FudgeCo

BA/Iberia: The merger agreement between British Airways and Iberia should be a triumphant moment for a European airline industry crying out for consolidation. But while the logic for a tie-up is there, the detail of the deal is disappointing.

Like Air France/KLM and Lufthansa/Swiss before them, the UK and Spanish flag carries have come up with a convoluted structure to circumvent regulatory hurdles. A new holding company will own economic rights of both airlines, while the voting rights reside in newly created UK and Spanish “national control companies”. The structure allows the pair to preserve international traffic rights.

But the compromises on governance are a big mess. The umbrella group will be incorporated in Madrid, with headquarters and a primary listing in London. Having board and shareholder meetings in Spain when everything is going on in London is hardly ideal.

Worse, neither side’s management will be in control of the enlarged BA/Iberia. The group is to have three boards split equally among the two airlines. It looks designed to give everyone a job. One reason why the Air France merger worked is that the French were in the driving seat.

BA had to agree to these compromises because of its weaker balance sheet and its £2.6bn pension deficit. It is not hard to see why a cash-rich Iberia wants to stay inside a non-UK company. Indeed, Iberia can still walk away if it doesn’t like whatever deal BA reaches with its pension trustees on the deficit in June.

The airlines have been working together for over a decade. Still, this fudged management set-up will make it harder to achieve the claimed E400m of synergies, of which one-third already optimistically relies on revenue gains.

In a perfect world, BA would have fixed its pension problems first, allowing a cleaner structure for the deal. But with the airlines making E650m in combined operating profit losses, the pair were doubtless eager to get on with finding a way of getting more cost out. Even now, completion is a year away and the full synergies won’t be delivered until five years after that. This deal may just be the least bad option for both companies.