Deals and strikes loom for IAG after BA-Iberia merger

LONDON Mon Jan 24, 2011 12:54pm GMT

CEO of International Consolidated Airlines Group (IAG) Willie Walsh (2nd R) poses with IAG Chairman Antonio Vazquez (2nd L), next to a British flag and a Spanish flag, inside the Stock Exchange in London January 24, 2011. REUTERS/Stefan Wermuth

CEO of International Consolidated Airlines Group (IAG) Willie Walsh (2nd R) poses with IAG Chairman Antonio Vazquez (2nd L), next to a British flag and a Spanish flag, inside the Stock Exchange in London January 24, 2011.

Credit: Reuters/Stefan Wermuth

LONDON (Reuters) - International Airlines Group, formed from British Airways and Iberia, began its first day of trading Monday with unresolved issues, such as industrial unrest, facing it.

Deal-hungry IAG, Europe's second biggest airline group by value behind Lufthansa, was, however, seen as a major player in any further industry consolidation and well-placed to benefit from global economic recovery.

UBS has rated IAG shares, which trade in London and Madrid, a 'buy' with a price target of 360 pence. The stock was little change at 286.4 pence in London by 10:15 a.m., valuing the group at 5.3 billion pounds.

Bank of America Merrill Lynch also said it saw upside potential, valuing the stock at 315-350 pence or 3.8-4.2 euros. IAG traded 0.5 percent higher at 3.367 euros in Madrid.

"The macroeconomic backdrop and new capacity growth will be key drivers of revenue performance this year," Bank of America Merrill Lynch analysts said in a research note. "On the cost side, we see fuel as a greater potential risk in 2011. Labour and merger execution are also potential risks."

IAG, which will continue to operate the British Airways and Iberia brands, aims to shave 400 million euros (340 million pounds) off annual costs within five years.

Analysts noted potential for adding new routes because while prime long-haul slots are like gold dust at Heathrow, Madrid airport suffers fewer capacity constraints.

Also, an anti-trust immunity (ATI) trans-Atlantic joint venture agreed with American Airlines in September should ensure flights are as full as possible.

"We think IAG represents an interesting play on traffic recovery, synergies from the merger as well as ATI and potentially a vehicle for further airline consolidation," UBS analysts said.

MORE STRIKES?

IAG, with 419 aircraft flying to 205 destinations, was also seen as a key player in industry consolidation and has drawn up a list of 12 airlines it is interested in buying.

Asia was likely to be the focus for any deal, complementing strength on routes to North and South America.

Indian carrier Kingfisher Airlines, with whom BA signed a codesharing agreement last year, was seen as a prime target along with Australian group Qantas while a number of Chinese carriers may also be open to investment..

"British Airways and Iberia are the first two airlines in IAG but they won't be the last," chief executive Willie Walsh said Monday. "Our goal is for more airlines but, importantly, the right airlines to join the group."

The carrier still has a list of longstanding issues to deal with, including repeated industrial action by BA cabin crew and a big pension deficit.

BA staff voted Friday to strike again in a long-running battle over proposed job and pay cuts.

The companies highlighted employee harmony as a key risk in merger documents published earlier this month, noting a protracted dispute could drive customers to rival carriers.

Iberia chairman Antonio Vazquez Romero will chair the new company with BA chairman Martin Broughton serving as his deputy.

Top investors in the company include Spanish savings bank Caja de Ahorros y Monte de Piedad de Madrid and investment and pension funds such as BlackRock, Standard Life, Janus Capital and Lloyds Bank's Scottish Widows.

(Additional reporting by Simon Falush and Rhys Jones; Editing by Dan Lalor)

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