British Air And Iberia: Airlines Return To The Center Of M&A Stage

The rumor that US Air (NYSE:LCC) and American (NYSE:AMR) may merge is not so far-fetched today, or that Southwest (NYSE:LUV) might take over JetBlue (NASDAQ:JBLU).

British Air and Iberia, the flag carriers of the two nations whose fleets met at The Battle of Trafalgar, will merge, creating one of the world’s largest airlines. BA shareholders will control 55% of the new company which will have a market value of $7 billion and total sales of nearly $20 billion. It is noteworthy that just earlier this week, BA said it would fire  4,900 people because of a $485 million loss in the six months that ended on September 30.

Airlines have begun to despair that the industry faces another harsh year in 2010. There is little evidence that business or personal fliers are likely to return to the air. Oil prices hover near $80 and the smallest hurricane, a political incident in a crude-exporting nation, or news of increased demand from China could push that figure toward $90 overnight.

Unemployment in most of the wealthiest countries, which account for a disproportionate amount of global air travel,  is still high. Most consumers have become remarkably tight with money. Businesses have found alternatives to traveling like video conferencing which may be why Cisco (NASDAQ:CSCO) and Logitech (NASDAQ:LOGI) are so keen to get deeply into that business.

US carriers are plagued by the same problems that Iberia and BA are. American and Delta (NYSE:DAL) are each trying to make investments in Japan Air to bolster their potential traffic is Asia. Most domestic carriers have been able to strengthen their balance sheets, but that has only bought them time. It is still nearly impossible to consistently make money in the US air travel market under current economic conditions.

Delta bought Northwest late last year as the industry dropped into one of its most difficult periods since the 9/11 attacks kept people away from air travel for months. American and United (NASDAQ:UAUA) are viewed at the two US carriers most likely to face continuing financial problems. There has been talk about America merging with US Air for several weeks. American’s shares have dropped 25% during the last month.

Two things could  force a business combination among two US carriers quickly. The first would be a sharp and persistent increase in the price of oil. The second would be any significant signal that the very modest economic recovery has begun to reverse itself.

Two US carriers will announced a merger before the end of the first quarter of next year.

Douglas A. McIntyre