Amidst considerable brouhaha, the market reacted positively to BA’s long-delayed merger with Spain’s Iberia, on an effective 56%/44% basis. Not surprisingly, opposition to the merger has arisen, both from Virgin, who still recall BA’s role in the grounding of Laker Airways, and from the loquacious Michael O’Leary of Ryanair.
BA itself has many other challenges on its plate, ranging from the sharp plunge into losses, expected strikes and ongoing debate about its planned alliance with American Airlines. However, its worsening pension deficit – at an estimated £3 billion and above its current market value – represent a real impediment to completion of the Iberia deal.
Prudently, Iberia included a get-out clause in its market statement – ‘Iberia will be entitled to terminate the merger agreement if the outcome of the discussions between BA and its pension fund trustees is not, in Iberia’s reasonable opinion, satisfactory because it is materially detrimental to the economic premises of the proposed merger.’
Despite the hours of legal time devoted to drawing up this convoluted sentence, it remains opaque. Clearly, though, Iberia could walk away. Moving to its asset base, BA inherited its key asset – 41% of the slots at Heathrow, which drives its valuation. Without them, its core business class operations at Heathrow simply could not function.
Mindful of the £22.5 billion raised from the sale of 3G spectrum in 2000, could the Government not auction the very valuable slots at Heathrow, both to raise funds and to generate more competition?
Of course, BA would vigorously oppose such a policy even if it were phased in over a deferred period. There are also highly complex legal issues relating to slot ownership both in the UK and in the EU.
But does – and should - BA have effective ownership of over 40% of Heathrow’s slots sine die, unless it chooses to sell them?