Why Did Iberia Merge With British Airways To Form IAG?

IAG is, today, one of the most well know airline groups in the world. But its history only goes back 12 years, when it was born out of a merger between British Airways and Spanish airline Iberia. What was the impetus behind this original merger?

Iberia Airbus A350-941 EC-NCX
What was behind the BA and Iberia merger? Photo: Vincenzo Pace | Simple Flying

A tough operating environment

In the early 2000s, British Airways was becoming somewhat isolated in the European aviation market. Air France and KLM had recently merged after talks of a KLM-British Airways tie-up fell through. Lufthansa had bought SWISS International Air Lines, and was closing in on a purchase of Brussels Airlines.

Everywhere BA looked, consolidation was happening at pace. With a global financial crisis on its hands and oil prices rising rapidly, the airline needed a friend, and fast. Being part of a larger group was clearly beneficial to the competition, not just in terms of network and reach but also in cost savings achieved through the consolidation of the operational side.

Iberia was in a similar position. It, too, had never found a partner to consolidate with, and was struggling to compete with the rising low-cost airlines proliferating on many of its routes.

Both British Airways and Iberia turned in sizeable losses in 2009. BA posted a loss of £531 million that year, while Iberia notched a loss of £381 million. With both airlines in similar positions, and already having a working relationship with codeshares and BA’s stake in the Spanish airline, a merger was almost a natural progression.

British Airways Boeing 787-9 Dreamliner G-ZBKO (4)
The two airlines were in similar positions – isolated and struggling to make money. Photo: Vincenzo Pace | Simple Flying.

In July 2008, BA and Iberia announced their intentions to merge. But it wasn’t all plain sailing from there. Foreseeing record losses, British Airways wrote to some 30,000 workers ahead of the summer peak in 2009, asking them to work without pay to save money. Strikes were called, and travel was disrupted for the rest of 2009 and into 2010.

In April 2010, firm merger plans were put in place. The newly combined airline was to be called International Airlines Group (IAG), although the airlines would retain their separate brands and liveries. The merger finally concluded in early 2011, with the new holding company IAG beginning trading in London and Madrid on 24th January 2011.

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The growth of IAG

Following the merger, the combined airlines became the third-largest carrier in Europe, and sixth in the world. But IAG wasn’t stopping there. Even in the days following the merger completion, IAG’s CEO Willie Walsh had already set his sights on further growth of the group.

In a statement carried by CAPA, he said,

“Our goal is for more airlines – but, importantly, the right airlines – to join the group. Today is the first step towards creating a multinational multi-brand airline group.”

Even before the merger had been finalized, Walsh had begun drawing up a shortlist of carriers that the group considered to be attractive targets for investment or acquisition. From a long list of 40, this had been whittled down to 12, spread across Asia, Latin America and Europe.

At one time, IAG had its eyes on more exotic members, including India’s Kingfisher Airlines. Photo: Aero Icarus via Wikimedia

Some of the airlines mooted to be on the list included Air Berlin, Kingfisher Airlines, easyJet and SAS. Finnair, TAP Portugal and the Lufthansa unit JetBlue Airways were also rumored to be targets. In the long run, none of those airlines ended up part of the IAG family, but others did.

The first acquisition was British Midland International (BMI), which was a Lufthansa airline. In November 2011, IAG agreed to buy the airline from Lufthansa, increasing its share of Heathrow slots from 45% to a solid 54%. The airline was slowly absorbed into British Airways, aside from BMI Regional, which was sold on to a holding company. It went into administration in 2019.

Why Did Iberia Merge With British Airways To Form IAG?
Lufthansa’s BMI was the first addition to the group. Photo: Maarten Visser via Wikimedia Commons 

Next to be added was Vueling, a low-cost Spanish operator, in November 2012. A month later, IAG consolidated all the cargo activities of British Airways, Iberia and BMI into what is now IAG Cargo.

The next addition was Aer Lingus, a sale that had been bubbling for many years but didn’t complete until 2015. It cost IAG 1.36 billion to secure the stake in the carrier from the Irish government.

Aer Lingus Airbus A330
Talks with Aer Lingus had been rumbling on for years before the sale was finally agreed in 2015. Photo: Vincenzo Pace | Simple Flying

In 2017, IAG created LEVEL, a new long-haul low-cost airline. Later, it also created LEVEL Europe, a short-haul low-cost which was intended to complement the rest of the group airlines. It closed in 2020 amid the COVID crisis.

The most recent addition has been Air Europa, a €1 billion purchase that was announced in 2019. However, amid the downturn caused by the 2020 pandemic, IAG cut its transaction price in half, paying only €500 million for the Spanish airline.

Although IAG has never quite reached its goal of becoming the global force that it once hoped it would be, in Europe, at least it remains a strong competitor. Walsh was correct in saying that, although BA and Iberia were the first, they wouldn’t be the last. Whether IAG grows further on the back of the 2020 crisis remains to be seen.