Qantas, British Airways merger talks grounded

Last Updated: Friday, January 8, 2010 - 11:59

Sydney/London: Australia`s Qantas Airways and British Airways called off talks for a $6.4 billion merger, leaving the British carrier to consider other combinations with European peers as the sector grapples with falling demand and volatile fuel prices.

Qantas and BA announced the end of talks to the Australian and London stock markets on Thursday, saying they could not agree on key terms for a deal, which a BA spokeswoman told Reuters included a Qantas demand for more than 50 percent of the business.

The BA spokeswoman said the British carrier`s long-running merger talks with Spain`s Iberia were continuing but that it was not planning to take an equity stake in Italy`s Alitalia.

The CAI group that owns Alitalia has said it is looking for a potential airline partner to take an equity stake, but the BA spokeswoman said it was only interested in a commercial deal.

Air France and Lufthansa are also battling for a tie-up with Alitalia.

Qantas Chief Executive Alan Joyce had warned last week that a BA merger faced major hurdles and would only go ahead if Qantas could secure major revenue and cost benefits. He also lamented the fact the talks had been leaked and forced out into the open.
A Qantas-BA marriage faced major challenges, not least the ownership split of the combined business, which was proposed to be formed through a dual-listed merger whereby the two firms would have kept their existing listings but be managed as one.

"This is not wholly unexpected considering the hurdles that had to be overcome, for example how you split the company and get round the bilateral issues of foreign ownership," Jonathan Wober, airlines analyst at Societe Generale, told Reuters.

BA said on Thursday it would not agree to Qantas owning more than 50 percent of the merged entity, though Qantas is the larger company by market value.

Qantas is worth about $3.3 billion and BA about $3.1 billion, based on latest exchange rates and share prices.

Asked if Qantas wanted more than 50 percent of the combined entity, she added: "Yes."

Iberia another hurdle

Under Australian law, Qantas must remain majority-owned by Australian investors and its head office, stock market listing and major facilities must remain in its home country.

A source familiar with Qantas` plan said the Australian carrier was still open to airline mergers, especially in Asia, though it was not in any active talks.

Qantas has had previous dialogue with Singapore Airlines and Malaysian Airline System, the source noted, adding: Qantas continues "to work on and keep the door open for discussions with an airline."

The hurdles to a Qantas-BA deal also included BA`s $2.2 billion in pension-fund liabilities and also the British carrier`s separate merger talks with Spain`s Iberia.

Qantas had ruled out a three-way merger with BA and Iberia, though this would have created the world`s biggest airline, ahead of American Airlines, Iberia declined to comment, though Chairman Fernando Conte is likely to be heartened by the news. He told journalists in London this month that deals between airlines within regions were more compelling than cross-regional tie-ups.

"On paper, Iberia is a deal that is less complex -- we see more synergies. But it depends on whether the two companies can agree on who gets what slice," Panmure Gordon transport analyst Gert Zonneveld told Reuters.

Iberia`s shares rose 5 percent on renewed hope for a deal with BA.
Qantas shares rose 7.5 percent in heavy trade ahead of the announcement, which came after the Australian market had closed.

Aviation analysts had said a Qantas-BA merger would lead to other big marriages in the airline industry, which has been slashing capacity this year as fuel prices rallied to record highs in July.

Fuel prices have tumbled since then, but so has demand for air travel, keeping alive the forces of consolidation.

Germany`s Lufthansa last week signed a deal to buy Austrian Airlines, a move that will make it Europe`s biggest airline.

Qantas and BA remain code-sharing partners in the Oneworld alliance.Qantas is being advised by Macquarie Group Ltd, while BA is being advised by UBS.

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First Published: Friday, January 8, 2010 - 11:59

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