BA, Iberia merger hinges on pensions

By Tracy Rucinski and Rhys Jones

MADRID (Reuters) - British Airways' (BAY.L) pension fund deficit could yet scupper its planned merger with Spain's Iberia (IBLA.MC), as the airline still has to agree the size of the multi-billion pound shortfall with the fund's trustees.

Iberia, which on Friday posted a bigger than expected nine-month operating loss, agreed with BA on Thursday to create a group with a combined market value of $7 billion (4.2 billion pounds) as they continue to battle the worst industry downturn in decades.

But BA's pension deficit was one of the main stumbling blocks in the 16-month merger talks and was a key negotiating point for Iberia, which is reserving the right to back out of the deal if the funding hole turns out to be bigger than the 3 billion pounds which analysts have forecast.

BA pension trustees undertook a triennial review of the pension scheme earlier this year but the results have yet to be announced, with BA saying it expects to agree a figure with the trustees in the next two to three months.

"The market will be looking at the discount rate used by BA's trustees to calculate its pension liabilities. You'd expect them to use a favourable one to help push the deal through though, especially since the deficit is bigger than its market value right now" a London-based analyst said.

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

Iberia's shares closed 3.15 percent lower at 2.15 euros, after Thursday's 12 percent gain, while BA was 0.93 percent higher at 217 pence.

Some analysts said they were surprised that the terms of a deal had even been announced before the pension issue has been resolved.