Setback for BA as Qantas merger talks are grounded

Airlines fail to agree on stakes in combined group

Merger talks between British Airways and the Australian flag carrier, Qantas, were grounded yesterday because the two companies could not agree on the size of their stakes in the combined group. The tie-up faced well-documented hurdles, not least Australia's foreign ownership rules, but the collapse comes barely two weeks since the negotiations were made public.

Both sides said yesterday that relations remained cordial and they would continue to co-operate in the OneWorld alliance, of which they are members. But sources close to the discussions said the deal was scuppered by unbending demands from Qantas for a 55 per cent stake in the new company – a proportion to which BA could not agree.

BA is already in merger talks with the Spanish carrier Iberia, and is pushing an alliance with American Airlines through regulatory hurdles. A three-way tie-up between BA, Qantas and Iberia would have created one of the next generation of global super-airlines being forced into existence by the exigencies of the credit crunch and global recession.

BA's talks with Iberia, which began in August, have already taken longer than expected and are unlikely to conclude before next summers because Iberia's investors are wary of BA's ballooning pensions deficit. In September, BA said the deficit was £1.74bn, more than its market capitalisation, which prompted Iberia's largest shareholder, Caja Madrid, to call for the Spanish carrier to take a larger holding in the combined group.

Yesterday, BA denied that its pension problems came up in its discussions with Qantas, but the claims met with scepticism in the City. Gert Zonneveld, an analyst at Panmure Gordon, said: "It is difficult to believe that a pension deficit running into the billions was completely irrelevant. It is simply too big and important, as has been proved by the discussion with Iberia."

Airlines are facing a rash of mergers as they look to economies of scale to beat what the BA chief executive, Willie Walsh, has called "the worst trading environment the industry has ever faced". The International Air Transport Association is predicting combined losses of up to $5.2bn (£4.8bn) this year. Nearly 30 airlines have gone bankrupt since January, skewered by rocketing fuel costs and falling passenger numbers.

In Europe, the sector is coalescing into three groups. The largest, led by Air France-KLM, is circling Alitalia, the bankrupt Italian flag carrier. The second is led by Lufthansa, which has already bought Swiss International Air Lines and is trying to buy Austrian Airlines. The third is the cluster being put together by BA. Although the Qantas deal may be off, Mr Walsh was in Rome this week to talk to the investor group propping up Alitalia about a possible link with the company.

Apart from the issue of stake sizes, the BA/Qantas deal faced the uncharted difficulties of linking two airlines on different continents. The proposed Iberia merger is unlikely to be affected by the collapse of the talks. "The Spanish deal was always more logical because it is between two European carriers so is easier to pull off and offers potentially greater benefits," Mr Zonneveld added.

BA's shares remained broadly flat after yesterday's announcement, closing up 0.29 per cent at 172.5p.