* Tie-up to make world's third largest airline by revenue
* Deal still pending regulatory, shareholder approval
* Merged entity to fly by year-end
* BA shares up 0.7 pct, Iberia 0.4 pct lower
(Adds union comments, updates shares, more details)
By Rhys Jones and Tracy Rucinski
MADRID/LONDON, April 8 British Airways BAY.L
and Spain's Iberia IBLA.MC signed an $8 billion merger to
create the world's third-largest airline on Thursday, bringing a
three-way tie-up with American Airlines AMR.N a step closer.
The deal between BA and Iberia, which the pair hope to
complete by December, is designed to help BA and Iberia stem
over $1 billion of combined annual losses following the worst
industry downturn in decades.
They hope to cut costs by 400 million euros a year to better
compete with larger rivals Lufthansa (LHAG.DE) and Air France
(AIRF.PA) and budget carriers such as Ryanair (RYA.I).
The combined group, to be majority owned by BA shareholders,
ends the British company's long pursuit of Iberia and positions
the companies for further consolidation.
BA, Iberia and American, members of the Oneworld alliance,
want to deepen the pact to take advantage of the U.S./EU "Open
Skies" agreement, which liberalises transatlantic aviation.
"The tie-up with American is the next thing on BA and
Iberia's agenda now and this agreement brings that closer but
they are probably looking at European and Asian carriers too,"
said Davy Stockbrokers analyst Stephen Furlong.
"There are too many airlines in the world and bigger will be
better in the future. BA will hope that this is the start of
many more tie-ups."
On Wednesday, sources said United Airlines UAUA.O was in
merger talks with US Airways LCC.N in a deal that could create
the second-largest carrier in the U.S. [ID:nN07137095]
The Oneworld alliance will hold a news conference in Los
Angeles later on Thursday to announce a joint venture between
American and Japan Airlines 9205.T on Pacific routes, an
industry source said. BA's Chief Executive Willie Walsh and
Iberia boss Antonio Vazquez will both be present.
Vazquez, who will chair the merged International Airlines
Group, said a combined BA-Iberia would "participate in future
BA and Iberia will continue to operate under their original
brands -- mirroring the structure of the 2004 Air France-KLM
merger, in which both carriers kept their own fleets and
networks but are owned by a common holding company.
"The name itself reflects a longer term intention to add
more airlines without favouring any one company," said Societe
Generale analyst Jonathan Wober.
By 1215 GMT, BA shares were up 0.7 percent at 239.6 pence,
while Iberia shares fell 0.4 percent to 2.61 euros.
For a graphic comparing BA and Iberia, click on
The merger will combine BA's strong position in north
Atlantic traffic with Iberia's Latin American business, which
could be reinforced by the planned American Airlines alliance.
BA and Iberia's target to save 400 million euros of annual
costs by the end of the fifth year will involve cutting jobs and
less profitable shorthaul flights.
BA has recently faced strikes by its cabin crew over pay and
jobs which it said were threatening its future.
"I'd imagine the 400 million euros is a low-ball figure, but
with BA union action they can't be much more aggressive at this
point. The whole reason behind this merger is revenue and cost
synergies," said an analyst in Spain who asked not to be named.
"We accept the logic of the merger in the challenging
economic climate for aviation, said Steve Turner, UK union
Unite's national officer for civil aviation. "We support this
move - but not any cost."
Spanish unions welcomed the tie-up, which still needs
regulatory and shareholder approval.
"The European air industry is moving toward three large
players ... and the (BA) deal's being done in a way that
respects Iberia's current labour agreements," a spokesman for
Spain's second-largest union UGT said.
Once finalised BA will have a 56 percent share and Iberia 44
percent and each airline will appoint seven members to the board.
BA's $5.6 billion pension deficit could still scupper the
deal after Iberia reserved the right to walk away if the UK
pensions regulator forces bigger costs on BA to sort out the
shortfall than the Spanish carrier thinks is affordable.
BA's Walsh will be CEO of the new group, to be headquartered
in London with annual revenues of some $20 billion.
The pair began merger talks in July 2008 in response to
slowing passenger demand but industry body IATA last week said
airlines were slowly climbing out of recession. [ID:nLDE62T0N1].
For a factbox on how a combined British Airways and Iberia
would look, click here [ID:nLDE63708E]
For a Timeline on talks between the companies, click here
(Editing by Elaine Hardcastle)