British Airways and Iberia Announce Merger Plan

British Airways (BAIRY) and Spanish carrier Iberia announced their planned merger Thursday, a further consolidation in the struggling airline industry, and one that comes as word is spreading of similar talks between United Airlines (UAUA) and US Airways (LCC).

Under the transaction, a holding company called International Consolidated Airlines Group will be formed that will allow the two carriers to continue with their current operations and separate brand names. British Airways will own 55% of the holding company and Iberia 45%.

Terms of the transaction call for British Airways investors to receive one share of the holding company for every share they currently own, while Iberia investors will receive 1.0205 shares for every share they hold. The holding company's stock will trade on the London Stock Exchange and on Spanish exchanges.

"The merged company will provide customers with a larger combined network. It will also have greater potential for future growth by optimising the dual hubs of London and Madrid and providing continued investment in new products and services," Willie Walsh, British Airways CEO said in a statement.

Cost-Cutting Is in the Wings

International Consolidated Airlines Group expects to operate 408 airplanes traveling to 200 destinations and anticipates nearly $533 million in annual cost savings from the merger by its fifth year of operation.

And the carriers are indeed in need of cost savings.

According to Iberia's fourth-quarter earnings report, the carrier recorded net losses of 273 million euros ($363 million) and described 2009 as "one of the most difficult years in the company's history." Iberia further noted that its operating revenues fell by 19.1% to $1.43 billion, as it suffered a sharp decline in passenger and cargo bookings.

British Airways, meanwhile, posted an operating loss of $130.6 million in the final nine months of 2009, according to its interim report.

The merger deal, which is subject to shareholder and regulatory approval, is expected to close at the end of this year. One possible kink could be British Airways' pension recovery plan. Iberia has the right to terminate the agreement if a deal struck between British Airways and its pension trustees results in a situation "materially detrimental to the economic premises of the proposed merger," the companies stated in their merger announcement. British Airways noted in its interim report that its pension fund is facing is a $5.62 billion deficit.