Qantas, BA merger 'will deliver savings'

3 Dec 2008, 6:21 pm   -   Source: AAP
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A merger between Qantas and British Airways would create an $8 billion carrier and deliver cost savings, but there is a long way to go before any deal is done.

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A merger between Qantas Airways and British Airways would create an $8 billion-plus carrier and deliver major cost savings, but there is a long way to go before any deal is done.

Merger talks between the pair were revealed overnight on Tuesday in London, after the federal government indicated it was considering lifting the holding foreign investors could have in Qantas to 49 per cent, from 35 per cent.

"There is no guarantee that any transaction will be forthcoming," Qantas said in a statement echoing its UK counterpart.

Analysts said there is a long way to go before a potential deal can go through, with one analyst predicting a merger has only a 50 per cent chance of taking off.

Confirmation that the pair were exploring a potential merger helped lift Qantas shares on Wednesday, with the stock closing up 10 cents, or 4.44 per cent, to $2.35.

CMC Markets Stockbroking general manager Andrew West said a tie-up of Qantas and BA would be a merger of two equals and would create a strong single presence in the aviation industry.

"Upfront, the deal looks like it would benefit BA more than it would Qantas because Qantas has a lower debt level and a stronger balance sheet than BA," Mr West said.

"However, if you look at it a bit deeper, both companies are bringing their own strengths and brand value to the table."

The merged entity will have about 500 aircraft and a dual listed structure with a presence on the UK and Australian stock exchanges, while maintain separate BA and Qantas brands.

BA and Qantas have similar market values of around $4 billion each and have had a relationship in one form or another for more than 75 years.

They commenced "Kangaroo route" services between Australia and the UK in 1995 under a joint services agreement - an agreement that has been given the green light by competition regulators to continue until 2010.

BA bought a 25 per cent stake in Qantas in 1993 but sold its remaining 18.25 per cent holding 11 years later for $1.1 billion to repay debt.

Centre for Asia Pacific Aviation chief operating officer Derek Sadubin said a merger with BA would help Qantas stay competitive in a tough economic environment as the industry faces consolidation to survive.

He said the deal would help both carriers reduce costs through joint operations, crewing and ground services.

Mr Sadubin said key revenue synergies could be secured through greater network linkages and feeds in BA and Qantas's respective markets.

Shaw Stockbroking analyst Brent Mitchell said Qantas would benefit from BA's access to the European market and Qantas's access to Asian markets would appeal to BA.

"BA comes with one of the most important hubs in the world, Heathrow, and with access to a wider European market and direct access into trans-Atlantic services," he said.

"For BA,it gives them exposure to Asia through the Qantas and Jetstar brands."

But Mr Mitchell said the merger has less than a 50 per cent chance of going ahead because of structural and control impediments - including the government's firm stance on Qantas remaining 51 per cent Australian owned and maintaining an Australian headquarters.

"One of the difficult things will be who controls the whole thing," Mr Mitchell said.

"I think the Australian government, the public and various vested interests would not like to see control rest in London - so that will be the difficulty in setting up the structure, not only for the control interest but also to fit within the regulatory environment in Australia and in Europe."

Mr Sadubin was more optimistic about the prospects of a merger, saying competition regulators will be more flexible in the current economic climate.

"The environment in which we're in could potentially make regulators more amenable," he said.

Mr Sadubin said that in terms of fleet synergies, a combined carrier would have more flexibility in the deployment of aircraft and that Qantas's early positions on new aircraft - such as the B787 and A380 - would appeal to BA.

"Flexibility is the name of the game," he said.

Mr Sadubin said there would not be many benefits for staff or consumers from the merger.

"What Qantas and BA are doing are reinforcing their operations so they can handle the fare competition that we're going to be seeing over the next few years."

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