British Airways and Iberia face a messy merger

British Airways and Iberia are to merge in a £4bn deal that will create the world's sixth largest airline by revenues. However, this marriage of two loss-making national carriers looks likely to be messy – and will not be completed until the end of next year.

The new airline will have 419 aircraft and fly to 205 destinations. Under the terms of the deal, BA will have a 56 per cent stake in the new company, while Iberia will hold 44 per cent. The British airline already owns 13.5 per cent in Iberia and will be the dominant partner. The headquarters of the new company - called TopCo - will be in London, and Willie Walsh, BA's current chief executive, will be its boss.

Negotiations for the merger have been going on since July 2008. They have been lengthy for a reason. BA has a pension deficit of around £2.7bn – a situation deemed so serious by Iberia that it has won a concession under which it will be allowed to end the merger if negotiations between BA and its pension scheme trustees end in a deal that is "materially detrimental to the economic premises of the proposed merger".

The merger, under which the airlines will retain their separate brands, is expected to save TopCo £357m. But BA made a pre-tax loss in 2009 of £292m, and Iberia has lost £162m in the first nine months of this year, so significant savings will still have to be found.

It would seem therefore that job losses are inevitable, particularly among administrative staff, despite Walsh claiming that "I don't think staff will be worried, consolidation is part of our industry."

Spain and Britain are the only two countries in Europe to remain in recession but analysts suspect that with the HQ being based in London, Spanish workers have more to fear. The Unite union is taking no chances: it is already balloting BA staff on whether to strike over existing cost-cutting plans. Iberia staff, meanwhile, have begun their own strike over pay.

Regulators are unlikely to oppose the merger as it will probably not impact on fares. BA and Iberia have already been selling each other’s tickets on Spain-UK routes and face intense competition from low-cost airlines. In addition, there is little overlap in their long-haul flights – BA being strong on UK to North America and Iberia being a major player on Latin American routes.

But BA may find resistance to its tie-up with American Airlines, which has been under consideration in the EU and Washington. This is arguably far more important than the merger with Iberia since it would allow BA and AA to collude on fares and scheduling in the lucrative transatlantic market – and is therefore bitterly opposed by BA’s deadly rival, Virgin Atlantic.

WHAT THEY'RE SAYING:

Nils Pratley, the Guardian: "The excitement should be put in perspective. In short-haul, EasyJet and Ryanair continue to chip away at BA. In long-haul, investment bankers' renewed perkiness has not translated into renewed demand for first-class cabins on the North Atlantic route. Nobody expects the good old days to return."

Lex, Financial Times: "The real problems are with governance. This is the messiest structure since the earlier days of EADS, with much the same potential for in-fighting along national lines. The entity will have no fewer than three boards, each of which will be divided equally between representatives of the two airlines."

Leader, El Mundo: "Regrettably, after massive aid from the state, Iberia has ended up under British control, but there was probably no better choice in a world increasingly globalised."

David Wighton, the Times: "Iberia is regarded in the aviation industry as offering a lower standard of service than BA. Will the merger improve Iberia or will it result in Spanish practices being imported into BA? Bigger may prove to be better. But stapling together two loss-making airlines does not guarantee that both will improve."