Consolidation on the cards as IAG claims deal to acquire BMI

Willie Walsh is at it again (on the takeover trail) - this time claiming success in IAG’s chase to acquire loss-making BMI (British Midland) from its current owner Lufthansa. Virgin Atlantic, the main competing buyer for BMI, will undoubtedly fight the deal, pointing to concerns that customers will suffer from a loss of competition as IAG (which includes British Airways) take control over even more slots at Heathrow.

The deal is not yet complete. As the IAG press release points out:

“International Airlines Group (IAG) and Deutsche Lufthansa AG (Lufthansa) have today reached an agreement in principle for the sale of British Midland Ltd (BMI) to IAG. The sale and closing of the deal remain subject to conditions including a binding purchase agreement, further due diligence and regulatory clearances. It is envisaged that the purchase agreement will be signed in the coming weeks and the aim is for the transaction to be completed in the first quarter of 2012”

Looking at the comments from Willie Walsh at the time of the announcement, it is clear what he sees as the strategic rationale for the deal.

Walsh is looking to switch BMI’s takeoff/landing slots (currently used for short-haul destinations like Europe) to long-haul destinations in emerging markets (e.g. Indonesia, Vietnam).

The problem faced by IAG (as well as Virgin Atlantic) is that Heathrow is now at full capacity. Political and other stakeholder opposition to building a third runway makes the ownership of existing slots even more strategically important.

Further viewing / reading:

Two good clips from the BBC explaining the background to, and issues arising from the deal:

Lufthansa selling BMI to BA owner

Virgin Atlantic fights back

Key points from the videos:

- Lufthansa keen to offload a loss-making part of its group
- The deal takes time to complete
- British Airways would increase its share of landing slots at Heathrow from 45% to 53%
- Will customer service suffer - e.g. cuts in flights to certain short-haul destinations
- Would a tie-up between Virgin & BMI make more strategic sense and improve competition in the market? (Virgin certainly think so)
- It is the lack of capacity at Heathrow which is the real problem - the busiest international airport in the world has only two runways!
- A suggestion that IAG buying BMI is essentially a defensive act - to stop Virgin Atlantic from getting the business