M&A

Merger Down Under? BA, Qantas Weigh It

British and Australian airlines stun the industry with disclosure of their discussions.
Roy HarrisDecember 2, 2008

Hints of a global airline merger wave began to develop — starting with a possible combination of British Airways and Qantas — as carriers pondered the potential for a lengthy economic downturn.

British Airways got the talk started, revealing its exploration of “a potential merger” with Qantas Airways, the struggling Australian carrier. British Air continues to be involved in discussions with Spain’s Iberia.

Sydney-based Qantas confirmed the talks in its own statement, noting that what was being considered was “a dual-listed company structure,” allowing both airlines to continue but presumably under a joint ownership. It said that there “is no guarantee that any transaction will be forthcoming and a further announcement will be made in due course, if appropriate.” Any transaction would also comply with the airline’s obligations under the Qantas Sale Act and Australia’s international Air Services Agreements, it said.

The $23-billion-in-annual-revenue airline created by a British-Qantas merger would approximate the size of AMR Corp.’s American Airlines, which in North America tops number-two United, owned by UAL Corp., by about $3 billion. In Europe, British Air is now third-largest, after Air France-KLM group and Deutsche Lufthansa AG, according to a Bloomberg News report.

Industry-watchers noted that global consolidation seems a particularly tempting idea now, with the threat of a prolonged recession hanging over both industrialized and emerging countries — and more than replacing the sharply diminished concerns about fuel-price surges. A large-scale merger like British Air-Qantas would likely lead other large global carriers to consider competitive combinations.

The two airlines were founding members of the Oneworld alliance of carriers 10 years ago. The British Air fleet contained 245 planes as of Sept. 30, with Qantas having more than 220, Bloomberg reported. But its story also reflected skepticism about a deal developing quickly.

“Nothing’s going to happen anytime soon. I’m not expecting anything in 2009,” Howard Wheeldon, senior strategist at London-based BGC Partners, told the news service. “This is a big piece of global consolidation if they pull it off, and it’s a big if.”

Besides any problems with the blending of giant, distantly based airlines, there are also governmental questions involved. The Australian government is saying that it could eliminate its current rule barring foreign holdings in Qantas of more than 25 percent, and total foreign airline holdings of more than 35 percent. There has been no move to change the “Qantas Sale Act,” which requires 51-percent Australian control of the carrier.

Opposition also began to emerge immediately from rival Virgin Atlantic Airways, the UK-based carrier that competes with British Air both on Australian and U.S. routes. An E-mail response from Virgin cited in the Bloomberg report said: “One day it’s Iberia, then it’s American and now Qantas. During a downturn there is no excuse for competition laws to be suspended.”