Qantas-BA merger hits turbulence even before takeoff

Qantas.

Qantas is likely to continue the merger talks despite an overwhelming amount of scepticism.

Proudly-Australian airline Qantas’ merger talks with British Airways (BA) have generated hostile reactions, signalling a bumpy road ahead.

The merger speculation surfaced as BA revealed talks were underway to explore a potential merger via a dual-listed company structure, following Federal Transport Minister Anthony Albanese’s revelation that he’d allow foreign investors, including airlines, to take a stake of up to 49 per cent in Qantas.

Qantas, the world’s 10th biggest airline, also confirmed the negotiation, but said “there is no guarantee that any transaction will be forthcoming and a further announcement will be made in due course, if appropriate.”

Fuelled by the news, Qantas shares experienced a short-lived increase of nearly 10 per cent to $2.46.

The deal is expected to create a company worth more than $8 billion. While Qantas’ market value is somewhat higher than that of BA, it is understood the companies are considering taking a half each in holdings.

BA, which was forced to sell its considerable shareholding in Qantas when faced with choking debt, is also reportedly continuing merger talks with Spanish airline Iberia. The consolidation of the three carriers will create the world’s biggest airline, comfortably beating American Airlines.

The move is in line with the argument put forward by Qantas former chief executive Geoff Dixon, who has been making headlines regurgitating the need for consolidation as a survival option for the beleaguered airline industry.

It is also speculated the merger would encompass Qantas’ budget offshoot Jetstar and the freight division.

Australian, it is and will be

The foremost impediment to the merger process would be Qantas’ obligations under Australia’s international Air Services Agreements and the Qantas Sale Act, which stipulates a cap on foreign ownership at 49 per cent and total foreign airline ownership at 35 per cent.

The Act also demands the carrier’s main operational base and headquarters must remain in Australia, and it must be Australia-incorporated, with at least two-thirds of the Qantas board and the board chairman to be Australian citizens.

The Government was quick to denounce the deal, saying it would not stand by the proposal. 

“The Australian Government believes in an Australian-based and majority Australian-owned Qantas.

“At no stage as the Government indicated support for any proposal – in principle or otherwise,” Mr Albanese said in a statement.

The government went further, pre-emptively indicating it would not support any foreign mergers of other Australian airlines including Jetstar, V Australia and Pacific Blue, as well as all Australian international freight operators such as Heavy Lift Cargo, Tasman Cargo and Express Freighters.

Mr Albanese reaffirmed the Qantas Sale Act would remain unchanged except for the review of the additional ownership restriction, and stressed retaining national airlines was imperative for economic growth and national security.

“The Government is committed to growing a strong Australian-based aviation industry and Qantas is a key part of Australia’s aviation future,” he said. 

Dogged pursuit of consolidation

Despite facing a massive backlash, Qantas is likely to remain firm on its stance favouring consolidation with an aim to create a transcontinental airline.

Qantas made an attempt to merge with Malaysia Airlines earlier this year but the move was muddied by disagreement over management issues. 

According to media reports, the Australian airline also wants to join forces with Hong Kong carrier Cathay Pacific, a starter in the emerging Chinese market with a 20 per cent stake in Air China.

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