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IAG wins BMI with £172.5m cash deal

A file picture from 2010 of a British Airways Boeing 747 taxiing on the runway at Los Angeles International Airport.

Story highlights

  • International Airlines Group has won the takeover battle for British Midland
  • IAG, the holding group of British Airways and Spain's Iberia, agreed to pay £172.5m in cash to BMI's owner Lufthansa
  • Willie Walsh, IAG chief executive, warned the airline's planned restructuring would include axing jobs at BMI

International Airlines Group has won the takeover battle for British Midland, seeing off a late challenge from Virgin Atlantic to snap up the loss-making UK airline.

IAG, the holding group of British Airways and Spain's Iberia, agreed to pay £172.5m in cash to BMI's owner Lufthansa, the German carrier, which is taking responsibility for the British airline's defined benefit pension scheme's liabilities of about £180m.

Willie Walsh, IAG chief executive, warned on Thursday that the airline's planned restructuring would include the axing of a number of jobs at BMI, which flies to destinations in the UK, continental Europe, the CIS states, the Middle East and Africa.

"Given the scale of BMI's losses, there is an urgent need to restructure this business," said Mr Walsh. "Unfortunately, this will mean some job losses, but we will secure a significant number of high quality jobs here in the UK and create similar new jobs in the future."

IAG's acquisition, which is subject to regulatory approval but expected to be completed in the first quarter of 2012, includes BMI's sought-after runway slots at London's Heathrow airport.

Lufthansa has the option to sell off BMI's regional and BMI Baby low-cost operations, and there would be "a significant price reduction if Lufthansa does not opt to sell BMI Baby before completion", IAG said.

"Buying BMI's mainline business gives IAG a unique opportunity to grow at Heathrow, one of our key hub airports. Using the slot portfolio more efficiently provides the option to launch new longhaul routes to key trading nations while supporting our broad domestic and shorthaul network."

The BMI sale will come as a relief to Lufthansa, which had been looking for some time to dispose of an airline that turned in an operating loss of €154m in the nine months to September 30.

"With the transaction, Lufthansa is disassociating from a sustainably loss-making subsidiary," the German airline said, adding that although the cash price was £172.5m, the net price to the carrier was "expected to be significantly negative".

Analysts at Oriel Securities were positive on the move, but noted that IAG would control "about 53 per cent of the slots at Heathrow post-acquisition and this is likely to be scrutinised by the competition authorities".

"The price to be paid is significantly lower than our own and consensus forecasts of about £300m. We view this as an important strategic move for the group," they added.

IAG had been the frontrunner to buy BMI after entering talks with Lufthansa in early November.

But Virgin Atlantic this month made a counter offer that was lower than IAG's bid, but was likely to have completed earlier.

IAG said the purchase would be add to its earnings per share "by 2014 at the latest", and that the restructuring costs would be spread over three years.

Shares in IAG rose by 2 per cent to 148p in early London trading.