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Simon Calder: Why Walsh is turning to Spain to relieve BA's pain

"We'll take more care of you," the British Airways slogan used to run. "Fly the flag." These days, within Europe, many more of us fly the harp (Ryanair) or the orange splodge (easyJet). BA's chief executive, Willie Walsh, has many burdens to shoulder, from strike-prone cabin crew to a ballooning pension deficit. But at the core of BA's startling loss of £16.50 for every passenger it carried during the summer is the traveller's changing perception of value.

Unquestionably, BA commands a premium for its with-frills product: a still-generous free baggage allowance, free pre- assigned seating and at least a G&T or a coffee to go with the packet of birdseed that passes for lunch on shorter European flights.

Commendably, the price you first see when you book online with BA is the price you usually pay. The airline's punctuality has never been better. And, when an itinerary unravels due to disruption, BA is generally better at coping than its rivals. Yet the evidence from yesterday's results is that we do not value these benefits sufficiently highly to sustain the airline's astronomical cost base.

One of Mr Walsh's key strategies to reduce the cost per seat kilometre is to merge with Iberia; the UK and Spanish flag carriers look as though they have little choice but to marry, given the non-availability of other partners of the right scale.

It is widely believed that the resulting airline will have its headquarters in Madrid, a deal-breaking demand from Iberia. The two airlines, though, have radically different reputations: not quite BA's Waitrose to Iberia's Lidl, but not far off in the perceptions of many passengers. Delegates to last month's Abta convention in Barcelona who flew on Iberia described it as "easyJet without the smiles".