British Airways Looks to Merge With Qantas

(MoneyWatch)  BA's shares received a boost on news that it is considering a merger with Australia's Qantas, while it tries to ringfence potential tie-ups with Spain's Iberia and American Airlines. The merged entity, if it goes ahead, would have a dual listing structure.

Why it makes sense:
The two airlines are broadly the same size in terms of fleet and passengers, and already codeshare on the UK to Australia route.

They've also both endured a tough year -- BA's T5 problems compounded by a reported 91.6 per cent drop in profits from March to September this year. Qantas, meanwhile, has seen its previously unblemished safety record dented by safety scares and has put domestic expansion plans on hold in an attempt to cut costs. And they've both had to part with millions in fines relating to price-fixing allegations -- several BA executives were charged with criminal price-fixing earlier this year.

Neil Glynn of NCB Stockbrokers sees a merger as offering synergies in fleet costs and maintenance for the two carriers, telling Forbes: "This continues the trend of global consolidation to save costs and maximise revenues."

Potential obstacles:
But competition rules may need to be relaxed to allow BA to continue its talks with American Airlines and Iberia -- BA's seeking worldwide anti-trust immunity from US authorities to keep that partnership alive.

BA used to own a stake in Qantas, which it had sold off by 2005 and current rules limit foreign ownership of airlines to some degree -- EU rules allow for 49 per cent, the US limits voting rights to 25 per cent.

Australia's rules stipulate the collectively, foreign airlines can own up to 35 per cent of Qantas, but a single investor's limited to a 25 per cent shareholding.

But there are indications that Australia's government could lighten up on restrictions to allow foreigners to take a larger stake in the national airline.

Not everyone's so keen to facilitate merger talks, though. Virgin Atlantic airline has already appealed to the European Commission to reject any BA/AA alliance, with chief executive Steve Ridgway saying the "virtual merger" would "lock up one of the world's busiest air corridors" and hand the airlines a monopoly on the lucrative North Atlantic routes.

Commenting on the latest talks, he said: "One day it's Iberia, then it's American, and now Qantas. The only strategy BA seems to have is to lock-up some of the busiest routes in the world, against the consumer interest."

So much for the friendly skies--

This post first appeared on BNET's Sterling Performance blog.