Not content with Iberia, BA wants more

Willie Walsh, chief executive of British Airways, has caught the merger bug.

Not satisfied with a takeover of Spain's Iberia, Walsh says he's seeking more deals to keep pace with rivals.

The main hitch: preferred partners American Airlines and Qantas 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 US$7 billion ($9.6 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.

"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, India's No 2 carrier.

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

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 and Lufthansa snapped up a clutch of smaller airlines.

Walsh says he'd "like to go further" with American Airlines, but US ownership restrictions mean transatlantic mergers probably won't happen within the next five years, with only United Airlines chief executive Glenn Tilton showing any real enthusiasm for inter-continental consolidation.

That's likely to change as takeovers within the US boost profitability and convince carriers that they can be acquirers in global deals, prompting them to push for an easing of a 25 per cent 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 US carriers to operate to Heathrow, the chief executive said.

Walsh said British Airways was also unlikely to revisit a deal with Qantas, with which it held talks in 2008, since chief executive Alan Joyce is less merger-minded than predecessor Geoff Dixon, who conducted tie-up talks with the UK company before retiring in November 2008.

The Australian carrier is focused on growth in Asia through its low-cost Jetstar unit.

His room for manoeuvre 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 offered the clearest opportunities, said Walsh, adding that there were indications of a willingness to relax ownership limits in some jurisdictions.

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

"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 might lie in persuading allies of the merits of a merger with a carrier rooted in Europe and the US.

"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 UK 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 couldn't stretch to building up Heathrow as a hub of its own, Walsh said in the interview.

Another Lufthansa unit, New York-based JetBlue, 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 says. JetBlue has begun shared ticket sales with American Airlines and British Airways is keen to recruit it for Oneworld.

As head of IAG, Walsh says he'll seek about €400 million ($708 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 says.

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

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, says 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 sceptical 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 says the American Airlines venture may generate more than US$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 transatlantic traffic with the Star Alliance's Lufthansa and United and SkyTeam's Air France and Delta, whose pacts already have antitrust immunity.

Walsh still has a big 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 labour costs that mirrors one forced through in his previous position as head of Aer Lingus.

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 head 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.

"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, his post at the merged BA-Iberia will present a new set of strategic challenges, says Brian Dunne, chief financial officer at Aer Lingus when Walsh was head of it.

"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 chief financial officer at ACE Aviation Holdings, which owns 27 per cent of Air Canada.

"Time will tell, but it's hard to think of anybody who would be better suited."

- BLOOMBERG