Survival of the fittest, or is it those whose who merge who survive?

There are no doubts many positive aspects about a merger, economies of scale, synergies etc... But there are also certain pitfalls. Is it wise to merge to hurting giants together, or shall they drawn themselves in sorrow?

Mr O’Leary from Ryanair welcomes the merger of British Airways and Iberia, saying it shall leave more passengers for Ryanair, as the merger of the two is “like two drunks supporting each other on the way home from the pub”. Clearly there is a least one person in favour hoping to pick up the pieces (passengers) when this who affair fails. Some are not so content on the matter Richard Branson for example names it a “monster monopoly”, that should not be allowed. The Virgin team are afraid that merger shall be successful and that they shall dominate the market forcing other airlines out.


The feeling of the people seems to be mixed, passengers are afraid that the quality they are used to from British Airways and their award winning cabin space and service shall no longer be at their disposition, as Iberia simply cannot match the high standard. The Spanish do not seem to enthusiastic either, as one person compares British Airways with Titanic only with more holes in their pension plan.
Oh yes that pension plan is a big problem, with a deficit of £3 billion, if the merger is to be successful, Mr Walsh has to address the fund problem and has to come to an agreement with all 12 trustees. Although the prognoses seems to be rather sunny skies, as the trustees seem to want the merger to happen, as it could secure British Airways future. Mr Walsh assures the pension fund shall not stand in their way and that within the next two to three months the trustees and British Airways shall have attained an agreement.


Well let’s look at what this merger entitles, what it means for both parties, and their passengers. The two airless shall merger in a similar style and structure as KLM and Air France did in 2002; the structure was seen to be very complicated, yet successful. Can this be the case for this merger as well, it seems less likely, 2002 was still a booming year, where everything and anything was possible, and can this still be said nowadays? Anyway the airlines companies shall remain two separate brands (allowing them to continue to show the flag and follow through with their special contracts with certain countries or airports), under one umbrella holding company named TopCo. TopCo interesting choice of words, are they really the top, I think not. Personally I am not a big British Airways or Iberia fan, they are constantly late, lose one’s baggage, rude, bad food and service, shall I go on? TopCo you wish! TopCo shall have its operation centre in Madrid with Iberia’s CEO, taking the high seat and Mr Walsh shall take care of the Headquarters situated in good old London. British Airways shall hold 55% and 45 shall go to Iberia. Apparently the first talks were more like 60/40 but Iberia was able to pressure Walsh with the pension fund deficit.


The merger is to be executed in the first quarter of 2010. So what shall that mean for the airlines and their passengers? First and for mostly it shall help cut costs, Mr. Walsh is setting a goal of £400 million within the next five years, this should be done through cost cutting such as reducing staff cost, but also through removing duplicating functions such as head offices maintenance and sales force. The unions do not seem to be too happy with that, the Spanish union immediately demanded a 4% salary increase, already adding to their extremely high pay grade comparing to other airlines. The BA union threaten that they would commence strikes as of the end of November. Although they are willing for the merger to go through they expect and demand that no more people shall be made redundant, they have already suffered enough this year. However, Mr. Walsh announced that; as of Monday 3000 cabin crew staff shall be working on a part time schedule only, two year pay freeze, reduced holidays and 1000 will take voluntary redundancy. I am sorry but does that even exist, ok maybe one person says that they feel they shall be better off somewhere else but one thousand I doubt it. I just hope none of you are planning to take British Airways to go home for Christmas, if you do I suggest you take a blanket to the airport, as if strikes commence you shall never know if you shall actually be flying.


However do not despair there are positive sides to this merger as well. It shall present the airlines with the opportunity to drive down costs and boost revenues. It shall allow them to challenge other major players such as Star Alliance and the KLM, Air France, which in this recession period could become the only possibility of surviving. So what would be worse not having a national airline or simply having less cabin space as you are flying with Iberia?


Through this merger the airlines shall be carrying 62 million passengers a year and employ 60,000. It shall enhance the network of both companies, giving it greater flexibility and access to over a 100 destinations. However this might only be the beginning as apparently talks are underway to incorporate American Airlines into the merger, as through this the TopCo Company shall be the major player in the Atlantic. Whatever happens within the continent the airlines especially Iberia are not able to compete with other transportation methods such as the trains. So will the Atlantic be enough for 3 global players?


Personally, I believe that the industry has been hit so badly by this recession, that their survival might well depend on the merger. It might be a bad time, especially since both companies together shall write a £600 million loss this year alone. It is wise for two companies whole clearly have cracks on their foundation. Well what else is there to do? How can they ensure their survival otherwise? Most other companies are merging or have already merged; therefore it might be a most.


