Just a few days ago I finished a group report about British Airway’s competitive strategy and therefore, news about them merging with Spanish flag carrier Iberia caught my attention this week. As BA is British flag carrier and “nation’s pride”, media seems to be very interested in covering every step of the story. BA currently has the biggest market share in UK which is around 42% and is forth largest airliner in Europe. Consequently, BA’s merger with Iberia will have an impact on consumers, employees, UK government, shareholders, competitors etc which is why this is a potentially ‘big news’.
I have read several articles from Financial Times, Daily Mail, The Independent, Business Standard and Guardian.co.uk.
After 16 months of talks and meetings between two companies they finally agreed to merge and sign the deal worth £4bn. Both carriers experienced worst ever financial performance this year due to the current economic environment. Increasing fuel prices, falling consumer income, decreasing load factors and 20-25% fall in sales 1st class and premium tickets contributed to losses made this year. According to IATA which has 236 airline members reported that it expects losses of airline industry to mount up to $11bn by the end of 2009. Iberia reported net loss of £295m in the first 9 month and BA report £292m half-year loss. Another problem facing BA except the loss is the pension deficit which seems to be currently around £3bn. Newly created holding company will be called ‘TopCo’; I must say I am not very impressed with the originality of the name. However, it is expected that two companies together will generate €15bn, 62m passengers and will have 419 aircrafts serving 205 cities. I believe this merger will improve BA’s position in the Latin American market as Iberia has well established routes to this part of the world. Together BA and Iberia are third largest airline company in Europe, just behind Air France-KLM and Lufthansa. Companies expect to cut cost through redundancies, IT, back office functions, fleet maintenance, catering, engineering and airport business class lounges; £356m is expected to be saved in first 5 years. I believe that both companies have much bigger problems which cannot be solved with £356m and I am still not convinced that this was a good timing to merge. BA has huge problems with pension deficit and union strikes which seems to be threatening the Christmas travel season. Iberia shareholders will certainly not be happy to have BA’s pension deficit on their back. BA unions made it clear that they will not support the merger if they do not get “guarantees from both airlines that they would not impose compulsory redundancies”. I personally think this was not a good time for companies to merge together because of the economic climate and problems both airlines are carrying with them. I agree that the benefits are endless for both, but merging because they are desperate to cut costs does not seem to me as a good idea. Air France-KLM is a successful merger many articles refer to, but they must not forget that Air France was lucky to in a strong economic environment at the time which is not the case for BA and Iberia. I do understand that the industry “over-burdened” with capacity in the recession is pressuring them to do something in order to maintain their competitiveness. With routes opening up with this merger and routes available to BA as a member of OneWorld alliance will increase their competitive advantage in the market.
The news in very interesting and it can be debated whether this was a smart move right now because there are clear advantages, but there are disadvantages as well which can lead to worsening the current situation at both carriers. I do believe they should have waited a bit longer for their performances to start picking up again. On the other hand if everything goes well this might be just what they needed to boost their financial performance and improve their sales, market share, load factors etc. Then again I do not know what was BA waiting for all these years; they could have done this a long time ago when Air France-KLM or Delta-Northwest Airlines or United Airlines and Continental Airlines. This could have been something that would have helped BA survive this recession much better than it did if they merged with someone years ago. On the other hand, it is just my opinion and I could be wrong.
Articles from FT were very clear and straight forward with their message. I could not see any bias; I found them very objective. They focused more on comparing this merger with other mergers in airline industry years ago whereas other articles from Daily Mail or The Independent focused only on BA and Iberia. FT articles did not have any ‘second hidden meaning’ underneath unlike Daily Mail and Independent. Most importantly FT articles were positive but still objective. The Independent and Daily Mail seem to be very negative in delivering this news. Both articles have a negative outlook on the story and the news about companies getting together. Sentences like “... BA’s mushrooming pension deficit could yet scupper the $7bn deal” or “if BA pension people think that they are going to get sugar daddy coming over from Spain, they had better think again” give certain arrogant note to the article. Irony is present in both articles which is not the case with FT and Guardian. However, the story is important and is considered something not to miss out on my writers. I checked BA’s share price earlier and you can just image what happened to it after the news was published; increased of course.
Just from looking at the headline you can see the obvious difference between what each of the articles ‘think’. “British Airways and Iberia merger sees airline heading for combined £1bn loss” or “Iberia losses take the shine off BA merger” do not portray very happy image or positive message. FT as usual had very neutral or positive headlines like “BA and Iberia joining merger party” or “British Airways, Iberia agree to $7bn merger”. Overall, all articles have a good quality of the information which investor, shareholders, employees or general public might find interesting and useful.
The merger is not 100% done; companies are still waiting to receive anti-thrust and other regulatory clearances. BA promised to resolve the problem with pension deficit and Iberia left room for them to get out of the agreement if BA does not resolve the pension deficit as they see fit. Whether this was a good move for both carriers future will determine; lets wait and see.
Sources:
1) FT “BA and Iberia joining merger party”
URL: http://www.ft.com/cms/s/0/360ef422-cff4-11de-a36d-00144feabdc0.html?nclick_check=1
2) FT “BA targets deals with Iberia template”
URL: http://www.ft.com/cms/s/0/bd5d92a6-d0be-11de-af9c-00144feabdc0.html
3) Mail Online “British Airways and Iberia merger sees airlines heading for combined £1bn loss”
4) The Independent “Iberia losses take the shine off BA merger”
5) Business Standard “ British Airways, Iberia agree to $7bn merger”
URL: http://www.business-standard.com/india/news/british-airways-iberia-agree-to-7-bn-merger/376433/
7/10. Good research and analysis. An interesting point from the class discussion - that the Daily Mail story was so different in tone from the story Stella uses. Even day by day reports differ in the media.
ReplyDeleteI like your approach on the topic, funny how different two perspectives on the same topic can be. Did you know that Iberia can still pull out of the deal, until BA solves this whole fund deficit problem.
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