British Airways hopes a deal can be struck with its pension fund trustees over the airline's £3bn to £4bn estimated pension deficit by Christmas, allowing the merger announced last week with Spain's Iberia to take-off as planned.
BA's chief financial officer, Keith Williams, said on Friday that negotiations between the airline and its pension fund trustees are progressing well, and that both sides are confident that an agreement will be reached before the end of this year.
"By Christmas we should have agreed a valuation for the deficit and also the method of funding, and the amount of cash which BA will contribute to cover the short-fall," Mr Williams said. The airline and the trustees must have all the details agreed by June next year to be cleared by the pensions regulator.
BA is paying £330m a year to cover the deficit at present. This sum may not necessarily increase following the new valuation as the amount it will have to pay out depends on the period, and other terms, over which the sides will agree it should be repaid.
The pension trustees hope to have their triennial review into BA's £10bn staff pension schemes completed over the next few weeks. This review will value the fund at the end of March this year when the FTSE 100 index was at 3,900 compared to 5,286 last week. Since up to 65 per cent of the fund is in equities, this means the deficit will be greater than it would be if valued today. Iberia also has its own actuaries working on a valuation, and central to the merger between BA and Iberia will be that all three parties agree on the value.
As part of the merger terms Iberia can walk away from the £4.4bn deal if BA cannot agree its liabilities. But both sides said on Friday they were determined to drive through the merger, which gives BA 55 per cent of the new company, and is not due to complete until next year.
Cost savings are one of the big factors behind the tie-up and both BA and Iberia have estimated €400m (£358m) could be saved over five years through restructuring. But one analyst close to the deal said this is "a conservative" estimate. The KLM-Air France merger, the most recent precedent, has been much more successful than originally forecast, leading the analyst to suggest that savings could be at least €100m greater than suggested.
Although the union, Unite has said it will not back the merger unless BA promises there will be no compulsory job losses, most of the planned redundancies are likely to be limited to "non-unionised, duplicative" staff, such as those in back office functions and IT.
One source said: "Of course there will be cultural differences between the airlines. But these guys have worked with each other for 10 years, so they have comprehensive due diligence on each other."