By Joe Brancatelli
November 18, 2009 -- Business travelers will be forgiven for shrugging off the hype surrounding the announcement that British Airways and Iberia of Spain were merging. After all, the flag carrier of the United Kingdom has flown from one potential partner to another for 20 years.

Back in 1989, British Airways announced plans to buy United Airlines. It never happened. In 1992, it struck a deal to invest $750 million in US Air. It never happened—US Air became US Airways, tried to merge with United, and eventually did a deal with America West in 2005. BA made at least two serious runs at KLM, the Dutch carrier that merged with Air France in 2004. Last year, it was going to be BA and Qantas, the Australian carrier. And after twice failing to gain approval for a wide-ranging antitrust deal with American Airlines, BA is currently trying again, this time in a menage a trois with Iberia.

It's easy to laugh at the corporate travails of the carrier that once claimed to be "world's favorite airline," but BA's careening from partner to partner is hardly unique. Merging—and talking about merging—is what big airlines do instead of running a tight financial ship, turning a profit or, heaven forfend, focusing on customers.

"I compare it to two drunks, where you assume that if they hold on to each other, they will walk straight," airline consultant Adam Pilarski told Time magazine over the weekend.

Pilarksi's metaphor, gleefully echoed in snarky statements issued by two of BA's low-fare competitors, is apt. British Airways and Iberia have lost a combined $800 million in the last six months, and both face potentially crippling strikes in the coming weeks. Delta Air Lines, which merged with Northwest Airlines last year, and American Airlines are big money losers too, but they are both pursuing Japan Airlines, the cash-consuming giant of the Asian skies. In Latin America, Avianca of Colombia and TACA, a consortium of Central American carriers, last month announced their own merger. The chief executives of US Airways and United Airlines, which have been bankrupt a total of three times this decade, have also tried to arrange mergers.

What drives the urge to merge? The chimera of cost savings. At least on paper, merged carriers can slash back-office, information-technology, and fleet-maintenance expenses. They can share airport facilities such as check-in desks, gates, and passenger lounges. Joint procurement of everything from airsick bags to jet fuel saves money. Merged carriers can eliminate duplicative routes and shed excess aircraft, thus giving them leverage to drive up fares. For their parts, BA and Iberia claim the merger will generate $600 million in savings by the fifth year.

And then there is the oft-repeated cliche, trotted out during every merger announcement, that bigger is not only better, but inevitable. Or as British Airways chief executive Willie Walsh said last week: "Consolidation is happening in our industry, and it is critical that BA starts participating in that."

In practice, however, bigger isn't probably better, and promised cost savings rarely add up. Thanks to its purchase of Northwest, Delta is now the world's largest airline, and it originally promised upwards of $2 billion in merger-related savings. But the payoff has been diluted because the labor groups at mostly nonunion Delta and mostly-unionized Northwest haven't been harmonized. Nearly five years after the merger that created what we now call US Airways, pilots who once worked for the old US Airways and pilots from the former America West continue to squabble amongst themselves, in the courts, and with management. They still haven't reached a contract agreement.

Cross-border mergers are even trickier, and some of the reason is simply political: Airlines are inextricably bound up in the culture and mores of their home countries, they "carry the flag" in international route negotiations, and their contracts, work rules, and corporate governance are controlled by their respective motherlands.

In fact, the proposed BA-Iberia deal is crafted along the same delicate lines that facilitated the merger of Air France and KLM. A parent holding company is created, yet each airline retains its own brand name and corporate residency and remains largely bound by the rules and regulations of flying imposed by the home country. It's hardly an efficient way to run a multinational corporation with hundreds of moving (er, flying) parts.

Even Lufthansa, Europe's largest and most profitable airline group, shows the strains of complying with the overlapping webs of national concerns. In recent years, Lufthansa has gained control or purchased outright Air Dolomiti of Italy (2003); Swiss International (2005); Brussels Airlines of Belgium (2008); BMI of Britain (2009); and Austrian Airlines (2009). Yet each of those carriers continues to fly under its own name and national identity, operate its own hub in its home country, and is largely advertised and marketed independently.

The bottom line on airline mergers is that the bottom line rarely improves.

"I see airlines growing bigger and more complex," one airline chief executive recently told me. "But I don't see airlines getting more profitable. And I know passengers don't love us more." Of course, the reason he made his comments off the record is because he didn't want them to haunt him if he eventually pursues a merger. "I'll do it if the other guys get too much bigger than me," he warned. "I'll have no choice but to get bigger too."

The Fine Print…
The memorandum of understanding between BA and Iberia creates a new holding company prosaically called TopCo. BA shareholders will receive 55 percent, 45 percent will go to Iberia stockholders. Each airline will retain operations in their current countries. TopCo will be incorporated in Madrid, but operating and financial headquarters will be in London. BA and Iberia will each have seven members on TopCo's board, and BA's Willie Walsh will be group CEO. The merger is subject to regulatory approval, and Iberia can opt out if it doesn't like BA's resolution of an estimated $5 billion pension-liability shortfall. The memorandum of understanding took 16 months to craft, and the merger is expected to be completed late in 2010. The two carriers currently have $20 billion in revenue and 419 aircraft. They fly to 205 destinations and carried 62 million passengers in 2008. The combined carriers would be Europe's third-largest airline after Lufthansa and Air France-KLM.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.

THE FINE PRINT This column is Copyright © 2009 Condé Nast Inc. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright © 2009 by Joe Brancatelli. All rights reserved.