UPDATE 2-BA in pension deal to clear way for Iberia merger

* Deal can remove main obstacle to Iberia merger

* BA to provide 250 mln stg additional security to funds

* To pay further sums if cash balance over 1.8 bln stg

* Iberia has 3 months to decide, calls move “positive step”

* BA shares slip 0.5 pct, Iberia off 0.3 pct in weak market

(Adds Iberia, analyst comments, shares, details)

By Matt Scuffham

LONDON, June 22 (BestGrowthStock) – British Airways (BAY.L: ) said it
had agreed a recovery plan for its 3.7 billion pound ($5.5
billion) pension deficit, potentially removing a final obstacle
to its planned merger with Spain’s Iberia (IBLA.MC: ).

BA and Iberia signed in April an $8 billion merger to create
the world’s third-biggest airline after months of negotiations
during which the British airline’s pension deficit had been one
of the main stumbling blocks. [ID:nLDE63707M]

Iberia had reserved the right to back out of the deal, which
will see BA shareholders take a majority 56 percent stake in the
combined group, if the funding hole turned out to be too big.

“Iberia has three months to reach a decision on the pension
recovery plan,” BA said in a statement on Tuesday.

The two companies hope to complete the merger by December
and a spokesman for Iberia told Reuters the pension agreement
was “a positive step forward in this process”.

BA said it had reached a deal with the trustees of its
Airways Pension Scheme (APS), which last December had a deficit
of 1 billion pounds, and its New Airways Pension Scheme (NAPS),
which had a 2.7 billion pound black hole.

The airline said the proposals would avoid closing the
schemes and maintain BA’s annual contributions at the current
level of 330 million pounds, plus agreed annual increases in
line with inflation expectations averaging 3 percent.

BA will, however, make additional contributions if its
year-end cash balance exceeds 1.8 billion pounds. BA had a cash
balance of 1.7 billion at the end of its last fiscal year on
March 31.

The two schemes will also get 250 million pounds of
additional security over the company’s assets which would become
payable in the event of BA becoming insolvent.

The company said that in the year to March 2010, NAPS assets
had grown by around 2 billion pounds, partly offsetting the
increase in liabilities due to trustees’ decision to adopt more
conservative investment return expectations.

Under the agreement, the pension schemes will continue to be
funded by British Airways and not Iberia or the merged holding
company, International Airlines Group.

Analysts at Citigroup said they now expected the merger with
Iberia to go ahead given that BA has avoided having to pay an
additional lump sum into the pension schemes.

“We had pencilled in 500 million pounds as a precautionary
measure but this is now not necessary. Given the absence of
additional immediate lump sum contributions, we would expect
Iberia to confirm its merger agreement with BA by the deadline
of Sept. 30, if not before,” they said in a research note.

BA said it will submit the recovery plan to Britain’s
pensions regulator, which has until June 30 to approve it. A
spokeswoman for the company said the regulator’s initial
response on the deal with the trustees had been “positive”.

“BA has kept the pension regulator informed with ongoing
negotiations, so we do not expect any difference of opinion,”
said Citigroup analysts.

Shares in BA slipped 0.5 percent to 212.8 pence at 1041 GMT
with Iberia shares down 0.3 percent at 2.489 euros.

British Airways remains in a dispute over pay and conditions
with its cabin crew who have staged a series of five-day strikes
this year, costing the airline over 150 million pounds.

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(Additional reporting by Sonya Dowsett and Cecilia Valente;
Editing by Paul Hoskins and Michael Shields)

($1=.6743 Pound)

UPDATE 2-BA in pension deal to clear way for Iberia merger