.99 percent, according to BA.

Iberia said today it has bought 2.99 percent of British Airways and holds a further 6.99 percent in contracts linked to BA's share price.

OneWorld

``A merger would be good news for our customers and enhance our existing relationship,'' Iberia Chairman Fernando Conte said in the statement. ``It would also strengthen the OneWorld Alliance and further develop Madrid's position as the European gateway to Latin America.''

British Airways and Iberia are both members of the OneWorld group. The U.K. carrier has been in talks with AMR Corp's American Airlines, also a OneWorld member, about deeper cooperation on trans-Atlantic routes.

``This is not a question of survival, this is aimed to help us compete much better on a global scale,'' BA CEO Walsh said of the merger at the Madrid news conference.

A holding company would be created for the two airlines and be quoted in London and on the Madrid Stock Exchange. The management structure is not decided, Walsh said, though there would be boards for the two airlines and one for the merged company. Walsh said it's too early to talk about job cuts.

BA's most recent acquisition was the $107.6 million purchase of L'Avion, a French business class-only carrier that will be combined with the airline's OpenSkies unit. Competitor Deutsche Lufthansa AG, Europe's second-largest airline, bought Swiss International Airlines in 2006 for about $325 million.

European Approval

OpenSkies is the only carrier created specifically to take advantage of the U.S.-European Union treaty of the same name, which allows airlines to fly between the U.S. and any of the bloc's nations instead of just their home countries.

A BA-Iberia merger would likely be approved by European Union regulators, given precedents elsewhere in Europe, according to Nick Cunningham, an analyst at London-based Evolution Securities.

``In today's world, airlines can only continue to grow by coming together,'' Iberia's Conte told reporters in Madrid.

The tie-up is more likely to kick-start trans-Atlantic mergers than further consolidation in Europe, Cunningham said.

``There are few attractive targets left,'' the analyst wrote in a note. ``It may hurry on prospective trans-Atlantic deals by Air France and Lufthansa.''

Virgin Atlantic Airways, the carrier controlled by billionaire Richard Branson, said a merger would give British Airways too much of the London market.

``This potential merger will only fuel BA's dominance'' at London Heathrow, Europe's busiest airport, Virgin spokesman Paul Charles said in an e-mailed statement. ``They would control nearly half of all takeoff and landing slots at the airport.''

CDs, Bond Rating

Credit-default swaps on British Airways fell 51 basis points to 357, according to CMA Datavision prices at 11:55 a.m. in London.

A basis point on a credit-default swap contract protecting 10 million euros ($15.7 million) of debt from default for five years is equivalent to 1,000 euros a year.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

``We do not expect the integration of Iberia to adversely affect BA'S financial position,'' Standard & Poor's credit analysts led by London-based Leigh Bailey said today as the ratings company reaffirmed its rating and outlook on BA debt. ``Iberia faces tough challenges in its short- and medium-haul businesses, but has a good track record of consistent profitability.''

ΒLOOMBERG