BA's long-haul route to Iberia tie-up

Analysis
By Robert Plummer
Business reporter, BBC News

Spain's Iberia has had a number of suitors circling around it since last year's "open skies" agreement between the US and Europe made consolidation in the airline industry inevitable.

Iberia and BA have co-operated for nearly a decade

The carrier, Europe's fourth-largest, has attracted attention from Lufthansa and Air France-KLM, both of whom saw Iberia's strong presence in the Latin American market as a way of enhancing their respective transatlantic offers.

But in the end, British Airways was the one potential partner that was in it for the long haul.

BA began working with Iberia in 1999, during the first phase of the airline's privatisation by the Spanish government.

Snapping up an initial 9% stake in Iberia, BA set up a code-sharing agreement which allowed the two carriers to sell seats on each other's services.

About a year ago, BA was preparing to increase its ownership to 40%, with backing from a consortium of private equity groups.

But the deal fell through, leaving BA with a slightly higher holding than before, but no controlling interest.

The remaining shares in play were acquired instead by another Iberia shareholder, savings bank Caja Madrid, which upped its stake to 23.3%.

Mutual attraction

That seemed to complicate any takeover bid, since Caja Madrid said it had no plans to sell out.

But now it seems that the attraction between BA and Iberia is mutual. It has emerged that Iberia recently took a 2.99% stake in BA, with an option to buy another 6.99% of the UK carrier's shares.

Plans have been hatched to form a combined group that would retain both the BA and Iberia brands, most likely along the lines of the 2004 tie-up that brought together Air France and KLM under one roof.

The move apparently has the blessing of Caja Madrid, although it may take months to agree the precise terms.

Since BA walked away from last year's more straightforward takeover bid, Iberia's fortunes have fallen.

In the first three months of 2008, it made a net loss of 441,000 euros (£350,000; $680,000) compared with a 12.9m euro net profit a year earlier.

Iberia's share price has also declined sharply, while it has faced severe competition in domestic and European markets, both from budget airlines and from high-speed train services.

However, the Spanish carrier remains unrivalled in its services to Latin America, a region where BA has cut back flights in recent years.

In that respect, BA chief executive Willie Walsh is right to speak of "anticipated synergies" between the two airlines.

The deal is also likely to have little trouble clearing regulatory hurdles in Brussels, since the European Commission has already smiled on BA and Iberia's earlier courtship.