BA weighing up Spanish merger

BRITISH Airways has targeted Spain's national airline Iberia as its preferred merger partner in Europe, a senior BA source has told Financial Mail.

Analysts say the two airlines would fit together well. They have complementary strengths, with BA holding a leading position on lucrative North Atlantic routes, while Iberia is the top European airline serving Latin America.

BA already has a 9.99% stake in Iberia and a seat on its board. Both carriers are part of Oneworld, an alliance of eight international airlines that co-ordinate their schedules and tickets.

Iberia told shareholders this month that it planned to strengthen its commercial relationship with BA, led by chief executive Rod Eddington. As a first step towards a closer relationship, the airlines are seeking permission from the EC to share routes.

The competition authorities will be concerned that the two airlines already have a market share of 27% of the air traffic between Britain and Spain. But a full merger, which on current values would create a company worth £3.3bn, must wait until changes are made to the complex rules that govern national carriers' rights to fly to each other's countries.

Under the current rules, a national airline is entitled to fly to other countries, but if its ownership passes to a foreign company, it loses the rights. These rules are one reason why BA pulled out of a deal with KLM last year. If the Dutch carrier had become British-owned, it would have lost its right to fly from the Netherlands to the US.

The EU's highest court, the European Court of Justice, is expected shortly to outlaw bilateral aviation negotiations among EC states. This decision is expected to lead to Europe becoming a single air state with the EU negotiating flying rights. This would speed up the consolidation of European airlines, which, unlike their American rivals, have been unable to merge. But any rule changes are not expected for at least two years.

Iberia, which was privatised last year, is one of the few European airlines to have made profits since the 11 September terrorist attacks. BA announced a £200m loss in the year to March. It has racked up losses of £726m on its European operations in the past three years.

BA's plight was illustrated last week when it announced that it was taking on the no-frills airlines by slashing its fares The price cuts, which are expected on up to 12 continental European routes, are part of BA's plan to turn round its loss-making European shorthaul operations. Eddington said BA needed to ensure that its online ticket system could meet expected passenger demand. He said BA would use smaller planes, but would increase the number of flights.