What’s behind the BA and Iberia Merger?

There are lots of resources available (and a video clip to follow) for an interesting business merger case study. What factors have encouraged BA and Iberia to merge? What will it mean for the firm and for its customers?

Both firms have had a miserable time over the last few years and stacked up heavy losses. And these two firms are not alone – the International Air Transport Association, an industry body, estimates that total losses for the world’s airlines this year will be some $11 billion. The credit crunch has hammered ticket sales (especially of premium priced Business class tickets) and fuel has been expensive. By agreeing to join together the two firms will join the trend for big European airlines to grow through mergers.

The first motivation is probably cost savings: the pair reckon that by the fifth year the new group will save some €400m annually by cutting overlapping routes, and by combining maintenance, office functions and business-class lounges. The pair may also have more muscle when it comes to negotiations to buy new planes from Boeing and Airbus. You would group these ideas together under the heading of economies of scale.

What problems lie ahead? According to reports, Iberia’s cabin crew have just finished one round of strikes and are promising more in a dispute over changes to their jobs. BA’s attempts to cut cabin crew and freeze pay could also result in strikes over Christmas. Ground staff and pilots are equally willing to use industrial action to get their way.

I also suspect that the attempt to keep two separate brands alive, with separate corporate operations could eat into some of the advantages of the merger – and even prove to be a potential diseconomy of scale.

Watch out for still more mergers in the years ahead in this troubled industry. It has plenty in common with the car business: over capacity, falling sales, high costs and environmental hassles. Politics has a big part to play too.

See an accompanying BBC video clip