British Airways CEO Sizes Up Next Deal After Iberia

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Willie Walsh, Chief Executive Officer of British Airways Plc
British Airways CEO Sizes Up Next Deal. Photographer: Jason Alden/Bloomberg Businessweek

Sept. 6 (Bloomberg) -- Willie Walsh, chief executive officer of British Airways Plc, has caught the merger bug.

Not satisfied with a takeover of Spain’s Iberia Lineas Aereas de Espana SA, Walsh says he’s seeking more deals to keep pace with rivals. The major hitch: preferred partners AMR Corp.’s American Airlines and Qantas Airways Ltd. of Australia are off limits for now, pushing Walsh to cast his net elsewhere.

A 48-year-old Irishman who has taken an uncompromising stance in British Airways’ first cabin-crew strike for 13 years, Walsh has formed a taskforce to identify merger candidates even before the ink on the $7 billion Iberia deal is dry. By focusing on consolidation from the get-go, the enlarged company aims to be in front as a desire to cut costs and expand networks hastens tie-ups between carriers on different continents.

“Our competitors will be looking to move on too, so we want to make sure we’re capable of pursuing further consolidation immediately,” Walsh said in an interview for Bloomberg Businessweek’s next edition. “We intend to be clear in our ambition so that we know who is attractive and who would be attractive if the opportunity arose.”

British Airways has identified about 12 airlines that would be attractive, narrowing the list from an initial pool of about 40. Walsh was in Mumbai at the weekend to announce a code-share agreement with Kingfisher Airlines Ltd., India’s No. 2 carrier.

Lost Time

Investors have backed the Iberia deal. Before today, British Airways shares had risen 19 percent this year, the third-best performance in the eight-stock Bloomberg EMEA Airlines Index, which added 3.3 percent. Iberia has jumped 40 percent, while Ryanair Holdings Plc, Europe’s largest discount airline, is up 20 percent in the period.

British Airways slipped 2.2 pence, or 1 percent, to 220.8 pence at the close of trading in London at 4:30 p.m. Kingfisher jumped 8.9 percent to 69 rupees in Mumbai.

While Walsh has made his mark by sealing the Iberia deal and winning antitrust approval for an alliance with American Airlines in July, that’s done little more than make up for lost time after a decade during which British Airways was beaten to the purchase of Dutch carrier KLM by Air France SA and Deutsche Lufthansa AG snapped up a clutch of smaller airlines.

Walsh says he’d “like to go further” with American Airlines, but U.S. ownership restrictions mean trans-Atlantic mergers probably won’t happen within the next five years, with only United Airlines CEO Glenn Tilton showing any real enthusiasm for inter-continental consolidation.

U.S. Limits

That’s likely to change as takeovers within the U.S. boost profitability and convince carriers that they can be acquirers in global deals, prompting them to push for an easing of a 25 percent cap on investment from overseas, Walsh said at Waterside, the British Airways base near Heathrow airport that he’ll be leaving to take charge of the holding company running the combined BA-Iberia, International Airlines Group.

The European Union is unlikely to force a change of policy on Washington after losing leverage when it de-linked ownership from route-access issues in a so-called Open Skies treaty that allowed all U.S. carriers to operate to Heathrow, the CEO said.

Walsh said British Airways is also unlikely to revisit a deal with Qantas Airways, with which it held talks in 2008, since CEO Alan Joyce is less merger-minded than predecessor Geoff Dixon, who conducted tie-up talks with the U.K. company before retiring in November 2008. The Australian carrier is focused on growth in Asia through its low-cost Jetstar unit.

Oneworld Partners

His room for maneuver limited, Walsh says he’ll seek partners among other members of the Oneworld alliance and those carriers that aren’t yet aligned to a global grouping, with the taskforce seeking to establish which company leaders share his views on the need for consolidation at a global level.

Asia, Latin America and Europe offer the clearest opportunities, said Walsh, adding that there are indications of a willingness to relax ownership limits in some jurisdictions.

Oneworld has 11 member airlines, including Hong Kong-based Cathay Pacific Airways Ltd., Finnair Oyj and Lan Airlines SA of Chile, which last month agreed to buy Brazil’s Tam SA for $3.7 billion, as well as American Airlines and Sydney-based Qantas.

In a separate interview with Bloomberg UTV, Walsh called on India’s government to relax rules restricting foreign ownership of the country’s carriers.

‘Come to Party’

“I have absolutely no doubt if the rules do change here in India that there will be lot of interest not just from British Airways but a lot of interest from airlines around the world in investing in the market here and potentially investing in the airlines here,” he said. “I do see this as an opportunity.”

