In many ways, British Airways and Iberia deserve each other. Both sets of cabin crew employees are already threatening strikes, and neither company makes any money. And this merger-of-equals proposal, over than a year in gestation, shows just what a parlous state BA is in.
The combined entity, a holding company so far known only as "TopCo", leaves BA shareholders with 55 per cent of the combined group, despite a market capitalisation that is double Iberia's, and will be incorporated in Spain and subject to the Spanish tax regime. The management headquarters, though, will be in London, with a local office in Madrid. Straight away, this looks like an attempt to placate politicians in both countries who might otherwise have protested at a "foreign" takeover of a national asset.
The same applies to management. Each operating company, running the airlines under their existing brands, will have nine directors and TopCo will have 14, including 11 non-executives. Just shuttling these people between London and Madrid should provide a boost to premium-cabin traffic. In contrast, Air France-KLM somehow seems to manage perfectly well with only 16 directors in total.
Total savings of €400m (£357m) are expected to come through because of the merger, as parts of the operating business are rationalised. This looks respectable, rather than geniunely game-changing, and low compared to the €600m that Air France-KLM expects to save this year.
Why didn't BA shareholders get a bigger chunk of the combined entity? The pension fund deficit is the short answer. Neither Iberia nor TopCo will make any financial contribution towards BA's scheme, but Iberia could walk away from the deal and pay only a derisory penalty fee of €20m, if the steps taken to rectify the deficit are not, in its reasonable view, satisfactory. That effectively leaves the 12 trustees of the pension fund, six of them elected by employees and retirees, with the power to make or break the deal.
BA's chief executive Willie Walsh tried to play down the significance of the deficit, as it was last valued at 31 March this year and equities have since risen substantially. But the scheme's next formal review, scheduled to complete in June 2010 (that is, before the Iberia deal is due to complete), will determine the level of contributions the company has to make over the next few years to close the deficit - and these could be very expensive.
