FEATURE: BA-Iberia merger

BA and Iberia seem set finally to announce their intention to merge. What will this mean for the airlines and for the aviation industry?

The long expected merger between British Airways and Iberia, which seemed to move a step closer yesterday (November 12), will put in place one of the cornerstones of Willie Walsh's long term plans for the airline.

The ceo will be hoping a second cornerstone, the granting by the US Department of Transportation (DoT) of anti-trust immunity (ATI) to BA and fellow oneworld alliance members, among them American Airlines and Iberia, will also soon be in place.

This will give the airlines the go ahead for a joint transatlantic venture in which marketing, ticket sales and operations can effectively be merged. It is a big step along the way form code sharing.

The DoT has granted similar ATI rulings to member of rival alliances, Star and SkyTeam and seemed set to follow suit with the oneworld members. BA certainly expected it to do so. But last month the EC threw an unwelcome spoke in the wheel by highlighting its concerns over competition on seven transatlantic routes.

Its remedy was for BA and oneworld to consider give up slots, primarily at Heathrow, to other carriers.  Twice in the past, when AA and BA have applied for ATI, this requirement has proved too much and the application failed.

BA is by far the dominant airline at Heathrow with 40% of the slots, with bmi with 12% a distant second. With AA, it is also dominant on the usually lucrative transatlantic routes, especially London-New York, a staple journey for the world's bankers.

But times have changed considerably since the last ATI application in 2001 and this time round, the price the DoT and the EC demand in terms of slots may be more palatable to swallow. This change in circumstances was a point BA, AA, Iberia, Finnair and Royal Jordanian Airlines made in their current application.

This claimed that the merger of Delta Air Lines and Northwest Airlines - both SkyTeam - and the closer co-operation of United Airlines and Continental Airlines - both Star Alliance - had put AA at a "distinct competitive advantage". Together the four carriers "dwarfed" AA's network.

Since 2001, the oneworld members said the "presence and power of the immunised SkyTeam and Star Alliance have grown considerably." If oneworld did not get similar immunisation, competition between the alliances would be stifled.

Should it get its ATI, BA and oneworld will begin to operate on a similar footing to the rival alliances. That BA is in this position, far behind rivals, is in part due to itself. Persuading itself it was the "world's favourite airline" which could dictate terms to would be allies, it missed opportunities to expand and consolidate.

Talks with KLM fell through because BA wanted to take it over rather than form a partnership. KLM rapidly did just that, and very successfully, with Air France. A chance to link up with SWISS also fell through amid acrimony.

When it finally turned to Iberia, there were not many airlines left to court. Even in the middle of these ever delicate talks, BA was caught making overtures to Qantas. It could be little wonder that Fernando Conte, until summer the Iberia ceo, dragged his heels.

What looks essential to BA now is to act quickly to make sure the new merger starts working in it and Iberia's favour as soon as possible. One obvious advantage it can concentrate on some growth in the South American market Iberia is a major force and Brazil is emerging as one of the world's largest economies. This should e a big plus for both Iberia and BA.

The same need to move quickly applies to any ATI the DoT grants.

BA has a lot of catching up to do in a world that has rapidly changed. Not only have low cost carriers won an ever greater share of the market, most keenly of all in the crowded UK market, but legacy rival have also become more powerful. The industry has also been wrestling with the greatest downturn in demand it has ever suffered.

Looking more broadly at European aviation, this merger would stabilise it a little more, creating three big camps, Air France KLM, Lufthansa (with Austrian Airlines, SWISS, Brussels Airlines and bmi in tow) and BA-Iberia.

If BA hesitates any more it will just give more succour to its rivals.