September 23, 2010 7:48 pm

BA merger with Iberia a step closer

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British Airways has taken a significant step towards sealing its merger with Iberia after the Spanish airline approved BA’s plan to tackle its multi-billion-pound pension deficit.

The pensions black hole was the biggest threat to the Iberia deal and while a cancellation was thought unlikely, the Spanish airline was allowed to walk away if BA’s £3.7bn ($5.8bn) pensions deficit could not be resolved to its satisfaction.

The Spanish endorsed the British flag carrier’s plans at a board meeting in Madrid on Wednesday. BA, which had agreed the measures with pension trustees in June, welcomed the decision. “Our merger plan is now on target,” said BA.

The merger already has European Union clearance and shareholders of both companies are expected to approve the deal in November. BA investors will control 56 per cent and Iberia shareholders 44 per cent of a combined company to be called International Airlines Group (IAG).

Willie Walsh, chief executive of BA, will become boss of IAG and Antonio Vaz­quez – his opposite number at Iberia – will be chairman.

The deal will create Europe’s second-largest airline by market capitalisation after Lufthansa, carrying 62m passengers earning revenues of £12.5bn a year.

British Airways is keen to be at the forefront of consolidation in the industry, and the merger aims to exploit Iberia’s strength in Latin America as well as BA’s presence in Africa, Asia and North America

But its expansion plans were dealt a blow on Wednesday when Qantas said it would not revisit its abortive 2008 attempt to merge with BA. “We have been there, done that. We are not interested,” said Alan Joyce, chief executive of Qantas.

The Australian carrier had been one of 12 airlines that BA said it wanted to buy once the merger with Iberia was completed.

BA has one of the private sector’s largest pension deficits owing to two funds, the New Airways Pension Scheme (NAPS) and the Airways Pension Scheme (APS), which have gaps of £2.7bn and £1bn respectively.

Under the deal struck with pension trustees in June, the NAPS deficit will be closed in 2026 with APS balancing its books three years earlier. BA’s cash contributions to the funds will remain at £330m, rising with inflation at about 3 per cent a year.

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