BA-Iberia merger hinges on pension deficit

By Tracy Rucinski

MADRID (Reuters) - British Airways' 3 billion pound pension deficit could yet scupper its planned merger with Spain's Iberia, as the UK airline has still to get clearance from the fund's trustees.

BA (BAY.L) and Iberia, which on Friday posted a wider-than-expected nine-month operating loss, agreed on Thursday to create a group with a combined market value of $7 billion (4.2 billion pounds) in an attempt to cope with the industry's largest downturn in decades.

BA's pension deficit was one of the main stumbling blocks to the 16-month merger talks and was a key negotiating tool for Iberia, which is reserving the right to back out of the deal if the pension hole turns out to be detrimental.

"There's still a risk that the deal will fall through. It's all hanging on BA's negotiating weight with Trustees over its pension," a Madrid-based equities sales trader said.

By 10:40 a.m. British time, Iberia's (IBLA.MC) shares were 1.2 percent lower to 2.19 euros, after Thursday's 12 percent gain, while BA was 1.5 percent higher at 218 pence.

The new company will combine British Airways' strong position in Europe-to-North America traffic with Iberia's Latin American business, and will potentially be reinforced by a planned alliance with AMR Corp's (AMR.N) American Airlines.

So far the deal looks set to give BA shareholders 55 percent of the new company, effectively giving it control, but the balance of power remains in question and could shift to Iberia's favour depending on the outcome of BA's talks with trustees over its pension deficit.

The BA-Iberia format mirrors the ground-breaking 2004 merger of Air France and KLM, which airline industry executives describe as a back-office merger designed mainly to slash costs.