While we’re on the subject of airports, here’s a a little tidbit on British Airways’ pension deficit, sourced from a 52-page note by Citi’s airline analyst, Andrew Light:
… BA had total pension assets of £12.3bn (of which roughly £5 billion in equities) and pension liabilities of £14.0bn as of end March to give an actuarial combined deficit of £1.7bn as at last March. With c.40% of assets in the form of equities and assuming a 30% fall in equities since last March, we estimate the combined actuarial deficit could well have risen from £1.7bn to as much as £3.2bn.
Ouch.
The pension deficit is of particular importance given BA’s in the midst of merger talks with both Iberia and Qantas. The deficit is already said to be a sticking point to the Iberia deal, and the Qantas CEO has picked up on it as a point of favour for his company in the potential structure of a BA-Qantas tie-up.
In Light’s view:
… we believe that the split should be 50-60% to BA shareholders and 40-50% to Qantas shareholders. Current relative share prices suggest 50:50. The CEO of Qantas has noted the uncertainty over BA’s pension deficit as being in Qantas’ favour when it comes to splitting the value between the two sets of shareholders and setting the exchange ratio. We would argue that BA’s pension deficit is well known and understood by the market and was already priced in to BA’s share price prior to the announcement of BA and Qantas exploring a merger. An equity value split of 50:50 already reflects the underperformance of BA’s shares relative to Qantas, lately driven by the pension deficit issue plus the global financial crisis, which is disproportionately affecting BA’s UK base. A 50:50 equity value split would be consistent with the average of the last 7 years, although the range has been wide. For example, BA’s share of the combined market capitalisation has ranged from 30% to 65%. Prior to 2001, however, BA would have accounted for 70% or more of the combined market capitalisation.
And if the Qantas/Iberia deals don’t materialise — Light has a few other options for the airline. Notably, acting as a ‘white knight’ for Aer Lingus (currently being pursued for the second time by Irish rival Ryanair) or trying to get Lufthansa to sell it BMI. In any case, airline consolidation is well under way. There’s even talk in the note of the first ever global airline — with the lower costs, purchasing power, etc. that would come with it:
We believe a merger of British Airways and Qantas could be the first step towards establishing a truly global airline. That is why we are in favour of a 3- way merger involving Iberia as well as this would represent another step towards a global airline group.
Related links:
BA asked to choose between Qantas and Iberia – FT
Ryanair 50:50 - FT Alphaville