The company's promotional literature emphasizes the synergistic effects of this corporate structure: "IAG combines the two leading airlines in the UK and Spain, enabling them to enhance their presence in the aviation market while retaining their individual brands and current operations. The airlines' customers benefit from a larger combined network for both passengers and cargo and a greater ability to invest in new products and services through improved financial robustness" (About IAG, 2012, para. 2). These changes in the corporate structure are consistent with larger trends in the airline industry which has experienced increasing consolidation among major carriers notwithstanding some regulatory constraints, and are also congruent with IAG's stated mission to "play its full role in future industry consolidation both on a regional and global scale" (About IAG, 2012, para. 3).
Market perception of IAG as a whole
Some recent media reports provide some useful insights concerning the standing of IAG in the current competitive airlines environment. For instance, Brummer (2011) reports that in IAG still plans to proceed with a partnership with American Airlines in spite of the carrier's current status in federal district bankruptcy court. This is not all that surprising, Brummer suggests, because, "In the U.S. skies Chapter 11 [bankruptcy] is a way of life, and post 9/11 most of the major carriers, including United and Delta, shed their debts and found merger partners. Houston-based American Airlines was the exception until earlier this week when it filed for Chapter 11 in a bid to free itself of $30 billion of debts and costly contracts with pilots and other staff groups. The big difference in the case of AA is that it has an antitrust immunity deal with International Airlines Group, the owner of BA, so its affairs are of a real consequence to the flag carrier" (p. 93).
In reality, the completed merger action does have some significant benefits for IAG if American Airlines succeeds in reorganizing under the protection of the bankruptcy court and overcomes its labor problems (an issue that remains uncertain as this is written), making it a good North American match for IAG to help it achieve its corporate goals. In this regard, Brummer reports that, "The ideal outcome for Willie Walsh, who is now seeking to build IAG into a world beater, would be one which allowed BA to merge with its American partner; however, there is a big obstacle in the way in the shape of the U.S. restriction on share ownership in airlines which would limit IAG-BA to a 25% stake. Nevertheless, IAG has not entirely lost hope that the U.S. authorities and Congress might yet sweep the restriction into the sea making a merger possible" (Brummer, 2011, p. 93).
Many observers question whether such congressional approval is readily forthcoming, but most agree that the IAG merger is representative of the consolidation trends that have characterized the airline industry in recent years. For instance, Brummer concludes that, "There is an increasing recognition among the U.S. carriers that they risk being left behind by the big European airlines such as Lufthansa and IAG. They also face competition from new players, with limitless state money behind them, like Etihad, Emirates and Singapore. The pressure for change is gathering speed" (2011, p. 93). Taken together, the foregoing trends indicate that IAG is continuing to build a global concern in the face of increasing pressure from other major carriers that enjoy significant government subsidies and support, issues that affect the market perception of IAG. As reflected in the company's stock performance for the past year to date as shown in Figure 1 below.
Figure __. Stock Performance of IAG: Past YEAR-to-DATE
Source: http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary / company-summary-chart.html?fourWayKey=ES0177542018GBGBXSET1
Both carriers have struggled to compete with budget airlines and the decline in demand for premium business travel during the recession. Like its competitors, British Airways also attempted to reduce costs; however, this action resulted in cabin crews striking and in early 2010, the airline conceded that the costs of the labor issues could cost it as much as [pounds sterling]45 million (Tobin, 2010). Indeed, budget-carrier Rynair's CEO Michael O'Leary characterized the merger thusly: "This is two drunks holding each other up at the bar. "It's bad news for BA passengers as the company will now hike up the fares but good news for Ryanair as more passengers will switch from both to us" (Tobin, 2010, p. 37).
Other events have also affected the company's standing compared to its competitors in recent months,...
For instance, according to Smith (2010), recent reports indicate that the International Airlines Group consisting of the new merger between British Airways and the Spanish carriers Iberia may lead to the acquisition of another carrier, Bahrain-based Gulf Air (Smith, 2010). According to this industry analyst, "The airline, which flew almost six million passengers last year, currently has 24 super-jumbo Boeing 787s, 20 A330s and seven A320s on order. However, delivery of the 787s is being delayed to 2019 and there are reports that the carrier may shift its Airbus orders to smaller, narrow-bodied aircraft as part of a move to develop a more focused regional strategy" (Smith, 2010, p. 33). This reaction is congruent with the overall trend in the industry towards consolidation and may represent a valuable opportunity for carriers that identify strategic partners with the requisite resources and expertise that is needed in an increasingly competitive marketplace (Smith, 2010). Moreover, IAG's executive leadership team emphasized the importance of such initiatives to the company in the future and indicated they would be relentless in their efforts (Webb & Rothwell, 2012).
Impact of recent corporate developments for IAG.
A report from Tobin (2010) indicates that British Airways merger with Spain's Iberia air carrier took place when British Airways was in the process of formulating a 3.7-billion pound recovery plan that appears to have resolved many of the same types of problems that are still facing IAG's intended North American partner at American Airlines. According to Tobin (2010), "Strike-ridden BA said talks with members of the Unite union had, for once, gone well and it had agreed a plan with staff and pension scheme trustees to cut its massive deficit without closing its two final-salary pension schemes. The negotiations were the last remaining barrier to BA's merger with Iberia to form International Airlines Group, an industry giant operating 1700 flights a day" (p. 41). This initiative was widely regarded as crucial to the eventual merger process itself because Iberia had ensured a legal right to withdraw from the negotiations if British Airways failed to develop a viable recovery plan (Tobin, 2010). The recovery plan stipulated that:
1. British airline would maintain its current annual distribution of [pounds sterling]330 million a year towards the pension schemes, with inflation-level increases every year, averaging about 3% continuing until 2023 for British Airways' older plan,
2. The Airways Pension Scheme, which ran from 1948 to 1984, and until 2026 for the New Airways Pension Scheme, which was open to employees between 1984 to 2003, when BA stopped offering staff a final-salary retirement plan.
3. The airline also agreed to make extra deficit contributions if its year-end cash balance was more than [pounds sterling]1.8 billion (Tobin, 2010).
These arrangements proved satisfactory and IAG executive leadership team even began conceptualizing what steps they should take following the all-but-completed deal with Iberia. For instance, a follow-up report from Laing (2010) notes that British Airways chief executive Willie Walsh compiled a list of twelve air carriers he considered possible targets for acquisition following the successful merger with Iberia.
Another report from Davies (2010) described the original negotiations as "acrimonious" but suggested the end of the tunnel is in sight with the imminent merger due to take place as these words are written. According to Davies, "British Airways has had a rum old year. Increasingly acrimonious dogfights with trade union United and cabin crew offshoot Bassa were swiftly followed by a record [pounds sterling]531m annual loss. Equally time-consuming, albeit for happier reasons, has been BA's [pounds sterling]5bn merger with Iberia to form International Airlines Group, alongside a revenue-sharing agreement with the Spanish carrier and American Airlines on lucrative transatlantic routes" (p. 66).
Interestingly, some analysts characterize the IAG merger effort as continuing the wave of consolidation that is taking place in the industry and characterize the most recent effort by IAG as merely representing a way to "spread the blame around" in case something else goes wrong. In this regard, Davies adds that, "Even for a renowned workaholic such as chief executive Willie Walsh, it's been a year of hard graft. And when times get tough, there is safety in numbers. The wooing of new bedfellows in the form of Iberia and…
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