IAG's Acquisition of BMI: Rationale and Shareholder Value
This report examines International Airlines Group's (IAG) proposed acquisition of British Midland International (BMI) from Deutsche Lufthansa AG. It outlines the business rationale for the deal from both parties' perspectives, including Lufthansa's mounting losses from BMI operations and IAG's strategic interest in acquiring additional Heathrow take-off and landing slots. The report also discusses regulatory hurdles, competitive concerns raised by Virgin Atlantic, and the broader academic debate on whether mergers and acquisitions generate long-term shareholder value. Drawing on secondary research and academic literature, the paper concludes that it is premature to assess whether the BMI deal will ultimately benefit IAG's shareholders.
- Introduction: Profiles Lufthansa, BMI, and IAG's financial positions
- Rationale for Acquisition: Strategic and financial drivers behind the BMI deal
- Regulatory Clearances: EU competition review and Virgin Atlantic opposition
- Discussion: Mergers, Acquisitions, and Shareholder Value: Academic evidence on M&A outcomes and shareholder returns
- Conclusion: Uncertainty over long-run value creation for IAG shareholders
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What makes this paper effective
- Clearly frames both sides of the deal — Lufthansa's motivation to exit a loss-making subsidiary and IAG's strategic rationale for acquiring Heathrow slots and new route capacity.
- Supports practical business analysis with citations from peer-reviewed finance journals, grounding the discussion in established M&A theory.
- Includes financial appendices that substantiate claims about revenue, operating losses, and fleet data, lending empirical weight to the argument.
Key academic technique demonstrated
The paper effectively combines primary business data (annual reports, press releases) with secondary academic literature on merger performance. By referencing studies on shareholder returns in the UK, US, and Spain, it contextualises the IAG–BMI deal within a broader empirical debate rather than treating it as an isolated event. This comparative approach strengthens the analytical credibility of the conclusions.
Structure breakdown
The report follows a logical business-report structure: an introduction establishes both companies' profiles and financial positions; a rationale section traces the deal's origins and strategic logic; a regulatory section addresses competition concerns; a discussion section surveys relevant academic literature on M&A outcomes; and a conclusion synthesises findings while acknowledging the difficulty of predicting long-run shareholder value. Appendices with financial data support each major claim throughout.
Introduction
Lufthansa is one of Europe's largest airlines, measured both by the number of passengers flown and by total revenue. Lufthansa's aviation corporate structure consists of five segments: Passenger Airline Group, Logistics, Technik, IT Services, and Catering (Appendix 1). With generated revenues of €28.7 billion and a net loss of €13 million at the end of the reporting year, the organisation recorded a loss of €285 million connected to the discontinued operations of British Midland Ltd. (BMI). This result forms the financial basis for BMI's sale to International Airlines Group (IAG). BMI, as a subsidiary of the Lufthansa Group, is a UK-based airline that operates from London Heathrow as its main hub, serving major UK cities (Regional BMI) as well as destinations in the Middle East, Africa, and Asia. Heathrow is one of the world's busiest and best-connected international airports.
International Airlines Group (IAG) is one of the largest airline groups in the world, ranking sixth globally and third in Europe by revenue and passenger numbers. IAG was formed in 2011 through a merger of British Airways and Iberia, a Spanish-registered carrier. Their motto is "Stronger Together." The combined companies offer an expanded worldwide network. Financial results have been promising: combined operating profit doubled following the merger and revenue rose by more than 10% (Appendix 3).
This report investigates the proposed acquisition, recognising and critically discussing the business justification for the deal and its likely long-term implications. The key objectives are to: identify the business rationale for the takeover from the perspectives of both Lufthansa and IAG; address the complexity of the acquisition and the motives — including managerial motives — put forward; evaluate the expected gains from the takeover; and discuss the corporate objective of generating higher cash flows for shareholders.
Secondary research was conducted to address and investigate these issues. The airline groups' websites were thoroughly reviewed for financial performance data and stated reasons behind the acquisition and disposal. Academic journals and textbooks were also consulted, supplemented by recommended reading on mergers and takeovers with a UK focus and relevant articles from the financial press.
Appendix 1: Lufthansa Group Financial Summary (January–December 2011 vs. 2010)
Total revenue: €28,734m (2011) vs. €26,459m (2010), +8.6%
Traffic revenue: €23,779m (2011) vs. €21,466m (2010), +10.8%
Net profit/loss: −€13m (2011) vs. €1,131m (2010)
Capital expenditure: €2,575m (2011) vs. €2,273m (2010)
Cash flow from operating activities: €2,356m (2011) vs. €2,992m (2010), −21.3%
Employees (31 December): 120,055 (2011) vs. 117,019 (2010), +2.6%
Earnings per share: −€0.03 (2011) vs. €2.47 (2010)
Lufthansa's corporate structure comprises five segments: Passenger Airline Group, Logistics, Technik, IT Services, and Catering.
Appendix 2: BMI Financial and Fleet Data
Turnover: £869m (2005), £905m (2006), £1,023m (2007), £1,045.9m (2008)
Passengers: 10.5m (2005), 10.5m (2006), 10.6m (2007), 10.0m (2008)
Pre-tax profit/(loss): £10m (2005), £29.7m (2006), £15.5m (2007), (£155.6m) (2008)
Revenue passenger km (scheduled): 9,325m (2005), 9,776m (2006), 10,387m (2007), 10,997m (2008)
Fleet composition: A330-200 (1), A321-200 (7), A320-200 (7), A319-100 (11), Embraer 145 (14), Embraer 135 (4)
Appendix 3: IAG Financial Results Consolidated
Passenger revenue: €13,675m (2011) vs. €12,322m (2010), +11.0%
Total revenue: €16,339m (2011) vs. €14,798m (2010), +10.4%
Basic earnings per share: €31.1 cents (2011) vs. €17.1 cents (2010)
Available seat kilometres (ASK): 213,193m (2011) vs. 199,032m (2010)
Revenue passenger kilometres (RPK): 168,617m (2011) vs. 157,323m (2010)
Seat factor: 79.1% (2011) vs. 79.0% (2010), +0.1 percentage points
Passenger yield per RPK: €8.11 cents (2011) vs. €7.83 cents (2010)
Passenger unit revenue per ASK: €6.41 cents (2011) vs. €6.19 cents (2010)
Works Cited
Buyck, C. (2011). Lufthansa sells bmi to British Airways parent IAG. Retrieved 25 March 2012, from
Gregory, A. (1997). An examination of the long run performance of UK acquiring firms. Journal of Business Finance & Accounting, 24(7), 971–1002.
Limmack, R. (1997). Discussion of an examination of the long run performance of UK acquiring firms. Journal of Business Finance & Accounting, 24(7), 1003–1007.
Meeks, G., & Meeks, J. (2001). The loser's curse: Accounting for the transaction costs of takeover and the distortion of takeover motives. ABACUS, 37(3), 389–400.
Ocaña, C., Peña, I., & Robles, D. (1997). Preliminary evidence on takeover target returns in Spain: A note. Journal of Business Finance & Accounting, 24(1), 145–153.
Rahn, C., & Baigorri, M. (2011). BA bags Lufthansa's BMI Heathrow slots in $271 million deal. Bloomberg Businessweek. Retrieved 25 March 2012, from
Sudarsanam, S., & Mahate, A. (2003). Glamour acquirers, method of payment and post-acquisition performance: The UK evidence. Journal of Business Finance & Accounting, 30(I & II), 299–341.
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