Deal facilitates BA's soaring ambitions

 

LONDON BRIEFING:Thatcher may not have approved of merger, but it means carrier will survive turbulence

MEMORABLY, IT was enough to make Margaret Thatcher fume.

In the mid-1990s, British Airways redesigned its aircraft to do away with the union flag and instead feature different ethnic designs on the tail fins, a rebranding to reflect its self-styled position as the world’s favourite airline. They included Chinese calligraphy, Polish tower blocks and the Kalahari desert.

Thatcher draped a handkerchief over an offending model to express her disdain. “Awful,” she sneered.

The airline no longer uses the slogan; in fact, it has been pinched by Ryanair, in a typical piece of chutzpah by Michael O’Leary. But this week, BA really did become an international airline when the £5 billion merger with Iberia of Spain was waved through by shareholders.

The combined company will be renamed under the less than snappy moniker of International Airlines Group, although the British Airways and Iberia brands will still be used. The combined company will be run out of Heathrow airport, but the group will be registered in Spain.

The deal creates a carrier with 400 aircraft, flying to over 250 destinations and employing about 57,000 staff – the hope being that it can close the gap on multinational rivals Air France-KLM and Lufthansa.

Willie Walsh, who will run the enlarged group, said the deal would give the airline “considerable scale” and open up the fast growing markets of Latin America. The airline said it could not afford to be left behind by consolidation in the industry and Walsh has already apparently identified another 12 carriers that could be potential partners.

BA has found the headwinds tough lately and last year reported its worst ever first-half results since privatisation, with a £292 million loss – only returning to profit in the most recent quarter.

The entire industry has been buffeted by a series of storms since the terrorist attacks of 2001 – including Sars, two recessions, sky-high oil prices and the ash cloud. Thatcher would probably not approve, but it is hard to escape the logic for a merger that can help to strip out huge legacy costs from the days when airlines really were national champions.

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The latest forecasts from the office for budget responsibility on Monday suggested the recovery in Britain would continue next year, albeit at a slower rate than previously believed, and reiterated the view that there would be no double-dip recession.

This year the economy is expected to grow 1.8 per cent and next year by 2.1 per cent, trimmed in part to reflect the higher rate of VAT which takes effect in January and the looming spending cuts.

Chancellor George Osborne seized on the growth forecasts as evidence that the government’s slash and burn approach is working. He would, he said, “stick to the course” that the coalition has set the country on.

“This is an uncertain world, but the British recovery is on track,” he told MPs.

But there are worrying signs ahead. The economy has held up in part because Britain, with its own currency, has held on to the ability to set its own interest rates, and moved to lower them aggressively in response to the recession. The result – a good chunk of homeowners have hundreds of pounds extra in disposable income each month, which explains why, despite above average inflation and higher levels of unemployment, retail sales have remained robust.

It was a point made in a ham-fisted manner by Lord Young last week, and which led to his resignation when he said the “vast majority” of Britain had “never had it so good” because of their extra disposable income.

Pundits, though, are starting to worry about how long policymakers will keep interest rates low if inflation keeps rising – and upward pressure on the price of commodities looks unlikely to ease amid rising global demand from the likes of China and India.

Then there was further evidence on Tuesday that even those who benefited from low interest rates might be feeling the pinch from steadily increasing utility bills, travel costs and even the rising price of food.

Figures from the Office for National Statistics said household spending fell for the first time in almost a decade during 2009, suggesting that the consumer spending that has held the economy up might be heading for a decline. There was little crowing from the treasury this time.


David Teather writes for The Guardiannewspaper in London