BRITISH Airways CEO Willie Walsh isn’t short on ambition. On December 3, Walsh confirmed he was simultaneously negotiating mergers with fellow OneWorld alliance members Australia’s Qantas and Spain’s Iberia while still pursuing a joint venture with yet another OneWorld carrier, American Airlines.
For BA, such a tieup would give it an unrivaled global footprint and improved financial clout, and analysts estimate total cost savings could reach $875 million. Iberia would bring $3 billion in cash and a 20% share of the Europe-Latin America market. BA already has a long-standing revenue-sharing arrangement on flights between Britain and Australia with Qantas, and there is little overlap on existing routes. Together with Qantas, BA would carry 71 million passengers a year on 474 aircraft flying to more than 230 destinations. To get around current rules limiting foreign ownership of Australian airlines, the companies would remain as separate legal entities, with dual listings in Australia and Britain and a single board structure.
GOING GLOBAL
BA and American Airlines are applying for regulatory clearance to cooperate more closely over fares, schedules, and other operational issues in the lucrative transatlantic market. Back in August, American Airlines, BA, and Iberia signed an agreement to cooperate commercially on flights between North America and Europe. They applied for antitrust immunity, noting that their agreement would allow the OneWorld alliance to compete more effectively with rival networks SkyTeam and Star Alliance.
If Walsh succeeds, the combination of the four airlines—three controlled by BA—would create the world’s first truly global carrier, says Doug McVitie, founder of aviation consultancy Arran Aerospace in Dinan, France. “The creation of this kind of super-alliance is the way of the future.”
Tell that to Iberia CEO Fernando Contes. For the past five months, merger discussions between Iberia and BA have stalled over disagreements on the share price exchange ratio and concerns over BA’s large pension deficit. Contes, who was informed of BA’s bid for Qantas only an hour before the British carrier notified the stock market, told aviation executives at a lunch in London on Dec. 3 that it was “more rational” for his company’s merger with BA to precede a deal with Qantas and that pursuing both deals “would be too complex.”
TIME IS RIPE
Walsh’s move is indeed both audacious and complex. There has never been a truly global airline merger before, given that governments worldwide have been loath to cede control of carriers to foreign rivals. And regulators have scuppered previous attempts at tie-ups over competition concerns. But many analysts believe times have changed. “Now is a time of opportunity as aviation shares have fallen dramatically,” says Peter Morris, chief economist at aviation consultancy Ascend Aviation in London. “It’s about buying into future cash flow at a reasonable price.”
Witness the spate of deals recently announced as Europe’s strongest carriers rush to consolidate to cope with weakening demand. On December 1, Europe’s biggest discount airline, Ryanair kicked off the action, launching an all-cash $950 million bid for rival Irish carrier Aer Lingus, in which it already owns a nearly 30% stake. And on Dec. 3, the same day BA confirmed its merger talks with Qantas, Deutsche Lufthansa announced plans to take over Austrian Airlines by acquiring the Austrian government’s 42% stake for a nominal fee of — 0.01 per share and paying around $476 million for the remaining shares. “What we are seeing is a polarization of the industry around the big European carriers,” says McVitie. While the economic logic is compelling, political obstacles remain. Still, analysts reckon the sheer force of the global economic downturn is likely to help overcome them. Already there are signs that some governments and regulators are more open to consolidation. –
Sunday, December 7, 2008
British Airways targets Qantas merger
A MOOTED $8 billion Qantas merger with British Airways would be structured to ensure compliance with the Qantas Sale Act, but any deal could be jeopardised by BA choosing to merge first with Spanish airline Iberia.
Federal Transport Minister Anthony Albanese said yesterday that Qantas had to remain Australian-owned for national security reasons.
He cited bilateral aviation agreements -- for example, the arrangement with Japan restricting landing rights to a "51 per cent Australian-based airline" -- as well as the importance of a national carrier during emergencies, such as last week's shutdown of Bangkok's international airport.
"There are national security issues, particularly for an island continent located on the globe where Australia is, for having a national airline," Mr Albanese told the ABC Television's Inside Business program.
The minister noted, as well, that he had been able to pick up the telephone last week and ask Qantas chief executive Alan Joyce for extra flights out of Thailand.
It is understood, however, that any Qantas-BA deal would involve a dual-listed company structure that would comply with the act, which requires Qantas to be based here and have two-thirds of its board seats occupied by Australians, including the chairman's position.
Qantas has yet to start lobbying the Government about the transaction, preferring to wait until the proposed merger terms are finalised, which is unlikely before Christmas.
Share market trading over the past 12 months suggests Qantas would be the senior merger partner by a ratio of 55:45.
The airline's recent 2009 profit downgrade to about $500 million has, however, narrowed the gap to 52:48.
Mr Joyce and his BA counterpart Willie Walsh met in Hong Kong midway through last week.
Instead of making headway with the merger, they spent most of their time responding to an early leak of their merger plans to the media.
Both parties have done due diligence but the process has not been completed, although $US500 million ($771 million) in synergy benefits have been identified. One source said the major unresolved issues were the airlines' relative values, a pound stg. 2 billion ($4.5 billion) deficit in the pound stg. 16 billion BA pension scheme and BA's outlook given its heavy exposure to a downturn in trans-Atlantic flying because of the global financial crisis.
On the upside for BA, the performance of its new Terminal 5 at London's Heathrow Airport had been "encouraging", the source said.
The structure of the deal is understood to be fairly well advanced, and will approximate that of BHP Billiton-DLC.
In the current dislocation of debt markets, both parties are keen to avoid any trigger for a refinancing.
A potential spanner in the works, though, is the fate of BA's scrip merger discussions with Iberia. Last July, the airlines said their boards "unanimously" supported the talks.
In an embarrassing revelation, Iberia chief executive Fernando Conte said last week he had not known that BA had been conducting parallel negotiations with Qantas.
Qantas sources said the involvement of Iberia did not necessarily kill a Qantas-BA deal.
The Spanish airline, though, could only be introduced to a three-way merger after a Qantas-BA deal took off first.
The reason was that a BA-Iberia deal would be a full merger, including board seats for Iberia directors.
A merger of that entity with Qantas would make it hard to comply with the Qantas Sale Act and its board requirements.
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