LONDON, June 2 (Reuters) – British Airways’ (BAY.L) merger-driven cost-cutting plans and improving underlying business could make the stock an attractive long-term proposition, but costly disruptions pose potential hurdles.

Shares in BA fell 11 percent in May, compared to the European travel sector’s .SXTP 7 percent drop. Some see the sell-off as an opportunity to buy into BA as restructuring efforts and imminent tie-ups with Spain’s Iberia (IBLA.MC) and American Airlines (AMR.N) could reap long-term rewards.

Others fear the fallout from continued strikes, the sluggish global economic recovery and the volcanic ash cloud from Iceland could weigh on the stock.

BA trades on 102 times forecast 2011 earnings, compared to 33 times for Lufthansa (LHAG.DE), 11 times for Iberia and 11.6 and 13.6 times for low-cost carriers easyJet (EZJ.L) and Ryanair (RYA.I), according to Thomson Reuters StarMine.

BUY

BA has predicted a return to break-even next year after two years of record losses as a slump in travel caused by the global economic downturn eases, helped by a recovery in first- and business-class traffic — the most profitable part of its passenger business.

Of the top 20 analysts covering BA, 12 have a ‘buy’ rating on the stock, seven rate it ‘hold’, while one recommends investors sell, according to Thomson Reuters StarMine.

“The return of the long-haul premium customer should have significant implications for profitability going forward,” said Nomura analyst Andrew Evans, who rates the stock a ‘buy’.

“Long-haul premium revenue accounts for 40 percent of passenger revenues and is currently growing at between 10 and 15 percent.”

The Iberia merger, which BA expects to complete by year’s end, will save it around 400 million euros ($486 million) a year, while a three-way alliance with American — should it be cleared by regulators — will help it slash staff and pricing costs.

“The American tie-up is expected to be approved by July and although cost savings from this have not been quantified by BA, we expect around 150 million pounds ($219 million) of revenue synergies,” said Citigroup analyst Andrew Light, who is a ‘buy’ on BA.

“We expect cabin crew strike situation to be resolved shortly and would buy on strike action.”

SELL

Others, however, are much more pessimistic about the implications of further industrial action. [ID:nLDE64U10P]

“If the current cabin staff dispute is not settled soon, far from breaking even current year results could be even worse than last year,” said BGC Partners senior strategist Howard Wheeldon, who would sell the stock given the uncertainty surrounding BA.

“Even before the second month of BA’s new financial year is over we may need to build in a 300 million pound loss effect from strikes and volcanic dust.”

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a graphic showing the performance of BA shares since April, click on:

here

For a timeline on the industrial action affecting British Airways, please click on [ID:nLDE64N0U0] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Societe Generale analyst Jonathan Wober, who has a ‘hold’ rating on BA, is cautious on flag carrier stocks due to “uncertainties over the ongoing recovery” because of “macroeconomic factors and any further volcanic ash disruption”.

BA’s 2.7 billion pound pension deficit could also be a deal breaker in its merger with Iberia, which has reserved the right to walk away if the UK pensions regulator forces bigger costs on BA to sort out the shortfall than it thinks is affordable.

(Editing by Michael Shields)

($1=.6852 Pound)