The London stock market fell to its lowest level since early September 2009 as the European debt crisis rears its head again

Shares in London fell to their lowest level in nearly 10 months this morning amid fears that Spain was about to be pulled deeper into the European debt crisis.

In early trading the FTSE 100 fell as low as 4834 points, down 82 or 1.64%. This is its lowest intraday level since 4 September 2009.

Banks and insurers were among the biggest fallers, with Barclays off 3.5% at 260p and Aviva and Prudential both losing just over 3%. At 9am there were no risers on the index of the biggest blue-chip companies, and only seven on the FTSE 250.

Last night, rating agency Moody’s alarmed the financial markets by announcing that it has put Spain’s AAA sovereign rating on review for “possible downgrade”. It said that the country’s economic prospects are deteriorating, at a time when its government is attempting to cut its deficit.

Moody’s will now evaluate Spain’s credit rating again, over the next three months. It said it expects that any cut would only be by “one, or at most two, notches”.

Traders were also nervously waiting to hear the latest lending data from the European Central Bank. Later this morning the ECB will reveal how much European banks have borrowed through its short-term lending facility.

The EBC is calling in €442bn of loans made a year ago at the height of the financial crisis, so the markets are keen to learn whether institutions now have to lean heavily on its six-day lending facility. Yesterday they borrowed a total of €131.9bn in 3 months funding, less than feared.

According to Gary Jenkins of Evolution Securities, this may be a sign that the banks have lost their appetite for buying government bonds, which they had financed with cheap money from the ECB:

A year ago the opportunity to borrow significant sums of money from the ECB at 1% was probably seen by many institutions as an opportunity to put a “risk free” trade on where they used the ECB cash to purchase longer dated government bonds and then took the turn. A nice little earner on the face of it.

However as we know that has not turned out to be the case and in reality the banks have probably been preparing for the expiry of the €442bn facility by selling some of the assets that they purchased with it in the first place.

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The lowdown on the airlines, from the early years of air transport, to today’s financial losses and turbulent relations with unions

History

British Airways: Its forerunner, Aircraft Transport and Travel (AT&T), launched the world’s first daily international scheduled air service on 25 August 1919, between London and Paris. Its first flight carried one single passenger, plus cargo including newspapers, Devonshire cream and grouse. AT&T stopped operating the next year, prompting the British government to provide a subsidy to nurture its nascent airline industry. In 1924 several UK airlines were bundled together into Imperial Airlines. In 1929 Imperial began transporting passengers to India, a seven-day trek involving planes, trains and flying boats, costing £130.

British Airways Limited was created in 1936 when United Airways, Hillman’s Airways and Spartan Air Lines were combined. This company was then merged with Imperial Airlines in 1940 to form British Overseas Airways Corporation (BOAC). BOAC was eventually merged with British European Airways (BEA) in 1974 to form British Airways Group. BA was floated on the London stock market in 1987.

Iberia: Spain’s first commercial airline was founded on 28 June 1927, as Iberia, Compañía Aérea de Transportes. Its first planes flew between Madrid and Barcelona, with enough space for two crew members and 10 passengers perched on wicker seats. In its early years it operated flights from Spain to the Canary Islands and North Africa. It went international in 1939 with services to Lisbon, and in 1945 began flying to Argentina. The company was privatised in 2001, having been nationalised by General Franco in 1944. In 1981 it flew Picasso’s painting Guernica home to Spain from New York.

Workforce

British Airways: 38,704

Iberia: 21,578

Key people

British Airways: Willie Walsh became chief executive in 2005. He began his airline career as a pilot with Aer Lingus, the Irish carrier, where he later became chief executive and pushed through a major cost-cutting programme.

Iberia: Antonio Vázquez Romero has been chairman and chief executive since 2009. He previously ran the tobacco company Altadis.

Market capitalisation

British Airways: £2.8bn

Iberia: €2.5bn (£2.18bn)

Financial performance

British Airways: A pre-tax loss of £401m in the 12 months to 31 March 2009, on revenue of £8.99bn. It expects to make a record loss for the year to 31 March 2010, with analysts forecasting a pre-tax loss of about £595m.

Iberia: A pre-tax loss of €435m (£381m) in the 12 months to 31 December 2009, on revenue of €4.4bn. Did not give a forecast for 2010.

Routes

British Airways: Last year BA flew to 149 destinations: 9 in the UK, 67 in the rest of Europe, 15 in Africa, 12 in the Middle East, 7 in Asia-Pacific and 39 in America (35 in North America and the Caribbean, 1 in Central America and 3 in South America)

Iberia: Last year Iberia flew to 106 destinations: 37 in Spain, 38 in the rest of Europe, 9 in Africa, 1 in the Middle East, none in Asia-Pacific, and 21 in America (6 in North America and the Caribbean, 6 in Central America and 9 in South America).

Fleet

British Airways: 246 aircraft

Iberia: 174 aircraft

Industrial relations

British Airways: The Unite union held two strikes last month, costing BA an estimated £45m, in a row over jobs and cost-cutting. More strikes have been threatened.

Iberia: Unions had threatened to walk out for eight days last December, but called the strike off after Iberia offered a 4% pay rise for cabin crew.

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UK and Spanish airlines sign formal agreement to amalgamate operations – although both will operate under their original brands

The long-awaited merger of British Airways and Iberia moved a step closer today as the airlines signed a formal agreement to amalgamate their operations.

Under the terms of the agreement, the UK and Spanish flag-carriers would be combined into a new company called International Airlines Group, although both would keep operating under their own brands.

International Airlines Group will own 408 aircraft, fly to 200 destinations, and carry more than 58 million passengers a year. The company’s shares would be traded on the London Stock Exchange, and would be worth almost £5bn at current stock market prices.

BA and Iberia agreed to merge last November, after lengthy negotiations. Today, Willie Walsh, BA’s chief executive, said the deal would be good for passengers.

“The merged company will provide customers with a larger combined network. It will also have greater potential for further growth by optimising the dual hubs of London and Madrid and providing continued investment in new products and services,” said Walsh, who is likely to run the new company.

Antonio Vazquez, Iberia’s chairman and chief executive, said the merger will create one of the world’s leading global airlines.

Both companies’ shareholders are due to vote on the merger in November, with the deal scheduled for completion the following month. But even once the merger agreement has been signed, Iberia has the right to walk away if it believes BA’s plan to address its £3bn pension deficit is not satisfactory.

Combining the companies will yield cost savings of €400m (£350m) a year within five years. This has alarmed unions, who are already engaged in a bitter industrial dispute with BA that could already have cost the company £45m.

The damage caused by the recession is forcing the airline industry into widespread consolidation. Last night, it emerged that United Airlines and US Airways have been discussing a merger.

Dr Ashley Steel, global chair for transport and infrastructure at KPMG, welcomed the BA-Iberia merger: “It makes huge sense for passengers and airlines alike. It will allow participating airlines to spread their cost base, something they desperately need to do in this challenging environment.”

Bob Atkinson of travelsupermarket.com said that the number of destinations available from BA would increase by 40% when the deal is completed. Iberia has a much stronger presence in Latin America and some parts of the Caribbean than BA, which is stronger in North America.

However, he questioned whether the deal would deliver cheaper flights in the near term: “Any cost-saving benefits will only be felt by passengers if the businesses integrate quickly. But forcing through structural change and efficiency savings is exactly the challenge that has brought BA head-to-head with its staff and Unite in the current dispute; and the situation has the potential to be just as sticky in Spain.”

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