Airlines to merge after months of speculation

British Airways (BA) and Iberia expect to merge by the end of next year after reaching agreement on the plan last night.

Months of speculation ended when a joint statement said the boards of the two airlines had agreed a binding memorandum of understanding setting out the basis for a proposed merger.

The statement said amalgamation would produce annual savings of around €400 which a BA spokeswoman said were expected to come from joint IT and procurement rather than job losses additional to those already announced.

Last week when the airline announced a record pre-tax loss of £292m (€326m) for the six months to the end of September, chief executive Willie Walsh warned manpower would be reduced by the equivalent of 3,000 roles by March next year.

He said it had already reduced costs by some £400m (€447m) after 1,900 jobs were cut through reduced overtime, increased part-time working and voluntary redundancy.

Mr Walsh – who will become group chief executive – said: “The merger will create a strong European airline well able to compete in the 21st century.

“Both airlines will retain their brands and heritage while achieving significant synergies as a combined force.”

The proposed merger would create an airline group with 419 aircraft which would fly to 205 destinations.

The statement said the airlines believe “there is a compelling strategic rationale” for the merger which it said would benefit shareholders, customers and employees.

Both Iberia and BA have been hit hard by falling air travel in an 18-month period which has seen many smaller airlines go to the wall.

The pair first revealed merger talks in July 2008 although the recession forced the deal to be shelved.

BA shares rose almost 8% yesterday as speculation increased about an imminent announcement.

Antonio Vazquez, chairman and chief executive of Iberia, said: “It has been a long process where many people, both at British Airways and Iberia, have worked very hard to reach this agreement. But in the end it was worth it.”

He said the agreement was “a giant step” in the history of both companies who would be “more prepared than ever to face future challenges” as a result.

“We are laying the foundations of what will be one of the most important airlines in the world, a real global airline.”

Mr Vazquez said the agreement was “the most important in the European airline industry in recent years”.

The merger would create a new holding company (TopCo) with seven directors from each airline on its board.

Its shareholders would be the current British Airways and Iberia shareholders.

The firm would be registered in Madrid, where the majority of board meetings and all shareholders’ meetings would take place, but the operating and financial headquarters would be in London.

Each operating company will remain responsible for its own day-to-day commercial and operational management, including staffing numbers.

Under the terms of the proposed merger, British Airways shareholders will receive one new ordinary share in TopCo for every existing ordinary share they hold.

Iberia shareholders will receive 1.0205 new ordinary shares for every existing ordinary share.

The statement said this will result in British Airways shareholders holding 55% of TopCo and Iberia’s shareholders holding 45%.

The new firm will have its primary listing in the UK and its ordinary shares will be traded on the London Stock Exchange with, if possible, a secondary listing in the Spanish Stock Exchanges (Mercado Continuo Espanol).

A definitive merger agreement is expected to be signed in the first quarter of next year but remains subject to a small number of pre-conditions.

The agreement will be subject to approval from British Airways’ and Iberia’s shareholders and is expected to be presented for approval in early November 2010 at the latest, with completion expected approximately one month following such approval.

The estimated annual savings of around €400m are expected by the end of the fifth year after the merger.

Aviation consultant John Strickland said the announcement was not unexpected and BA would be keen to follow the example of an earlier deal between Air France and Dutch airline KLM.

“That has been an example where jobs lost were mostly through natural wastage,” he said.

“The airlines have kept a degree of separation but benefited from working together behind the scenes and having a stronger offering in the market place.

“Both BA and Iberia have got their own problems. Both are loss-making and both have industrial issues to deal with.

“If they can get this in place for when the economy begins its recovery in 2010 or maybe 2011 then it will benefit both.”

BA and Iberia carried 62 million passengers last year.