Does misery love company? Willie Walsh, the CEO of British Airways plc, hopes it does. "We are in the worst trading environment the industry has ever faced," Walsh told shareholders in early August. Days later his airline announced a three-way agreement with Spanish flag carrier Iberia Lineas Aereas de Espana SA and AMR Corp.'s American Airlines.
Walsh has good reason to be glum. BA has tried and failed in the past to cut deals with both airlines. Success this time around will hinge on convincing politicians, shareholders and regulators that conditions have changed, and not for the better.
High fuel prices and a slump in demand will lead to industrywide losses of between $2.5 trillion and $6.1 trillion this year, according to the International Air Transport Association.
If the woes loosen the protective bonds that have inhibited airline dealmaking, BA will at least have some reason to see a silver lining. The British carrier, once Europe's biggest, has slipped behind rivals such as Air France-KLM SA and Deutsche Lufthansa AG. In July, BA made its move when it announced talks to buy Iberia. The transaction was carefully pitched as a merger of equals, though BA shareholders will own 60% to 70% of a combined group.
BA must tread carefully. Last year, a private equity bid for Iberia, led by TPG Capital
and backed by BA, was rebuffed when Caja Madrid, a Spanish investment
bank with political connections, bought a large defensive stake. Caja
supports the current discussions between BA and the Spanish carrier,
but other shareholders, politicians and unions will have to
A similar soft touch will be needed to push through BA's partnership with American Airlines. That will depend on convincing a skeptical Department of Justice and European Union regulators that the new group's roughly 60% share of traffic between the U.S. and the U.K. does not warrant significant redress.
"The deals still have to be sold, but there is no doubt that the difficult markets make that task easier," says a London-based airline analyst.
BA is not the only European carrier hoping the sector troubles ease the passage of controversial deals. The Italian state is preparing to announce a painful restructuring of its failed airline Alitalia-Linee Aeree Italiane SpA. Austria on Aug. 5 announced plans to sell its 43% stake in Austrian Airlines AG, or AUA, which has a market capitalization of €370 million ($550 million).
Certainly, deals will do little to ease the immediate pain of high
oil prices, but reduced competition on some routes would allow fare
hikes and merging administrative functions could
A combined BA and Iberia, which would rank as Europe's No. 1 airline by market cap and its No. 3 by fleet size, would deliver £700 million ($1.3 billion) of improved sales and cost savings by 2015, according to analysts at Citigroup Inc. Add American Air and the new group would manage an impressive 6,200 daily departures.
For all the evident industrial logic of consolidation, though, the sector has a long history of protectionism that will not be easily shaken. Spanish pride, not to mention fears of job losses, could yet create political problems for the BA-Iberia deal when financial details are announced later this year.
Fear of ruffling the feathers of politicians and unions means the BA and Iberia union will likely be a commercial arrangement rather than a full-blown operational merger. The partners are likely to maintain their own brands and separate ground and flight staff. The nature of the BA-Iberia deal means that, at least initially, it will probably closely resemble the commercial arrangement planned with AA. It will focus on revenue sharing, price collaboration and schedule coordination.
That sort of arm's length deal may help BA win Iberia, but it likely won't persuade regulators to endorse its deal with American Airlines. The two airlines were forced to abandon a similar plan in 2001, when the Department of Justice demanded BA give up 16 daily flights to the U.S. to win approval. If the partnership receives a more sympathetic hearing this time, it will be because the DOJ has been convinced times have changed. In which case the industry's widespread misery will give Walsh reason to smile.