British Airways in merger talks with Qantas

LONDON (Reuters) - British Airways is in merger talks with Australia's Qantas , it said on Tuesday, adding to various attempts at consolidation in an industry desperate to cut costs in the global economic downturn.

Shares in British Airways, which had been up 5.1 percent ahead of the announcement, extended their gains to trade as much as 17.5 percent higher at a two-month high of 164 pence.

At 9:16 a.m. EST the shares were up 11.6 percent at 156 pence, valuing the airline at around 1.8 billion pounds ($2.7 billion), little different from Qantas's market capitalization of around 4.4 billion Australian dollars ($2.83 billion), according to Reuters data.

BA also said in a statement on Tuesday that prior merger talks between it and Iberia to form the world's third largest airline were continuing.

"BA has previously said it is determined to be at the forefront of industry consolidation. It is in talks with Iberia and American and this is of a piece with those efforts," Blue Oar Securities airline analyst Douglas McNeill said.

"They are out to create a global player, which is an audacious goal that would be difficult for any management team to pull off," he said.

BA's news follows Aer Lingus Group Plc's rejection on Monday of a fresh approach from rival Irish low-cost carrier Ryanair , and October's move by Germany's Lufthansa to become British bmi's majority shareholder.

Any merger with Qantas would be via a dual-listed company structure, BA said in a short statement containing the rider: "There is no guarantee that any transaction will be forthcoming and a further announcement will be made in due course, if appropriate."

In 1993 BA acquired 25 percent of Qantas in the first step toward privatization of the Australian carrier but sold out 11 years later.

"It's a good move for British Airways and Qantas," a trader said. "Basically, it means they would have got long-haul flight-sharing with Qantas. Qantas has a big exposure in the far east, so ultimately it will cut down the cost for BA."

Earlier on Tuesday, Australian transport minister Anthony Albanese said Qantas would remain majority Australian-owned. A discussion paper for the industry, to be released on Tuesday by the government, would keep the existing cap on foreign ownership of Qantas at 49 percent, Albanese told state radio.

But Albanese said he would not be opposed to one foreign airline buying 49 percent of Qantas, the world's 10th largest airline by market value, which has slashed jobs to combat the economic downturn.

When talks between BA and Iberia were announced on July 29, it was thought BA would take around two thirds of the new carrier based on their relative market capitalizations.

However the financial industry crisis has blown an even bigger hole in BA's pension fund and BA stock has underperformed Iberia's by 50 percent since the close of business on July 28.

Analysts have said the BA-Iberia tie-up could collapse under the weight of the British firm's pension deficit, calculated at 1.5 billion pounds in March.

BA and Iberia are in talks with American Airlines on a transatlantic alliance.

NCB analyst Neil Glynn said: "Any prospective deal would be strongly positive for British Airways over the medium term. This will be positive for the stock in the very short term. However, there is potential for significant revenue concerns to ultimately outweigh positive sentiment on this announcement.

"I would see the priority of things being the Iberia merger talks and the Iberia/American anti-trust immunity before any deal is done with Qantas. I would be surprised if any deal with Qantas is placed ahead of those in the pecking order.

Elsewhere, Lufthansa is vying with arch-rival Air France

KLM to strike an alliance with Italy's bankrupt national carrier Alitalia . The German carrier is also planning to buy Austrian Airlines .

($1=1.554 Australian dollars)

($1=.6745 pounds)

(Additional reporting by Matt Scuffham and Paul Sandle; Editing by Greg Mahlich)

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