IAG Receives Green Light for bmi Purchase

Last week the European Commission ruled that after agreeing a revised set of concessions, it had approved the acquisition of loss-making UK carrier bmi British Midland International by the International Consolidated Airlines Group (IAG), parent company of European heavyweights British Airways (BA) and Iberia. But, why was the parent of the UK’s national carrier so eager to purchase its main short- and medium-haul rival in the London market given its current poor financial performance? The answer is simple, slots and greater access to its London Heathrow hub, one of the world’s most capacity constrained international gateways.

When Lufthansa, the current owner of bmi, made its intention known that it was planning to sell the UK business it was always going to be a two horse race between BA and Virgin Atlantic Airways. Some had suggested that a BA deal would have given it a too dominant position at London Heathrow, but a scan of European hub airports showed that the airline had, and still continues to have, a much lower share of capacity of Europe’s flag carriers at their hub airports. There was of course also the option of allowing bmi to collapse but for both BA and Virgin Atlantic the risk of its shares being allocated on the open market was a risk not worth taking.

According to the European Commission the IAG-bmi deal is conditional upon the release of 14 daily slot pairs at London Heathrow in order to facilitate new entry, and upon IAG's commitment to carry connecting passengers to feed the long-haul flights of competing airlines out of London Heathrow. In light of these commitments, the Commission concluded the transaction would not raise any competition concerns.

Commission Vice President in charge of competition policy, Joaquín Almunia, said: "The Commission could clear this transaction in the first phase given the commitments package offered by IAG which addresses the competition concerns we identified. The commitments package includes an appropriate number of very sought-after slots at London Heathrow as well as far-reaching feeder arrangements as regards connecting passengers. We are therefore satisfied that the competitive dynamics will be maintained so as to ensure choice and quality of air services for passengers."

The Commission’s investigations found that the transaction, as initially notified, would have led to high market shares and even monopolies on a number of domestic, European and international routes out of London Heathrow airport. The Commission also analysed whether there was a risk that IAG would prevent passengers from connecting on long-haul flights operated by competing airlines out of London Heathrow. As such, during the first-phase review, IAG submitted commitments to release 12 daily slot pairs at London Heathrow which could be used on the specific routes of concern.

These include seven slot pairs to facilitate new competition between London Heathrow and either Edinburgh and/or Aberdeen and five daily slots to be used between London Heathrow and Nice, Cairo, Riyadh, Moscow, Edinburgh and/or Aberdeen. IAG has also committed to lease two daily slot pairs to Transaero Airlines to enable it to maintain its twice daily route between London Heathrow and Moscow Domodedovo (the Russian carrier had previously leased these slots from bmi), while other airlines can apply for seats on the integrated BA/bmi short- and medium-haul network for their transfer passengers, on normal commercial terms.

According to the European Commission, these commitments “adequately address all competition concerns” it identified and therefore concluded that the proposed transaction “would not significantly impede effective competition in the European Economic Area (EEA) or a substantial part of it”. IAG Chief Executive Willie Walsh was naturally elated by the ruling. “We're delighted the EC has given competition approval for our acquisition of bmi. Their decision follows a thorough review during which the views of key stakeholders have been taken into account. This is great news for Britain,” he said.

IAG expects to conclude the acquisition around April 20, 2012 as it acknowledges that some technical conditions still need to be finalised prior to completion. However, BA has already started codesharing on many of bmi's flights to the Middle East, Africa and the CIS and it has emerged that bmi will leave the Star Alliance from April 18, 2012 according to reports from member airlines.

"We plan to operate bmi's summer schedule and will update their customers once the transaction has been completed,” said Willie Walsh but it is expected that bmi will be completely integrated into the mainline BA operation by the end of the summer with a new schedule being introduced for the Northern Winter 2012/2012 Schedule. IAG’s acquisition cost of bmi remains unchanged at £172.5 million in cash, on a debt-free, cash-free basis, but is subject to significant price reductions if Lufthansa does not opt to sell the low-cost business unit, bmibaby. The German national carrier is currently in talks with two businesses over the sale of the budget carrier.

What will the deal mean for BA? Well there are a myriad of possibilities and after a tactical patching of the airlines’ short-haul networks, the extra 42 slot pairs available to BA will most likely be used to gain access to all the markets they've been looking to serve from its hub and has been talking about for many years. Willie Walsh has confirmed that some of the bmi slots will be used to expand the BA network into new markets, particularly in Asia. “Over time we will launch new long-haul routes to key trading nations that are currently not served from Heathrow while supporting our short-haul network,” he confirmed. “This is good for UK business and UK consumers. We have already announced that British Airways will re-start flights from Belfast to Heathrow, maintaining important economic links. While expanding our long-haul network also helps Heathrow grow as an international hub airport despite its infrastructure constraints.”

The table below highlights the top ten medium- and long-haul destinations from London Heathrow that are not currently served by BA from the hub airport. Other destinations outside of this area currently not served by BA but with strong traffic flows from London Heathrow are the aforementioned Belfast, the Irish cities of Dublin, Cork and Shannon, Malta and Keflavik in Iceland.

However, how many of these markets are BA currently targeting and of these how many can it easily grab traffic rights to serve. Another use for the slots would be the transfer of some of its London Gatwick-based short-haul network to Heathrow, where it could easily, and profitably, be absorbed into the hub operation. Under this scenario this would just leave the airline’s long-haul leisure network at Gatwick, a predominantly point-to-point market not in need of hub connections.

With limited operations outside of London it is important that BA defends its position in its home market and the takeover of bmi will go some way to achieving this. Will anyone pick-up the slots to fly from Aberdeen and/or Edinburgh to London Heathrow with the strong competition from BA, low-cost rivals to other London airports and in the case of Edinburgh, the rail link into the heart of the capital? It will be a brave decision by any venture especially with Air Passenger Duty (APD) and the high costs associated with flying into a major international hub. The side effect of this deal is the impact on Virgin Atlantic. The airline is now much more exposed than it has ever been and analysts will be watching the company closely as it perhaps seeks a new direction.