16 NOVEMBER 2009

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Article from BTNews 16 NOVEMBER 2009

COMMENT: The British Airways / Iberia Merger

Willie Walsh has stuck his neck out this time.  If the emerging British Airways/Iberia (BA/IB) consolidation goes ahead as planned by next June, he should emerge as one of the great leaders of the airline industry.  If it fails it will be interesting to see if his five-year contract is extended.  The excuse is already built in.  BA’s pension fund, a historical liability.

Walsh has experience with dealing with Spaniards, CEO of the now failed Futura a decade back when Aer Lingus was a major shareholder, and of course with Ferrovial, his present landlord at Heathrow Terminal 5.  Both relationships can be questioned.

Iberia is the latest partner in a series of abortive attempts over the years by BA to seek an international marriage with all the synergies it brings.  Memories are short in the airline business but past possible relationships have included Qantas, US Airways and Swissair, plus the disastrous purchase of a couple of French airlines.  In whatever business we have all read the immediate platitudes concerning takeovers or new found partnerships.  But there have been very few success stories.

British Airways has in the past had a reputation for quality and service.  Yes it was “The World’s Favourite Airline” and it still is always a relief to arrive at an airport somewhere around the globe and to see the Chatham flag on the tail plane.  It helps to sell Britain. Any dumbing down will undoubtedly drive passengers away.  By comparison Iberia is poor, its Business Class never receiving any awards, and its Economy cabin not a particularly pleasant experience.  It is for Iberia to go up, not for BA to go down!

At the end of the day it is the commercial part of an airline that is the engine room.  Without passengers nothing will happen.

BA dominates the North Atlantic.  Love it or hate it Heathrow is the gateway for Europe, and the United States too.  Madrid should do the same for the southern oceans but somehow misses out.  South America is a major market for the future.  But will travellers from that continent want to route via Spain?  With the very long range aircraft now available it makes much more sense going direct to Heathrow (or Paris for that matter).  If BA were to put efforts in that direction would an Iberia partnership be needed?

In this issue Tim Clark of Emirates makes the point talking about Africa (see WTM) but the same goes for South America.  “As we started to connect these points, people started to flow in ways that we had not seen before.  More fool those who do not harness what is going on.”  Is BA going to throw away Brazil, Argentine and the rest in return for a few slots to the USA?  Long haul flights make money, short haul, typically the feeds into Madrid, for the most part don’t.

In the past, part of the success of British Airways has been a salesman chairman, backed up by a chief executive who played a more chief operating officer role.  Under the present regime this has not been the case and whilst Martin Broughton is undoubtedly a very successful businessman his part time role has been questioned.  Under the new arrangement he remains, part time of course, accompanied by three other non-executives.  Curiously Antonio Vazquez, Chairman and Chief Executive of Iberia, and Chairman Elect of TopCo, the official name for the merged company came from the tobacco company, Altadis, which was sold to Imperial Tobacco in 2008.  Martin Broughton was Chairman of British American Tobacco until 2004.

Both BA and IB are losing money but the argument that all airlines are in dire financial peril does not stand up.  Air France, Lufthansa and Korean have recently posted positive figures.  They seem to have got it right.

In the main analysts have supported the new tie-up, at least at this stage.  The problem with the city folk is that for the most part they do not understand the nuances of airlines and seem to take for granted the information (spin) being offered by whoever they are scrutinising.  For them only a theoretical bottom line counts.

The new proposed structure is extremely complex but is not unlike AF/KLM which has been largely a success, with Paris definitely dominating at all levels.  Will a British/Spanish partnership work so well?  Who leads?  Madrid or Waterside? Both of the commanders wish to remain in their own castles.

Neither BA or IB have been considered success stories in recent times.  Sir Stelios Haji-Ioannou has described the arrangement as “two drunks that believe they can walk together by supporting each other,” whilst Sir Richard Branson has pointed out that the combined airline would have 44% of Heathrow, conveniently forgetting that Air France and Lufthansa have a higher factor of their hub airports.

The history of Britain over the last 150 years is fascinating.  We lead the world with engineering, railways and ships during Victorian times.  In the 20th century our cars were outstanding for many decades, and the Viscount was the exceptional aircraft of its era.  British Airways (including BEA and BOAC) has been one of the finest air carriers of the last 50 years.  Is it all, like everything else above, going to come to a messy (and expensive) end?  Mr Walsh says the brand will remain.  Mr Royce would be proud of his heritage today.  Let us hope the same can be said in the decades to come of Mr Walsh’s airline.

MALCOLM GINSBERG

Editor in Chief

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