Is Iberia worth it – or will the Spectre of Qantas still haunt?

Iberia is at the moment being poked and prodded like a contestant at a very ritzy beauty pageant. With only the Joint TPG/BA team allowed anywhere near the books – you can ask why anyone would want to pay for the company with one of the most bloated payrolls in Europe. Simple. 12 straight years of profit. Oh yes and add in the combined effect of the AF-KL deal as a model and you have an interesting cocktail that someone clearly thinks is worth it.

So what do we think?

Without touching the books and with only public reports to work with we feel it comes down to a certain amount of cojones and ego. BA is literally challenging or daring LH to come out and play. The latter has effectively grown by stealth through defusing competition and broadening its base while at the same time building a set of vassal states to feed its dual hubs in FRA and MUC.

Effectively we are neutral on it. We can’t see the large scale synergies emerging because the London Madrid Axis has been in place for many years. Unlike AF KL who were in different leagues and therefore could engage in joint value, BA and IB wont achieve anything like that. Sure BA will have a growth opportunity in LATAM (one of the bright growth spots in international inter-regional travel) but it is still a small base. IB won’t benefit because it is a mature market and there isn’t the value proposition to move to BA's core markets such as Africa and the orient. So the only other reason for doing it is defense. While there are some short term gains – long term value is far from assured.

Risk factors abound:

Open skies on the transatlantic
Premium niche carriers
LCCs especially Ryanair, Easyjet and Air Berlin
Etc

So we remain ambivalent to the deal. We think that it’s necessary but fundamentally we don’t like the match up.

Cheers

Timothy