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Friday, 13 November 2009

We're all going on a Spanish holiday

I never rated Iberia as an airline. It wasn't just about the last time I flew with them, when their cabin crew allowed their off-duty colleagues to smoke in the non-smoking section of Business Class. I think it was more to do with their FD of about 15 years ago. I went to a meeting in Madrid full of bankers, lawyers and advisers who had all flown into Madrid from London to finalise a deal that had been under negotiation for months. The Iberia FD strutted in, preening himself like a matador. He listened to the lawyer who went through the major terms of the deal and then said "No, this is all to difficult, let's do it my way."

So everybody stood up and went home.

Now we have British Airways, formerly the world's favourite airline but now a shadow of its former self has agreed a merger of equals with the Spaniards. Well, not quite equals. There will be a 55:45 split of the shares in the new company in favour of BA shareholders. It is a sign of the decline in the value of BA that that ratio is not the 75:25 or 67:33 that it would have been a few years ago, and that is due to the egregious management and poor strategy of its current boss.

However, there is still a large stumbling block to the deal in the deficit in the BA pension fund. The two BA pension funds are substantial, but the deficit is also a very significant deficit of around £2.5 billion plus or minus a few hundred million depending on whose valuation you go with. Amazingly, BA and Iberia have signed their MOU subject to satisfactory resolution of the issue.

One view is that the trustees may be prevailed upon to revalue the fund using a lower discount rate and thus reduce the deficit to a figure acceptable to Iberia. The theory might be that without the merger BA and hence the pension fund would be in more trouble so the trustees may choose to revalue the fund to ensure the deal goes though.

Which is another failure on the part of Willie Walsh. The trustees would be negligent if they overvalued the fund simply to facilitate a merger. If Walsh wants to push the deal through he should announce a pre-merger rights issue to plug the gap and satisfy Iberia. The pitch to the equity markets would be that the investment would lead to synergistic cost savings, plus the value of reduced future pension fund contributions that the company would have to make at some point.

Asked what would happen if agreement could not be reached on the pension fund, Walsh said the issue was entirely hypothetical. Well it isn't. The BA pension fund deficit is real, and it is an obstacle to the merger. Rather than solve the issue, Walsh has simply pushed the matter over to the trustees, because it is too difficult for him.

Don't be surprised if, this time, it is the Spaniards who pack their bags and go home.


Angry Walrus said...

I was highly amused by the comment by Walsh this morning that the 55:45 ratio didn't take into account the existing shareholding that BA has in Iberia.

This he assured the audidence would dramatically boost the BA share in the new business to a massive 56%.

I don't know if he just got it wrong or thinks thats a significant change but suggests that either way he's an idiot.

Alex said...

I don't think he is an idiot, I just think he was a bad hire. His predecessor, Eddington was ex-Cathay & Qantas and thus keen on building a long haul business, and thus it became based around long-haul flights from London at the expense of its domestic network.

Walsh was brought in because somebody thought that BA needed to compete with Ryanair, although the dmage to BA had been done by neglecting its domestic network.

Walsh then tried to cut costs, treating full-fare passengers as though they were travelling in a budget airline.

If you now compare BA's domestic network with Air France or Lufthansa's you will see that the BA network is pitiful. If you live in Hamburg or Marseille you can fly round the world or across the country without changing in Frankfurt.

If you live outside London, you have to fly through London to get anywhere else because BA doesn't fly anywhere else from airports outside London, and if you live in Belfast or Birmingham (yes, the second city) forget it because BA doesn't go there.