BA paves way for Iberia merger with Madrid talks

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The Independent Online

British Airways has identified the Spanish flag-carrier Iberia as its preferred merger partner in Europe and has begun a series of top-level discussions to achieve an alliance.

Rod Eddington, BA's chief executive, held two days of talks in Madrid last month with his opposite number at Iberia, Fernando Conte Garcia, to explore ways the two airlines could work more closely together in advance of a full-blown merger.

He was accompanied by the full BA "leadership" team. This includes the finance director, John Rishton; the director of marketing and commercial development, Martin George; the director of customer service and operations, Mike Street; the director of investments and alliances, Roger Maynard; and BA's general counsel, Robert Webb.

Mr Eddington told shareholders at BA's annual general meeting yesterday: "I see Iberia as an absolutely key partner for us. Our first priority is to restore the fortunes of BA and our next priority is to take advantage of consolidation in Europe. I have no doubt our relationship with Iberia will be the cornerstone of that."

BA already owns a 10 per cent stake in Iberia, which was privatised in 2001, and has two seats on the board of the Spanish carrier. Iberia is also a member of the BA-led oneworld airline alliance, while BA and Iberia are currently seeking European Commission approval to codeshare on routes between the UK and Spain.

BA executives say the fit between the two airlines outside Europe is better than with any other carrier on the Continent. Iberia has a strong position in the Latin American market but almost no presence in the Far East and Middle East - two regions where BA is traditionally dominant.

A merger of the two airlines would create a single carrier with 82,000 employees, a market capitalisation of more than £3bn and 63 million passengers a year. BA is roughly twice the size of Iberia in terms of staff, aircraft fleet and passengers carried. But the Spanish carrier is more profitable, with operating margins last year of 5.4 per cent against BA's 3.8 per cent. BA is currently valued at £1.93bn, while Iberia has a stock market capitalisation of €1.64bn (£1.15bn).

BA has twice investigated the possibility of taking over the Dutch carrier KLM but called off the talks each time.

Lord Marshall of Knightsbridge, the BA chairman, told shareholders that moves by the European Transport Commissioner, Loyola de Palacio, to confer EU status on the airlines of member states could allow "sorely needed industry consolidation". The moves by the Commission are linked to talks with the US, due to begin in October, which will allow Brussels to negotiate changes to nationality clauses in air service agreements with other countries.