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

Spain's Iberia has had a number of suitors circling around it since 2007's "open skies" agreement between the US and Europe made consolidation in the airline industry inevitable.

The carrier, Europe's fourth-largest, 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 ultimately, 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.

In 2007, BA sought 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 now owns about 23% of Iberia, making it the airline's biggest shareholder.

Stumbling blocks

In July 2008, BA and Iberia said they were holding talks on a possible merger, with both brands to be retained as part of a combined group.

The intention was to imitate the model of Air France-KLM, allowing both Britain and Spain to continue having a national carrier.

Since BA walked away from a more straightforward takeover bid in 2007, the fortunes of both firms have fallen, as the global recession and high fuel costs take their toll on the air industry.

Earlier this month, BA announced the worst half-year losses in its history.

During the six months to September 2009, the company suffered a £292m ($485m) loss, compared with £52m profits during the same period a year earlier.

For its part, Iberia reported a loss of 165.4m euros ($237.2m; £145.7m) for the first half of this year after passenger numbers fell during the downturn.

Both airlines are also facing industrial unrest. BA cabin crew are being balloted on whether to take strike action over the company's cost-cutting plans, while Iberia staff have already staged a number of stoppages in a pay dispute, with more scheduled in the run-up to Christmas.

BA and Iberia face severe competition in domestic and European markets, both from budget airlines and - in Iberia's case - 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.

BA has already applied to US and European regulatory authorities for anti-trust immunity for the deal.

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

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