British Airways in merger talks with Qantas

LONDON (Reuters) - the companies said, signaling further consolidation in an industry desperate to cut costs in the global economic downturn.

Shares in British Airways surged as much as 17.5 percent after the airline said it was exploring a potential tie-up with fellow OneWorld alliance member Qantas in which it used to own a 25 percent stake

BA, whose market value of 1.8 billion pounds ($2.7 billion) is only a fraction smaller than that of Qantas, also said merger talks already underway with Spain's Iberia (IBLA.MC) to form the world's third largest airline were continuing.

A tie-up between BA, Iberia and Qantas would create the world's biggest airline with combined scheduled passenger kilometres flown of almost 270 billion a year, comfortably overtaking American Airlines (AMR.N) on 222.8 billion.

Blue Oar Securities airline analyst Douglas McNeill said BA's latest move was in line with its strategy of taking a lead in consolidation in an industry battling wild swings in fuel prices and falling demand as global recession looms.

"They are out to create a global player, which is an audacious goal that would be difficult for any management team to pull off," he said.

Analysts said a three-way combination looked a long way off, however, given that talks with Iberia were first announced in July and have stalled on worries over BA's pension deficit.

Qantas made no mention of Iberia in its statement.

"Qantas Airways Ltd confirms that it is exploring a potential merger with British Airways plc via a dual-listed company structure," the airline said in a statement early on Wednesday, adding there was no guarantee they would agree on a deal.

BA acquired 25 percent of Qantas in 1993 in the first step toward privatization of the Australian carrier but sold out 11 years later.

"I would see the priority of things being the Iberia merger talks and the Iberia/American anti-trust immunity before any deal is done with Qantas," said NCB analyst Neil Glynn.

"I would be surprised if any deal with Qantas is placed ahead of those in the pecking order."

British Airways, Iberia and American Airlines said in August that they had filed for antitrust immunity in the United States in order to be able to cooperate commercially on flights between North America and Europe.

"REVENUE CONCERNS"

Shares in BA climbed as high as 164.1 pence following the announcement before settling down to close 12.5 percent higher at 157.1 pence, valuing the airline at around 1.8 billion pounds, little different from Qantas's market value of around A$4.4 billion ($2.83 billion).

On Tuesday, Australian transport minister Anthony Albanese said Qantas would remain majority Australian-owned with a cap on foreign ownership maintained at 49 percent.

But Albanese said he would not be opposed to one foreign airline buying 49 percent of Qantas, the world's 10th largest airline by market value, which has slashed jobs to combat the economic downturn.

"Qantas is very important to Australians, it is important as our national carrier. It's been an important part of our history and it's obviously a very big employer of Australians," Deputy Prime Minister Julia Gillard told Australian state radio on Wednesday when asked about the merger proposal.

She added that any proposal would be subject to a national interest test.

Transport minister Anthony Albanese said in a separate radio interview that the government would protect Australian ownership of Qantas and would not allow the national carrier to be taken over.

An $11 billion private equity bid for Qantas fell apart early last year as shareholders baulked.

News of the talks follows Aer Lingus' (AERL.I) rejection on Monday of a fresh approach from rival Irish low-cost carrier Ryanair (RYA.I), and October's move by Germany's Lufthansa (LHAG.DE) to become British carrier bmi's majority shareholder.

BA said in a short statement that any merger with Qantas would be via a dual-listed company structure and cautioned there was no guarantee the talks would result in a deal.

NCB's Glynn said a merger would be strongly positive for British Airways over the medium term and likely to help its share price in the very short term.

"However, there is potential for significant revenue concerns to ultimately outweigh positive sentiment on this announcement," Glynn said.

Elsewhere in Europe, Lufthansa is vying with arch-rival Air France KLM (AIRF.PA) to strike an alliance with Italy's bankrupt national carrier Alitalia AZPIa.MI. The German carrier is also planning to buy Austrian Airlines (AUAV.VI).

In the United States, Delta Air Lines (DAL.N) will trim capacity as travel demand wanes.

(Writing by Paul Hoskins, additional reporting by Matt Scuffham and Paul Sandle and Sonali Paul in Melbourne; editing by David Cowell and Jonathan Standing)