Regarding the reading for this week, well I thought it would be interesting to follow the story over the week to see how, why, from which angle and how often the newspapers would cover the story. I think Times online was the winner on that last point, they brought out 9 stories over a 2 day period, seeming to be very anxious of what the outcome shall be and what effects it shall have. Each looking at the merger from a different perspective, although what they had to say about BA was not all peaches and roses; they definitely were on the more nationalistic side. It was also interesting to see what peoples comments were, it generally was not the best, calling it a messy affair. The language varied from being more tabloid style quoting O’Leary and his somewhat nasty comments, to being more news worthy, it had a questioning style to it throughout the different articles, making it all a little more interesting. However, in general it gave a good overview, with the pros and cons for both sides. I would say it tended to be more pro BA, but let us not forget that this is their flag flying airline, how can they not be in favour of them. The Daily Mail was very funny read, as apparently the deal is already through, they are very positive about it and are as they say in constant contact with Mr Walsh himself. Way to go fellas! The Swiss article was straight forward and as objective as can be, stating the details of the merger, the why, how and when, it was a goof informative read, but I could not detect any bias. Reuters and Bloomberg focused on the financial aspect and did not care much for the passengers and their lack of cabin space. It covers the increase in the share prices since the announcement of the merger and that BA share are raising faster than Iberia’s. They talk about the unions and the likelihood of strikes. Bloomberg also incorporates opinions of different analyst and other airlines such as Virgin.


The Telegraph was rather pro merger and was quoting Mr Walsh every word it seemed and nobody else’s, however they also covered the pension plan deficit, yet were happy to say that the affair could be regarded delta with.


The titles also said a lot about what the articles thought of the merger this week, the Times focused on Iberia and the negative sides they would bring “more routes but less class”, or that BA shall “still be able to fly the flag”. The Swiss newspaper named it the struggle for the skies, also stating that this move might be more of a must then a want. Reuters and Bloomberg’s heading focus on the financial side, that the merger might not be enough or that the pension fund is a bigger issue than many other newspapers claim. The Daily mail as said before was rather positive about the merger happening soon, “British merger with Iberia imminent”. The wording is also rather interesting, as it is a whole country and its people (British) merging with just an airline (Iberia).


Whatever the newspapers say the merger is not over yet, there shall still be some interesting stories to come. I wish them luck and hopefully for me the soon to be new additional power of the skies shall help push airfares down from other companies, as wouldn’t that be splendid!


Till next week,



S



Sources used:
Times online
http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article6915425.ece
Ryanair's O'Leary welcomes BA-Iberia merger
13.11.2009

Times online
http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article6916739.ece
More routes but less class
The merger of British Airways and Iberia is not one of equals when it comes to product quality
14.11.2009

Times online
http://business.timesonline.co.uk/tol/business/article6916561.ece
Merged group will still be able to fly the flag
14.11.09

Times online
http://business.timesonline.co.uk/tol/business/columnists/article6915006.ece
BA taking a bit of a flyer with Iberia deal
13.11.09

Times online
http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article6916756.ece
Destination for Europe’s biggest airline
14.11.09

Times online
For Spaniards merger is seen as a bad move
http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article6915018.ece
13.11.09

Times online
http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article6916635.ece
Iberia’s costly crew will be the focus of attention for Willie Walsh
14.11.09

NZZ
Drei Grosse kämpfen um die Lufthoheit
http://www.nzz.ch/nachrichten/wirtschaft/aktuell/drei_grosse_kaempfen_um_die_lufthoheit_1.4011789.html
13.11.2009

Reuters
BA, Iberia merger hinges on pension deficit
http://uk.reuters.com/article/idUKTRE5AC0XD20091113
13.11.09

Telegraph
http://www.telegraph.co.uk/finance/newsbysector/transport/6557766/BA-Iberia-4.4bn-merger-creates-Europes-third-largest-airline.html?utm_source=telegraph&utm_medium=TD_baiberia&utm_campaign=Finance1311
BA-Iberia £4.4bn merger creates Europe's third-largest airline
13.11.09

Bloomberg
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKD1nSQQefAs
British Airways May Need AMR Alliance More Than Iberia Merger
13.11.09

Daily mail
British merger with Iberia imminent
http://www.dailymail.co.uk/money/article-1227347/British-Airways-merger-Iberia-imminent.html
13.11.09