BA merger is a wake-up call for London
CONGRATULATIONS to Willie Walsh, British Airways’ chief executive, for having pulled off a better than expected deal in his merger talks with Iberia. BA shareholders will own 55 per cent of the new company, while Iberia’s will hold 45 per cent; that is better than the 53-47 per cent split many had expected. Even though Iberia’s chairman Antonio Vazquez will chair the new company, Walsh will be group CEO, the job that really matters.
But the deal is also a stark warning for Britain, even though it may not look that way at first glance. The operating and financial headquarters of the group will be located in London, which shall contain the principal management functions of the combined firm. Madrid will only host a secondary management office. The group’s primary listing will be on the London Stock Exchange. But TopCo, the holding company, will be a Spanish incorporated company registered in Madrid. The majority of board meetings and all shareholders meetings will take place in Madrid. Most important of all, TopCo will be tax resident in Spain, a fascinating development which ought to send alarm bells ringing in Whitehall.
BA is denying that this will mean paying less tax here in Britain; in the short-term, they are right as there are lots of guarantees in the deal that will ensure that, for at least five years, the UK and Spanish wings of the business will be preserved as distinct national entities. Over time, however, the new group may easily end up being less and less British. And with the Tories set to veto the third runway at Heathrow, Walsh has already said that he will gradually shift flights to Spain. The statement lists as a benefit of the merger “greater potential for future growth by optimising the dual hubs of London and Madrid”. At the moment, it is hard to see how that won’t mean downgrading London. Perhaps as a harbinger of things to come, all the financials in BA’s statement last night were in euros, not in pounds. I don’t blame BA: Britain is an increasingly high-tax, high-cost location, crippled by absurdly restrictive planning restrictions and bureaucratic inertia. If airlines are no longer made to feel welcome, they will seek more welcoming locations.
Several drawbacks clearly remain. The timing of the deal isn’t great: it is expected to formalised in the first quarter of 2010 and closed by the end of that year. In other words, nothing will happen for another year, which is far too long to have to wait.
Iberia also said it reserves the right to back out if the final agreement between BA and the administrators of its disastrous £2.7bn pension deficit is not “reasonably satisfactory”, whatever that means.
BA is right to want to do the deal; flying solo is no longer an option for it. Iberia’s Latin American routes are its real prize. But Walsh has precious little time: his half-year losses were a crippling £292m, even though he has already cut unit costs by 5.2 per cent since March. He wants to save another £140m; when one adds the £300m or so in synergies from the merger the numbers don’t look as bad.
But the two companies must beware: they are both legacy airlines with antiquated working practices and excessively high costs. Both firms are facing an epidemic of destructive strikes. Merging two troubled companies doesn’t automatically create a healthy giant: rather, it could easily make a doomed dinosaur. If anybody can pull it off, however, it is Walsh. [email protected]