Qantas says BA merger faces major hurdles

Qantas Airways warned investors its proposed €4.3 billion merger with British Airways (BA) faced major obstacles over the terms of the deal and stressed there was a reasonable chance talks would fail.

Qantas chief executive officer Alan Joyce, in his first public comments on the proposal since it was revealed last week, said he would only proceed if major revenue and cost benefits for Qantas were assured and that he was not yet able to give such an assurance.

"There is a reasonable chance that this might not go ahead," Mr Joyce told reporters yesterday after speaking at a business lunch.

"We still are in a position where we have significant hurdles to overcome," he added, citing the terms of the proposed share merger, BA's pension liabilities, which total about €1.7 billion, and the economic outlook.

The world airline industry cut capacity aggressively this year as fuel prices rallied to record highs in July. Energy prices later retreated, pushed lower by economic crisis that also dampened demand, forcing many airlines to consider joining forces.

"In order to survive for the longer term, it does potentially make sense for groups to get together if there is synergy benefits to be had," said Paul Xiradis, chief executive officer of funds manager Ausbil Dexia, referring to ongoing consolidation efforts in the aviation sector. Mr Ausbil does not own Qantas shares.

British Airways is also in merger talks with Spain's Iberia to form the world's third-largest airline, but Mr Joyce said a BA-Iberia combination would not go ahead if Qantas and BA merged. "BA are conscious, I think as Iberia are and as we are, that only one of the transactions could take place," Mr Joyce added.

Other airlines looking to deal include Germany's Lufthansa, which is vying with Air France KLM to secure a tie-up with bankrupt Alitalia, and plans to buy Austrian Airlines.

Mr Joyce, in a speech to the lunch, said a BA merger had the potential for major revenue benefits and cost savings but, when later pressed by reporters on the issue, added it was still unclear if there were enough synergies to justify a deal.

He said BA and Qantas had only revealed the existence of the talks last week because they had been leaked, noting that it was not ideal to pursue discussion in the full glare of news media.

"There's absolutely no guarantee that transaction will be forthcoming. That's why I think we felt that the leak was a bit premature," he said.

He met his BA counterpart, Willie Walsh, in Hong Kong on Saturday to discuss the merger proposal, the Australian Financial Review said yesterday, adding that Mr Joyce was due to brief the Qantas board on his latest talks tomorrow.

He declined to comment on the talks and gave no time frame for the negotiations, saying the remaining obstacles were major.

BA and Qantas have only said that they are exploring a dual-listed merger, a structure that would preserve their separate London and Australian stock market listings but would galvanise their management so that the firms were run as one. In forming a dual-listed business, two companies typically set a merger ratio whereby shareholders of each firm are entitled to a fixed percentage of the combined business's dividends and net assets, an arrangement which is kept in place by arbitrage.