British Airways Parent IAG Targets Long-Haul Acquisitions

British Airways parent IAG, seeking to build on its formation from a merger of the U.K. carrier with Spain’s Iberia a year ago, is working to identify new takeover targets including long-haul operators.

IAG is looking at opportunities beyond European airlines such as Deutsche Lufthansa AG’s BMI, which it has agreed to buy, and Portugal’s state-owned TAP SGPS SA, in which it has declared an interest, Chairman Antonio Vazquez said in an interview.

“We are definitely interested in seeking other acquisitions,” Vazquez said today in Madrid. “In Europe, everything is really taken, so it’s difficult to do anything. So we would be keen on looking for long-haul airlines.”

IAG Chief Executive Officer Willie Walsh said prior to the company’s formation that he’d drawn up a list of 12 possible partners from an initial pool of about 40. Vazquez said today that a major inter-continental deal with a carrier such as Oneworld alliance partner Lan Airlines SA of Chile will take time because of regulations limiting holdings to 49 percent.

“The problem is that current regulation doesn’t allow it and I don’t see anything happening this year at least,” he said in the interview. “We are working on identifying new potential targets to be ready for the moment when they arise.”

Multiple Options

IAG rose 2.1 percent to 171.10 pence in London, taking gains this year to 16 percent and valuing the company at 3.17 billion pounds ($4.9 billion).

“It will be a good thing to do to remain competitive,” said Andrew Fitchie, an analyst at Investec Securities in London with a “sell” rating on IAG. “There are a wide range of carriers that could be targets. Pretty much wherever you look there are opportunities, although those are there for other airlines too.”

While adding a long-haul carrier will be positive for IAG, it is also probably more of a longer-term goal, with BA and Iberia needing to first complete the “big job” of delivering savings from their own merger, Fitchie said.

IAG is working to close the deal to buy BMI, which it wants primarily for operating slots at London’s crowded Heathrow airport, and will subsequently decide whether to sell or keep the unit’s headquarters building and other assets, Vazquez said.

LOT Bids

Turk Hava Yollari AO, or Turkish Airlines, is one of two carriers in talks about a bid for Warsaw-based Polskie Linie Lotnicze LOT SA, the Polish government said today.

British Airways lost out in bidding for LOT as long ago as 1999, when the now defunct SAirGroup took a 37.6 percent stake. BA was identified by Poland’s Rzeczpospolita paper as a possible suitor in 2010 following the start of the current sale process.

Vazquez said that IAG isn’t concerned about losing out in Europe to Middle Eastern carriers such as Etihad Airways, which has taken a 29 percent stake in Oneworld recruit Air Berlin, or Qatar Airways Ltd., which said last week it’s examining deals in the region after buying Cargolux International SA in 2010.

Shares of Stockholm-based SAS Group gained as much as 7.8 percent Jan. 19 after Qatar Air CEO Akbar Al Baker said he was looking at an unspecified purchase. Ireland’s Aer Lingus Group Plc, previously linked with a bid from Etihad, rose 9.1 percent.

Hub Challenge

Qatar Airways also seems a likely candidate to take a stake in Spanair SA, which is controlled by the regional government of Catalonia, Vazquez said. The Spanish newspaper Expansion reported on Oct. 27 that a Qatari bid for the Barcelona-based carrier might consist of cash or planes.

“We aren’t worried about Gulf carriers coming to Europe,” Vazquez said, adding that inter-continental travel hubs being established in the Middle East present a far greater challenge.

Gulf states “are obsessed with building huge airports” to target long-haul flights between East and West and that has become a “big headache” for more heavily regulated European airlines, the executive said. IAG is itself in talks to operate flights to Beijing even as it waits for demand to pick up sufficiently to make the services viable, he said.

No action has yet been taken regarding TAP as Portugal’s government has yet to begin a sale process, Vazquez said. Buying the Lisbon-based airline would consolidate IAG’s hold on routes from Europe to South America, something which might become a priority should Lan opt to switch to Lufthansa’s rival Star alliance once it has merged with Sao Paulo-based Tam SA.

Iberia Wrangle

IAG, as International Consolidated Airlines Group SA is known, remains confident it can end strike action by pilots over the planned Iberia Express discount unit, the chairman said, adding that the operation will commence flying on March 25.

Iberia would have preferred to have offered lower-cost, short-haul flights through a closer relationship with Vueling Airlines SA, in which it’s the No. 1 investor, but that wasn’t possible because of collective bargaining terms, Vazquez said.

While the strike is a “big headache” for Iberia, introducing Iberia Express is a “crucial” step, he said.

Luis Benguerel, a trader at Interbrokers in Barcelona, said a higher quality service, not just a discount one, will be required to stem declining domestic and short-haul traffic.

“What Iberia needs in order to stop losing customers to rivals such as the high-speed train is to reduce regional flights and encourage passengers to fly more regularly with more space and more comfort,” he said. “Does it need a low-cost carrier being the biggest shareholder in Vueling? I doubt it.”

Iberia’s mainline operation will invest in long-haul flights and continue to build Madrid as a hub while seeking to improve its short- and medium-haul business, Vazquez said.

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