Chris Tarry, an independent analyst who has followed the industry for almost three decades, said Walsh’s biggest challenge may lie in persuading allies of the merits of a merger with a carrier rooted in Europe and the U.S.

“I can’t see who is going to come to the party,” he said. “Why would an Asian airline give up some of its growth in a faster-expanding market? They would want to merge with somebody in their own region with better prospects.”

In Europe, Walsh says British Airways is keen to bid for BMI, the U.K. carrier that’s the second-biggest holder of slots at Heathrow airport, should parent Lufthansa choose to sell. The German airline, forced to buy BMI under duress after its then owner exercised a put option, probably can’t stretch to building up Heathrow as a hub of its own, Walsh said in the interview.

Air France, Lufthansa

Another Lufthansa unit, New York-based JetBlue Airways Corp., is also a bid candidate now that United’s purchase of Continental Airlines is poised to bring nearby Newark into the Star Alliance network, Walsh said. JetBlue has begun shared ticket sales with American Airlines and British Airways is keen to recruit it for Oneworld, he said.

As CEO of IAG, Walsh said he’ll seek about 400 million euros ($516 million) in annual synergies, one-third from revenue gains and the rest from savings. That’s a better balance than at Air France-KLM, where benefits came mostly from boosting sales, and Lufthansa, whose strategy is to squeeze costs at failing carriers, he said.

Fleet planning is already being coordinated, Walsh said, with British Airways taking over Iberia orders for single-aisle aircraft and the Spanish company’s future long-haul requirements likely to elicit major discounts from Airbus SAS and Boeing Co. since British Airways will inevitably opt for the same supplier when it comes to buy.

‘Mega Mergers’

Still, the merger hasn’t won universal acclaim within the industry, and Maurice Flanagan, vice chairman of Dubai-based Emirates, the largest airline by international traffic, said it will be tough to achieve the targeted economies of scale.

“The route structures complement each other, with British Airways flying to places that Iberia doesn’t and vice versa, but complexity is the bugbear of our business and this merger looks rather too complex,” Flanagan said in an interview.

Tarry, too, said he’s skeptical about the value of “mega mergers” among airlines, including those led by Air France, Lufthansa, United Airlines and Delta Air Lines.

“Big is not necessarily beautiful in this industry,” he said. “Combining two weak carriers does not necessarily give you one strong one.”

Walsh said the American Airlines venture may generate more than $100 million in annual sales, making it less lucrative than the Iberia deal, but of huge importance in putting Oneworld “back in the game” when competing for trans-Atlantic traffic with the Star Alliance’s Lufthansa and United and SkyTeam’s Air France and Delta, whose pacts already have antitrust immunity.

Fighting Walkouts

Walsh still has one major hurdle to overcome in his current post at British Airways, where 12,000 cabin crew are persisting with a 20-month challenge to his plans for a step-change in labor costs that mirrors one forced through in his previous position as CEO of Ireland’s then bankruptcy-threatened Aer Lingus Group Plc.

Flight attendants have staged strikes on 22 days this year after BA imposed contract changes when talks failed. Their last walkout in 1997 lasted three days before CEO Bob Ayling sought an agreement with unions: under Walsh the airline has instead leased planes and trained pilots and ground staff to double as cabin crew to keep services operating.

Analysts say the dispute may be in its final throes, and Walsh, portrayed as Adolf Hitler and the Devil on placards at picket lines but a union negotiator himself while working as a pilot at Aer Lingus, says there’ll be no climb-down.

Terminal 5

“I do genuinely try to understand where the other side is coming from,” he said in the interview. “But in the past we have in effect rewarded people for threatening -- and even taking -- industrial action, and I think that is one of the reasons why we’ve had a situation where we get threatened.”

While Walsh’s operational abilities have been tested in the strike and a botched move to Heathrow’s Terminal 5 that resulted in the cancellation of hundreds of flights at a cost of 16 million pounds ($25 million), his post at the merged BA-Iberia will present a new set of strategic challenges, said Brian Dunne, chief financial officer at Aer Lingus when Walsh was CEO.

“It’s a big undertaking and probably less hands-on from an operational perspective, with different aspects of strategy to focus on,” said Dunne, now CFO at ACE Aviation Holdings Inc., which owns 27 percent of Air Canada. “Time will tell, but it’s hard to think of anybody who would be better suited.”

To contact the reporters on this story: Steven Rothwell in London at; Chris Jasper in London at

To contact the editor responsible for this story: Kenneth Wong at