Global Economics

British Airways Eyes Qantas, Iberia Tieups


The mergers would make way for the first truly global airline, and economic pressures may help push through deals where they were stymied before

British Airways (BAY.L) CEO Willie Walsh isn't short on ambition. On Dec. 3, Walsh confirmed he was simultaneously negotiating mergers with fellow OneWorld alliance members Australia's Qantas (QAN.AX) and Spain's Iberia (IBL.BE) while still pursuing a joint venture with yet another OneWorld carrier, American Airlines (AMR).

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 longstanding 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

Meanwhile, 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 (BusinessWeek.com 8/14/08) 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 tieups 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 Dec. 1, Europe's biggest discount airline, Ryanair (RYA.I) kicked off the action, launching an all-cash $950 million bid (BusinessWeek.com, 12/01/08) for rival Irish carrier Aer Lingus (AERL.L), 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 (LHAG.DE) 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. News of the BA-Qantas tieup, for example, came on the day Australia's government indicated it might be prepared to relax the rules on foreign ownership, potentially lifting from 35% to 49% the holding foreign airlines can have in Qantas. Even the Irish government, which owns 25% of Aer Lingus, is seriously considering Ryanair's offer, even though it dismissed a previous offer two years ago that valued the carrier at twice as much. Says Morris: "Times are changing."

Capell is a senior writer in BusinessWeek's London bureau .

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