What happens when two become one?
February 2011
The official name of the merged British Airways-Iberia Airlines entity is International Consolidated Airlines Group SA (IAG) after trading of its stock began the week of 24 January. The combined airlines will be the 2nd most valuable airline group in Europe based on market value. But being number two may not be enough as IAG hints at bringing more airlines under its wing.
For British Airways, 2010 was the year of disruptions. Volcanic ash clouds, weather woes and strikes eroded company coffers but not enough to match the dismal finances of 2009. The airline was actually profitable through September of 2010 indicating that it had withstood the challenges posed by Mother Nature and multiple strikes in 2010. Now merged with Iberia under IAG, British Airways is looking to augment its strength in the trans-Atlantic market with Iberia's Latin America network.
According to The Associated Press, the airline group will feature over 400 aircraft reaching 250 destinations serving 57 million passengers a year. Revenue estimates of about £12 billion (US$19 billion) will place IAG revenues just behind Lufthansa AG and Air France-KLM. In terms of overall worth, IAG will rank above Air France-KLM and will seek to advance its industry standing by looking outside of the European continent for more airline partners. Iberia and British Airways will still operate as separate carriers but behind the scenes, things will likely be very different.
The predictions that competition between airline alliances will eclipse traditional rivalries between individual airlines seem to be coming true. While most government rules restrict the ownership stake one carrier can have in another, alliances are providing a bridge to all-out mergers. As airlines successfully operate under alliances they hope that regulators, softened by such proven success, will allow even closer ties, including mergers and increased ownership of other carriers. IAG seems to be positioning itself for this environment. British Airways chief executive (and now chief executive of IAG) Willie Walsh has suggested bringing in new airline partners, including short-haul and budget carriers into the parent company. But they must be "the right airlines," according to Walsh.
Each merger has to fight off concerns about competition, or specifically the lack thereof. One can argue that even with mergers, there are still many airline competitors and that keeps airfares low. Yet, when you look at the three major alliances and the global coverage they represent, you can see that the future points to more consolidation and less competition among individual airlines in the long run. Once the alliances have the long, medium and short-haul markets covered as they welcome new and diverse entrants, fears about anti-competitive behavior masquerading as a diverse group of airlines engaging in healthy competition could resurface.
The greater choices and coordinated schedules of alliances are plusses for airline passengers. However, where will the line in the sand (or the clouds) be drawn? Yes, regulators are approving mergers across the globe, but one has to wonder if they truly believe in the passenger benefits of such mergers or they have softened their positions. It could be that they are already conditioned to the fact that the industry has yet to produce the "monster monopoly" as often quoted by Virgin Atlantic chief Richard Branson.
As unpredictable as the industry is, one path the industry is taking seems clear. Airlines are partnering with their competitors; then they are inviting them to into an alliance; then, after operating together for a while, they are buying stakes in each other or merging. You can bet that Iberia and British Airways will eventually have company under the IAG umbrella. Passengers and regulators will have to determine what is acceptable in the evolving competitive landscape. We know where the airlines want the industry to go. Where do you want it to go?
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