Jeremy Warner: British Airways adds Qantas to list of marriage partners
Wednesday 03 December 2008
Outlook That two-timing Willie Walsh, chief executive of British Airways, has been playing the field again. Not content with his ongoing courtship of Spain's Iberia, or even his on-off affair with American Airlines on revenue, sales and cost-sharing, he's also been sweet-talking the Australian carrier Qantas, though you must please understand that it wasn't any part of Mr Walsh's doing. It was apparently Qantas that made the approach. What can a man do when such an attractive-looking Sheila throws herself at your feet?
Mr Walsh insists he had always made clear that Iberia wasn't an end game itself, but just a stepping stone in a process of global consolidation of the airline industry which he plans to lead from the front. Whether Iberia will prove quite so understanding is anyone's guess. Talks with Qantas have been going on since August, but Iberia was told nothing about them until yesterday.
As with the Iberia negotiations, the Qantas talks leaked before Mr Walsh would have wanted, but that hardly helps with the explaining he now has to do. Initial reaction from Spain wasn't as bad as you might have expected. The Iberia share price leapt and analysts were licking their lips at the likely cost synergies of a three-way merger.
Yet even if Iberia adopts a "liberal" attitude to BA's promiscuity, it seems unlikely Mr Walsh is going to succeed in pulling off a three-way merger, or not initially, at least. It's hard enough getting regulatory and shareholder agreement for a simple two-company marriage, but where there are three involved and a bit on the side as well in the shape of American, an already big ask becomes virtually impossible. It seems unlikely Mr Walsh will get away with doing both at the same time.
The Iberian negotiations were already in some difficulty in any case. Since announced, the relative valuation of the two companies has changed significantly, undermining the attractions to the Spanish operator of the proposed 65/35 split. Iberia also has concerns about the BA pension fund deficit, which with the fall in stock markets is again ballooning. By talking to Qantas at the same time as Iberia, Mr Walsh is hedging his bets. In so doing, he may pay the price of all love rats and end up losing both. Yet with BA shares one of the strongest performers in the FTSE 100, yesterday, investors are betting that at least one will succeed.
Still, you never know. Maybe Mr Walsh can eventually have both. The world is changing with frightening speed and, as with all industries, airlines are being forced to huddle together for warmth. Iberia, though solvent enough, is one of the more marginal European operators, and without a partner may end up getting squeezed by the big three of the European scene – Air France/KLM, Lufthansa, and BA. Michael O'Leary's Ryanair too is hoping to add itself to the roster as a low-cost fourth by acquiring Aer Lingus. Without the BA merger, Iberia might find itself left out in the cold.
In any case, if you had to bet on which deal would happen first, it would have to be Qantas, which is culturally an easier fit likely to yield more immediate cost synergies. What's more, the regulatory constraints on cross-border mergers between different economic regions may not be as insurmountable as they were.
To overcome the initial obstacle to a merger with Qantas of a 25 per cent limit on foreign ownership, BA proposes a dual-listed structure similar to that enjoyed by BHP Billiton and Rio Tinto. The two companies would nonetheless be merged for operational and balance-sheet purposes.
The structure proposed may or may not satisfy the Aussies, yet that unfortunately is the least of the merger plans' problems. The trouble with airlines is that their affairs are governed by a myriad of different bilateral agreements on landing rights between nations. All these would have to be renegotiated before the merger can proceed.
BA and Qantas are long-standing bedfellows, and quite similar in terms of size. Already they operate the "kangaroo" routes of direct travel between Britain and Australia jointly, for which they have a special dispensation from the competition authorities. Full-scale merger might further consolidate their stranglehold on travel between Australasia and Europe. Virgin is already screaming blue murder, but it does that about most of what BA does.
In any case, none of these deals is going to happen quickly. While Mr Walsh is out there negotiating with the rest of the world, the airline industry is going to hell in a handcart. To the problem earlier this year of soaring fuel prices must now be added that of collapsing demand, with capacity being chopped right, left and centre. Airlines hope to answer these challenges through consolidation. Whether regulators too accept that times have changed and this is the way to go remains to be seen. Never mind competition concerns, when it comes to airlines, perceived national interest is still a mighty powerful barrier to change.
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