Friday, 26 November 2010

BA/Iberia. The Galleon Sails On.

Next Monday,November 29th,BA's shareholders meet to vote their old company into oblivion as "a publicly quoted financial entity" and together with their Iberia equivalents sign up for compensatory shares in the new Spanish registered IAG,- International Airlines Group. BA's Chairman , writing in Overview, the magazine for shareholders,claims in an article headed "Still British to the core" that he "can reassure shareholders that British Airways will not have its strength drained by this merger". The front cover proclaims boldly "Everything you need to know about the merger". From this we can deduce that the Board thinks we need to know very little.Its 16 pages including covers are surprisingly unrevealing.It is a million airmiles from "Everything there is to know about the merger". There is absolutely nothing in it about the proposed organisational and financial structure for a start.

Mr Broughton says "Now British Airways will be more an airline brand". Nothing is said about its ongoing legal persona,if any. It is reasonable to assume therefore that it will indeed simply be a brand or division of IAG rather than a wholly owned subsidiary. He mentions airlines joining IAG "to retain their identity for the long term", but does not explain how this will be achieved or what guarantees there will be. If it is just a brand then BA will have lost control of the ultimate test of independence,- could it walk away from IAG if it found it didn't like the way things were turning out? It appears not. In that case BA and Iberia will be dead and gone for ever as separate businesses. All that will remain will be two facades, hollow shells,for the time being the frontage for IAG.

If this reasoning is correct and we haven't missed anything, there are a whole host of unstated facts and unasked questions behind the corporate smokescreen theme that this is an unmissable deal for BA's shareholders,customers and staff. What are the specific strategies and financial objectives of IAG? How do they differ from what the individual companies might reasonably have expected to achieve (bearing in mind that BA has been remarkably free of a global geographical strategy for the last 10 to 15 years)? Is the initial 55/45% split between the holdings of former BA and Iberia shareholders relevant for a second beyond the start of trading on the first day? How will the starting price of IAG shares be determined? If BA and Iberia have gone as separate entities ,who will mastermind staff issues, recruitment, career progresion etc? Will the two brands have any independence in strategy, route development and aircraft aquisition or will they have to bid against each other for turf and resources in an annual IAG budgeting process? If they do,as would be normal in a straight merger then surely the Group HQ will grow EU style and become another tier of management above the two brands. Decision making will be slower and complexity and costs higher?

Possibly the answers will be appear during Monday's meetings, but given the fact that the institutional investors, tired of years of few dividends and depressed share prices, have already indicated that they will vote "Yes" ,it looks all over bar any shouting from individual investors .Numerically they will be heavily outvoted anyway.

All that apart,recent events in Euroland and Ireland in particular should furrow the brows. Putting aside Greece, already in the sin bin,Spain is third after Ireland and Portugal in the list of Euro countries which could end up calling for the cash dispensing fire brigade. Unlike the other two it looks too big an economy to be rescued in the same way. That being the case,is this a good time for a UK company to be throwing in its lot with a Spanish one whose domestic market could end up with all sorts of problems were its homeland to get into serious difficulties? What if the needs of the Spanish side of the business drained cash from the needs of the UK operation? If you were piloting BA at this moment might you not be thinking of quickly hitting the "Go Round" button on the control panel?