Iberia losses take the shine off BA merger
Analysts warn that British Airways pension deficit could still ruin the deal
Saturday 14 November 2009
British Airways' new merger partner, Iberia, announced miserable results for the first nine months of the year yesterday, while industry experts continued to warn that BA's mushrooming pension deficit could yet scupper the $7bn (£4bn) deal.
Just a week after BA announced its worst losses since being privatised 22 years ago, the Spanish flag carrier recorded a net loss of €182m (£163m) in the nine months to the end of September, compared with a €51.1m profit this time last year.
Worryingly for the Madrid-based airline, its load factor, a key industry measure of how well a company fills its planes, was down from 83.2 per cent to 82.1 per cent. Iberia's announcement follows BA disclosure of a £292m loss for the six months to September.
BA declined to comment on Iberia's results, but the numbers come a day after Willie Walsh, BA's chief executive, argued that the agreement would help both groups to offset structural weaknesses in the airline industry. "The merger will create a strong European airline well able to compete in the 21 century," he said.
Separately, British Airways insisted yesterday that its huge pension deficit, now thought to be in the region of £3bn, would not undermine the merger, even though the group has yet to agree the actual level of the shortfall with the fund's trustees. A triennial actuarial review of the deficit is due to be completed in the next few months.
"BA's pension deficit ... is still a controversial point and Iberia maintains a get-out clause if it is not happy with the imminent triennial review," Jonathan Jackson, the head of equities at Killik, said. "In addition, the deal is dependent on receiving anti-trust and other regulatory clearances."
Mr Walsh, who will be chief executive of the combined company, said on Thursday night that the new BA operating company would be wholly responsible for the deficit. "No, no, no," he said, when asked if Iberia shareholders would be liable for the shortfall. A source close to Iberia warned that while a deal was likely, "if BA's pension people think that they are going to get a sugar daddy coming over from Spain, they had better think again".
Scott Mueller, the director of M&A at the Cass Business School, warned that neither group can ignore the deficit. "They cannot sweep this under the carpet, which is what they appear to have done so far," he said. "It is the sort of issue that tends to come back and bite you afterwards."
The two companies said on Thursday that they expect to save as much as €400m by the fifth year of a merger. Mr Walsh did concede, however, that a number of British jobs would be lost. That is likely to anger the unions. Unite, which is already threatening industrial action over proposed changes in working practices at BA, said yesterday that it would not support the merger unless it received guarantees from both airlines that they would not impose compulsory redundancies.
Steve Turner at Unite said: "It is imperative that both companies sit down as soon as possible with the unions here and in Spain to discuss how jobs and standards can be safeguarded."
The two airlines will be operated separately under a new holding company, TopCo, which will be a Spanish incorporated entity registered in Madrid and tax resident in Spain. The operating and financial group will be based in London. The shares will also trade on the London Stock Exchange.The merger will create the world's third biggest airline by revenue, behind Air France-KLM and Lufthansa.
The number of months BA and Iberia have been talking about a merger.
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