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British Airways is in talks about a merger with Qantas Airways of Australia that would create a company with almost US$23 billion ($44 billion) in annual sales and help bring down costs as the industry's losses mount.
British Airways rose the most in five years in London trading after saying the negotiations are aimed at creating a company listed in both the UK capital and Sydney. Qantas surged the most in two years yesterday on the Australian stock exchange. Shares rose as much as 9.3 per cent to A$2.46. They closed at A$2.35.
The two airlines, with a combined market value of about US$5.5 billion, would retain their own brands, BA spokeswoman Abigail Moore said.
"It certainly makes sense," said Neil Glynn, an analyst at NCB Stockbrokers in Dublin. "I see it as being very early stages, but the companies have a very strong relationship and would know each other quite well."
British Airways and Sydney-based Qantas were founder members of the Oneworld global airline grouping in 1998 and the UK carrier owned an 18.25 per cent stake in its ally between 1993 and 2004, when it sold up to focus on partnerships in Europe and North America. The airline industry may suffer losses of more than US$5.2 billion this year as the credit crisis and global recession deter tourists and business people from flying.
British Airways has a market value of at least 1.81 billion ($5.1 billion), roughly equal to that of Qantas, which was worth A$4.4 billion (5.4 billion) before to the announcement.
A combination would create a carrier on par with Texas-based AMR Corp's American Airlines, which has almost US$23 billion in annual revenue, and larger than Chicago-based UAL Corp, parent of United Airlines, with sales of US$20 billion.
British Airways had a fleet of 245 aircraft as of September 30, according to its website. Qantas had more than 220.
"This is a big piece of global consolidation if they pull it off, and it's a big, big if," said Howard Wheeldon, senior strategist at BGC Partners in London.
"Nothing's going to happen anytime soon. I'm not expecting anything in 2009."
The airlines are discussing a combination after the Australian Government said in a policy paper that it might axe a rule barring individual foreign holdings of more than 25 per cent and total foreign airline holdings of more than 35 per cent.
Still, there are no plans to abandon the so-called "Qantas Sale Act" that says the carrier must remain 51 per cent locally owned.
"Any transaction would also comply fully with Qantas's obligations under the Qantas Sale Act and Australia's international Air Services Agreements," Qantas said separately.
Negotiations on a merger are "advanced", the Australian Financial Review said. British Airways, Europe's third-biggest carrier after Air France-KLM group and Deutsche Lufthansa AG, said it issued yesterday's statement in response to "media speculation".
British Airways is being advised in the merger talks by UBS AG, with Qantas, whose 42-year-old chief executive officer, Alan Joyce, took over last week, advised by Macquarie Bank and Greenhill.
Qantas shareholders rejected an A$11.1 billion buyout offer from Macquarie and partners including TPG in May last year, saying the offer was too low.
British Airways, led by 47-year-old chief executive Willie Walsh, said it remained in merger discussions with Iberia Lineas Aereas de Espana SA of Spain. NCB's Glynn said the priority is likely to remain the Iberia talks and an application for antitrust immunity for closer ties with American Airlines.
"There is no guarantee that any transaction will be forthcoming and a further announcement will be made in due course, if appropriate," British Airways said in the statement.
Virgin Atlantic Airways, the UK long-haul carrier that competes with British Airways on routes to both Australia and the US, said regulators should intensify their scrutiny of its rival's merger plans.
"One day it's Iberia, then it's American and now Qantas," the London-based carrier said. "During a downturn there is no excuse for competition laws to be suspended."
Qantas last month eliminated 10 per cent of international seats, having already axed staff and closed bases to cut costs as the economic crisis damps demand for flights to Australia.
The carrier trimmed its pretax profit forecast for the year ending June to A$500 million from A$751 million on November 25. That would be a drop of 64 per cent from a year earlier. Further capacity cuts may follow, along with order delays, Joyce said last week, the day before he became CEO.
Qantas's crash-free safety record, made famous in the film Rain Man, has taken a hit recently following a spate of incidents. In October, a plane plunged in mid-air, injuring passengers and crew. Another aircraft made an emergency landing in Manila on July 25 after an oxygen tank exploded, puncturing the plane's fuselage at 8800m.
- BLOOMBERG
