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A cloud was hanging over the £4 billion merger of British Airways and Iberia today, as City analysts warned the UK flag carrier's £2.6 billion pensions black hole could yet be a “show-stopper”.
After two years of tortuous negotiations, BA last night confirmed it had signed a 55:45 merger with its smaller Spanish rival. But the airline bosses have failed to tie up the loose ends.
The deal will be delayed by a year because BA has yet to sort out its massive pension liabilities. And the merger may not go ahead at all after Iberia said it could walk away insisting on the insertion of a caveat in the memorandum of understanding that it has signed.
That caveat states: “Iberia will be entitled to terminate the merger agreement if the outcome of the discussions between British Airways and its pension trustees is not, in Iberia's reasonable opinion, satisfactory because it is materially detrimental to the economic premises of the proposed merger.”
BA is due an actuarial valuation on its £10 billion staff pension schemes.
That is likely to conclude that the funds are deeply in deficit. Following the valuation BA will have to thrash out a funding arrangement with the pension trustees over how much money the airline needs to pump into the schemes. Over the last three years that has amounted to £1.8 billion.
An agreement with the trustees is not expected until next summer, and that may yet get overruled by the UK pensions regulator if it does not believe BA workers and pensioners are getting a fair deal.
“The BA pension schemes' deficit has clearly been a concern for Iberia,” said one senior airline industry source.
“They do not have the equivalent in Spain and so it has taken Iberia a little while to get their head round it. It seems logical that Iberia will not sign up to anything until it knows the outcome of those negotiations and that it is not expected to pump its money into BA's pension schemes.”
Analyst Nick Cunningham at broker Evolution said: “The announcement does not make a deal much more certain in reality as the pension [issue] could still be a show stopper.”
The amounts needed to go into the schemes will come as BA is due to rack up losses of more than £700 million this year on top of the £400 million loss it made last year. It is expected to make losses running into the hundreds of millions of pounds in 2010/11.
Iberia's losses are also mounting.Just hours after agreeing to tie the knot with BA, the Spanish carrier reported that losses in the year to date now stand at €329 million (£293.2 million). During its traditional money-spinning summer season between July and September, Iberia said it lost €56 million.
Ryanair, which carries more passengers than the combined BA-Iberia, said the two had raised the white flag in their battle with budget carriers. “The merger is like two drunks trying to prop each other up,” said Ryanair's Stephen McNamara. “Both have reported large losses, both are facing a winter of industrial action and both charge high fares.”
Reader views (9)
BA are still paying pensions to staff who worked for BEA and BOAC, perhaps when the deal was done to amalgamate the two there was insufficient funding put in place then, which has contributed to today's pension shortfall. At the time BOAC and BEA were profitable. How do we know if this time BA wont also end up paying the pensions of Iberia staff. BA should concentrate on flying planes not being top dog in the mergers and acquisitions world.
- Ann Other, Heathrow, 16/11/2009 09:19
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"The World's Favourite Airline" merging with what is probably Europe's worst airline. It will be essential to check which carrier is operating a specific flight, as one has to for example if booking an Air France/ flight to the US, making sure it is not an American carrier.
- David Chown, bordeaux france, 16/11/2009 06:24
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just back from 4 short haul flights with BA within a week, did avoid them for a year but was positively surprised. very nice staff, joking about situation and taking all spanish jokes well ... lufthansa girls can be grumpy as well
- Rob, London, 13/11/2009 16:31
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I wonder if Iberia has as big a pension deficit as BA?
Bail (out) Airline BA, worthless, sell
- Wallytrader, London, 13/11/2009 16:25
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Two bad airlines merged into one great big loser.
- Janicebyrne, sussex, 13/11/2009 12:41
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Two bad airlines won't make one good one.
IBERIA an BA have much common
-Rude staff
-Bad service
-Awful food
-Belligerant unions
-Strikes.
-Nice flashy offices and a new hig-tech terminal plagued with problems
I'll stick with Lufthansa & go long haul via Frankfurt.
- Josph Yossaraian, London, 13/11/2009 11:15
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Reuben, BA needs to make redundancies to survive, they have about 16 times the number of staff per passenger as Easyjet and none of that is front of house, it's all back end. With the unions crippling it and poor management it needs a radical cull from top to bottom but that won't happen as it'll be mired in strike action.
- Bob, Cheam, 13/11/2009 10:52
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British Airways now relegated to Spain.
Expect countless thousands of BA staff to be thrown on the dole scrap heap in 2010.
- Reuben Camara, Plot 1, Morecambe Compound, EUSSR, 13/11/2009 09:05
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Where is BA getting the 7 billion from? Will they borrow from a guaranteed UK bank at taxpayers risk, yet register for tax purposes in Spain, so like Boots take over with 8 billion guaranteed by Gordon, nothing in it for the Brits.
- Annie Gray, uk, 13/11/2009 07:35
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