UK Authorities Defend Their Review of BMI Buy

 - April 9, 2012, 11:00 AM
The EC approved British Airways’ acquisition of BMI on March 30. (Photo: Ian Sheppard)

British competition authorities have dismissed complaints that they did not investigate the British Airways (BA) bid to buy BMI (the former British Midland International) from Germany’s Lufthansa—a deal approved by the European Commission (EC) on March 30. The UK Office of Fair Trading (OFT) has responded to transport group Stagecoach, which had described the move as “the most fundamental change to the UK domestic air market for many years.”

OFT chief executive John Fingleton, responding to correspondence from Stagecoach chief executive Sir Brian Souter in London’s The Times on March 31, said in a reply published on April 5 that the OFT had taken “a keen interest” and “worked closely” with the EC, which investigated the deal under European Union merger regulations.

He claimed that a remedy package under which BA owner International Airlines Group (IAG) has agreed to surrender London Heathrow slots and take other measures resulted from the OFT’s involvement.

The EC competition directorate approved the IAG acquisition of BMI from Lufthansa for £172.5 million ($274 million), on the grounds that it would “not significantly impede competition.” IAG offered to relinquish 14 slots, which it will hand over to a trustee for auction. 

Lufthansa must keep BMI pension obligations of $201 million—suggesting the deal was a poor acquisition for the German carrier, which also must dispose of low-cost and regional subsidiaries BMI Baby and BMI Regional (which IAG does not want) before completion later this month to avoid reducing the sale price. IAG estimates that integrating BMI (including adoption of 27 BMI aircraft) will cost approximately $131 million over three years. It aims for a 12-percent return on capital by 2015 through “synergies” and increased network opportunities.

The deal increases IAG’s share of Heathrow slots from 44 percent to 53 percent, and plans call for many to switch from short- to long-haul services. A rival bid from Virgin Atlantic Airways (49-percent owned by Singapore Airlines and holding 3 percent of Heathrow’s slots) failed, as did its protests against the IAG acquisition. Virgin said that removal of BMI “tightens [BA’s] stranglehold at the world’s busiest international airport” and vowed to continue opposing “this monopoly.”