British Airways PLC and Spain's Iberia SA signed a merger agreement on Thursday, moving a step closer to completing a long-awaited deal to create Europe's third largest airline and secure the two loss-making carriers' future.
The companies plan to finalize the tie-up, forming a carrier with a market value of around $7.5 billion pounds, by the end of this year. It would carry more than 58 million passengers a year to some 200 destinations while retaining both individual brand names.
The two had been trying to hammer out an agreement since 2008, seeking greater economies of scale to survive the downturn in the aviation sector following the global credit squeeze and growing competition from budget carriers.
Consolidation in the industry is rife, with the BA-Iberia announcement coming a day after sources confirmed that United Airlines and US Airways are in talks about a combination that would create America's second-biggest airline.
BA and Iberia said their deal, which will create a new holding company majority-owned by BA shareholders, will leave room to capitalize on further industry consolidation. Importantly, the deal will save the airlines some euro400 million ($530 million) a year by the fifth year if approved by European Commission and shareholders of both airlines.
But the proposed merger has been harshly criticized by rival carriers. Low-fare airline Ryanair Holdings PLC likened it to "two drunks trying to prop each other up," while Virgin Atlantic Airways said the deal would increase BA's dominance at Heathrow Airport.
Consumer groups have also been skeptical, suggesting that fares will rise as a result.
"At the moment, it's hard to see how this merger will benefit travelers, at least in the short term," said Bob Atkinson of travel Web site travelsupermarket.com. "Any cost savings will only be felt by passengers if the business integrate quickly."
Yet both face obstacles to quick integration, Atkinson noted, pointing to BA's acrimonious battle over pay and working conditions with its 13,000 cabin crew. Staff went on strike twice for a total of 10 days last month, costing the airline some 40 million pounds ($61 million), and have threatened to walk out again if the dispute is not resolved.
"The situation has the potential to be just as sticky in Spain," Atkinson added.
If successful, the merged group would be Europe's third largest airline and the sixth largest worldwide.
"The merged company will provide customers with a larger combined network," said BA Chief Executive Willie Walsh. "It will also have greater potential for further growth by optimising the dual hubs of London and Madrid and providing continued investment in new products and services."
The transaction will be implemented through the creation of a new holding company called International Consolidated Airlines Group SA which will be known as International Airlines Group.
British Airways shareholders will receive one new ordinary share in International Airlines Group for every existing British Airways ordinary share held and Iberia shareholders will receive 1.0205 new ordinary shares for every existing Iberia ordinary share held.
Stock market listings will be sought in London and Madrid, with the primary listing in London.
The airlines plan to hold shareholder meetings for approval in November.
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