Virgin cries foul as IAG agrees to take over BMI


The takeover of BMI by the British Airways-owner IAG would be "disastrous" for customers, Virgin Atlantic warned yesterday as it faced defeat in the race to buy the smaller carrier from Germany's Lufthansa.

IAG said it had signed an agreement in principle to acquire BMI, with the deal expected to be finalised in coming weeks.

Although loss-making, BMI owns 8 per cent of the take-off and landing slots at London's Heathrow airport, which is running at full capacity. With the third runway no longer in prospect, the slots will allow IAG, which already commands the biggest share of take off and landing rights at the hub, to expand at Europe's busiest airport.

BMI's 8 per cent will supplement the 44 per cent of slots controlled by British Airways and the 1 per cent controlled by Iberia, the Spanish airline that merged with BA to form IAG earlier this year. With a total of 53 per cent after the planned deal, IAG will pull further ahead of Virgin, which controls 3 per cent of the slots at the capital's main airport.

IAG's chief executive Willie Walsh expressed confidence at getting the deal, which analysts reckon could be worth about £300m, cleared by regulators, as the group would still have a smaller share relative to that commanded by rivals at major Continental airports.

Air France-KLM, for example, controls 59 per cent of the slots at the Charles de Gaulle airport in Paris and 57 per cent at the Schiphol airport in Amsterdam. "Regulatory rules are not set by Branson – they are set by competent authorities," Mr Walsh said, referring to Virgin Atlantic founder Sir Richard Branson, whose Virgin Group remains the majority owner of the airline. But Virgin Atlantic, which has also made a bid for BMI, said British Airways already had too big a share of the slots at Heathrow.

"British Airways' hold over Heathrow is already too dominant and we are very concerned – as the competition authorities should also be – that BA's purchase of BMI would be disastrous for consumer choice and competition," it said.

"With Government limiting growth at London Heathrow, they cannot afford to turn a blind eye to the deterioration of competition that would results from a BA purchase of BMI."

The sale to IAG, which was announced alongside results from the group showing that its third quarter profits had declined to €363m against €528m last year, remains conditional on the binding agreement, further due diligence and regulatory clearances. Lufthansa, which took control of BMI from Sir Michael Bishop just over two years ago, has been looking to either turn around or offload the ailing carrier, which booked a 2010 net loss of £124.5m.

Mr Walsh was confident of reviving the airline's fortunes. "It is clear that BMI in its current form is unsustainable but we're confident we can make a success of it," he said.

Analysts said that, if completed, the deal would be positive for IAG and Lufthansa. The former would grow its clout at a key airport and the latter would be free of a drag on its profits.

"Without knowing the specifics of the deal, our initial reaction is that this a positive for Lufthansa," Stephen Furlong, an analyst at Davy Research, said. "BMI does not provide any significant strategic value for the company, and BMI has a negative impact on profits. We estimate that BMI will have an operating loss of €250m (£215m) in 2011."