Airlines' tie-up under pressure after £3.7bn BA pensions deficit revealed

FURTHER pressure on British Airways's planned tie-up with Spanish airline Iberia emerged yesterday when BA revealed that its pension deficit has risen 76 per cent to £3.7 billion.

• BA's merger with Iberia seemed a done deal but questions now hang over it after pension details revealed. Picture: Carl de Souza/AFP/Getty Images

As the UK carrier prepared for a crippling Christmas strike by its cabin crew, analysts said the pensions figure was at the higher end of expectations.

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BA and Iberia announced in November that they had reached a preliminary agreement for a merger after months of negotiations. BA's pension deficit was one of the main stumbling blocks in the merger negotiations and Iberia has reserved the right to back out of the deal if the funding hole turns out to be too big.

The deficit figure could be higher by the time the valuation process is completed in June next year because Britain's Pensions Regulator believes the assumptions used to calculate the shortfall are too optimistic.

"The regulator's provisional view is that the technical provisions may be materially below a level it feels appropriate," BA said in a statement.

Analysts at Deutsche Bank described the figure as "towards the high end of market expectations" but said a recovery in the stock market since the end of March meant the current funding hole gap probably stood at around 2bn.

"However, even taking into account the rise in the stock market since March, it seems that more money will have to be found for the pension deficit," they said in a research note.

BA said the airline and pension trustees will work together to develop a recovery plan, a process which must be completed by 30 June.

BA and Iberia hope to conclude a merger deal by the end of 2010 and attention is now expected to switch to the nature of any pensions deal the British carrier can strike with its staff and what proportion of the gap will be covered by the company.

"The company may be forced to renegotiate pension benefits with employees if it is to avoid using more shareholders' cash," Deutsche Bank said.

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British Airways cabin crews are set to strike during the Christmas period over planned costs cuts and changes to work practices.

A Unite spokeswoman said that it had expected BA's pension deficit to be larger than the reported figure and that it does not want the issue "to dovetail into strike talks".

Independent pensions consultant John Ralfe said that although Iberia management may have been privy to the new pensions deficit numbers, investors would still be shocked by the size of the deficit.

"What a month ago looked like a deal that might work with a following wind… now looks much more difficult," he said.

Ralfe said the statement appeared to imply that the company would be talking to unions and employees about cutting benefits at a time when industrial relations are already strained.

A spokeswoman for BA said the company could not afford to make any additional contributions to the pension scheme but was looking for a recovery plan.

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