Qantas CEO says BA merger faces major issues

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SYDNEY (Reuters) - Qantas Airways Ltd sees major benefits from a merger with British Airways Plc (BA) but substantial issues still need to be resolved before a deal can be done, the Australian airline's boss said on Monday.

Qantas Chief Executive Alan Joyce, delivering his first public comments on the $5.6 billion merger proposal since it was revealed last week, did not quantify the likely benefits but cited BA's pension fund and the economic outlook as obstacles.

"There are a number of significant matters that still need to be resolved, including agreeing an appropriate merger ratio and resolving issues around BA's large pension fund and the broader economic outlook," Joyce said in a speech.

"We are in these discussions because a merger has the potential to create the global scale that would allow us to grow and enhance our services and deliver significant revenue and cost synergies," he added.

Joyce met his BA counterpart, Willie Walsh, in Hong Kong on Saturday to discuss the merger proposal, the Australian Financial Review said on Monday, adding that Joyce was due to brief the Qantas board on his latest talks on Wednesday.

Joyce made no mention of such talks in his speech on Monday.

Instead, he used the occasion to sell the potential benefits of a merger with BA which, though chiming with a trend toward consolidation in hard times, has caused disquiet among some Qantas shareholders and an anxious Australian government.

Australia has threatened to scupper the deal if it amounts to an effective takeover of Qantas, which is protected by special legislation that forbids majority foreign ownership and also ensures its head office, listing and key facilities stay at home.

Some Qantas investors have also queried whether a merger would expose them to the British carrier's pension fund liabilities and whether the two firms could draw substantially more synergies than they currently derive from code-sharing.

Qantas and BA are members of the OneWorld alliance.

"All I can say to all Australians is this: whatever happens Qantas will remain majority Australian owned, the vast majority of employees will always be Australian, and Australia will remain our headquarters," Joyce said.

British Airways pension liabilities stood at 1.5 billion pounds ($2.21 billion) in September.

"BA operates in two of the most competitive aviation markets in the world. We think Qantas has far less to gain from this deal than British Airways," JP Morgan said in a report last week.

BA is also in merger talks with Spain's Iberia to form the world's third-largest airline.

Qantas is being advised by Macqurie Group Ltd , while BA is being advised by UBS .

Qantas shares were up 6.3 percent at A$2.36 on Monday, outperforming a 3.7 percent rise in the broader market <.AXJO>.

($1=A$1.54, 0.6796 pounds)

(Reporting by Denny Thomas, writing by Mark Bendeich, editing by James Thornhill)

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