BA merger with Iberia steps closer after £425m Qantas sale

A merger between British Airways and the Spanish airline Iberia moved closer yesterday after BA raised £425m by selling its stake in Australia's national carrier Qantas in readiness for the consolidation of the European aviation industry.

A merger between British Airways and the Spanish airline Iberia moved closer yesterday after BA raised £425m by selling its stake in Australia's national carrier Qantas in readiness for the consolidation of the European aviation industry.

Rod Eddington, BA's chief executive, said the sale of the 18.25 per cent shareholding in Qantas would strengthen BA's balance sheet and put it in a "robust position" to participate in merger activity across Europe.

However, some analysts interpreted the move as indicating growing concerns within BA about its high level of net debt, which currently stands at £3.8bn, and the shares fell 3 per cent.

BA and Iberia already have cross shareholdings with the British airline owning a 9 per cent stake in its Spanish counterpart and relations will deepen further this autumn when the two carriers begin to pool revenues and profits on services between the UK and Spain.

The executive managements of the two airlines, led by Mr Eddington and his counterpart at Iberia, Fernando Conte Garcia, are due to hold one of their six-monthly meetings in November and closer co-operation is likely to be high on the agenda.

An actual merger of the two airlines will probably have to wait, however, until after the signing of a groundbreaking air services pact between the US and the European Union, which the two airlines hope will take place next year after the American presidential elections. The American government has the power to veto any merger between two European airlines by denying them landing rights in the US.

Mr Eddington has made no secret of the fact that Iberia is BA's preferred merger partner in Europe and, ideally, he would like to consummate a deal before he steps down from the airline, probably at the end of next year.

Senior BA sources said that a merger with Iberia was not "imminent" but Mr Eddington observed: "Being a minority investor in someone else's company is pointless unless it is part of the journey towards something bigger."

A combination of BA and Iberia would create a £4bn airline with sales of £10.6bn and 75,000 employees carrying 61 million passengers a year on a fleet of 440 aircraft, outstripping the newly-merged Air France-KLM in size.

The sale of BA's Qantas stake was carried out through an offer to institutional shareholders underwritten by Citigroup. The proceeds will be used to reduce BA's net debts. These stand at £3.8bn and Mr Eddington has said he wants to get them below £3bn.

Chris Avery, a transport analyst at JP Morgan, said he no longer expected BA to resume dividend payments this year, with a token 3p payout in light of the high priority it was placing on debt reduction.

The timing of the deal came as a surprise because BA has consistently maintained that the Qantas shareholding was not for sale, arguing it was necessary to underpin the two airlines' joint operation of the "kangaroo" route between London and Sydney.

However, Mr Eddington said this was no longer the case because the joint services agreement was strong and well-established and Australia's competition authorities had recently given approval to a five-year extension of the arrangement.

BA acquired the Qantas stake in 1993 for £304m and has since received A$600m (£234m) in dividend payments. It will, however, book a £12m pre-tax loss on the deal, mainly because of goodwill write-down.

BA and Qantas are leading members of the Oneworld alliance and at one time a full-blown merger of the two airlines was seen as a possibility. But the Australian government has placed a 49 per cent limit on overseas ownership of its flag-carrier. In addition, the growth of alliances, underpinned by code and revenue-sharing deals, has reduced the need for airlines on separate continents to merge.