LONDON/MADRID British Airways Plc and Spain's
Iberia IBLA.MC are in talks to create the world's
third-biggest airline, which could form the basis of a
three-way transatlantic tie-up and trigger a fresh wave of
The UK carrier said on Tuesday the two would spend several
months discussing terms of an all-share merger that would
create an airline worth a combined $8.4 billion, flying to over
200 destinations and which would significantly expand BA's
BAY.L presence in the expanding Latin American market.
News of the deal shot Iberia shares 21 percent higher,
while BA stock rose 6 percent.
BA Chief Executive Willie Walsh and Iberia Chairman
Fernando Conte told a news conference in Madrid the new firm
would operate as two separate brands but benefit from cost
savings, greater buying power and higher revenue synergies
thanks to a larger network.
"This creates a much stronger airline, capable of competing
in a much changed environment in the airline industry," said
The BA chief also confirmed the two carriers were still in
talks with U.S. carrier American Airlines AAMR.N about a
"Over the medium term, they should reap significant rewards
in terms of both synergies ... and also in terms of maximising
revenues," said NCB analyst Neil Glynn of the proposed deal.
"It also possibly brings a three-way transatlantic
arrangement closer between BA, Iberia and American Airlines."
Both Walsh and Conte had previously stressed the need for
more consolidation among European airlines, as they fight the
twin threats of soaring fuel costs and falling consumer demand.
A deal would end British Airways' 16-month chase for
Last March's approach by BA, in concert with private equity
group TPG, ended in failure after Iberia's biggest shareholder
Caja Madrid scuppered a deal. A source close to the matter said
on Tuesday savings bank Caja Madrid now supported a tie-up.
BA's 8.4 percent shareholder Standard Life also backed the
Air France and Dutch carrier KLM merged in 2004 to become
the world's biggest carrier, while a string of airlines such as
privately owned bmi are seen as future targets.
BA's Walsh said the move was not a life-saving tie-up, but
made sense in current market conditions.
"I don't see this as a matter of survival, but as two
strong companies coming together. We do not see this as the end
game but as the start of a new era," he told reporters. "The
combined balance sheet, anticipated synergies and network fit
between the airlines make a merger an attractive proposition."
Walsh said the opportunity provided by the new Open Skies
pact, which has freed up restrictions on carriers flying
between the United States and European hubs, had prompted a
"(This is a) consequence of liberalisation of the aviation
industry. Hand in hand with liberalisation is the need for
consolidation," he said.
The combined group would have revenue of 16.5 billion euros
-- around 60 percent of that from BA -- nearly 450 aircraft,
and would enable the two to better compete with larger rivals
Air France-KLM and Lufthansa. The former had turnover of over
24 billion euros last year.
Walsh said the current proposal was "very different" from
last year's 3.4 billion euro bid, which at 3.6 euros a share
was more than double Iberia's share price shortly before
"A year in this industry is a long time," said Walsh. "This
is a much more exciting development than the previous
BA has been a shareholder of Iberia since its privatisation
nearly 10 years ago and owns 13.15 percent of the Spanish
carrier. Iberia has a 2.99 percent direct stake in BA on top of
exposure to 6.99 percent via contracts for difference linked to
BA's share price, which closed at 248.5 pence on Tuesday.
BA said both parties were confident of securing regulatory
approval, adding that the European Union had already allowed
the duo to cooperate widely and that regulators in Spain and
France had reacted positively to news of a possible merger.
However, a spokesman for BA rival Virgin Atlantic was
critical. "This potential merger will only fuel BA's dominance
at Heathrow ... We all know that dominant players offer less
choice and push up ticket prices," he said.
BA and Iberia would control nearly 45 percent of take-off
and landing slots at Heathrow, the core hub for flights between
Europe and the United States.
Morgan Stanley (MS.N) and UBS AG UBSN.VX are advising
Iberia IBLA.MC and British Airways BAY.L, respectively, a
banking source close to the deal said.
For a DEALTALK on the merger plan, click on [nL9719078]
For a chronology of the BA-Iberia relations [nL9341228]
For a factbox, click on [nL9356282]
For more on the likely deal structure, click [nL9374553]
(Additional reporting by Mark Potter and Elena Moya in
London and Sarah Morris and Robert Hetz in Madrid; Editing by