By Denny Thomas
SYDNEY (Reuters) - Qantas Airways Ltd
Qantas Chief Executive Alan Joyce, in his first public comments on the proposal since it was revealed last week, said he would only proceed if major revenue and cost benefits for Qantas were assured and that he was not yet able to give such an assurance.
"There is a reasonable chance that this might not go ahead," Joyce told reporters on Monday after speaking at a business lunch.
"We still are in a position where we have significant hurdles to overcome," he added, citing the terms of the proposed share merger, BA's pension liabilities, which total about $2.2 billion, and the economic outlook.
The world airline industry cut capacity aggressively this year as fuel prices rallied to record highs in July. Energy prices later retreated, pushed lower by economic crisis that also dampened demand, forcing many airlines to consider joining forces.
"In order to survive for the longer term, it does potentially make sense for groups to get together if there is synergy benefits to be had," said Paul Xiradis, CEO of funds manager Ausbil Dexia, referring to ongoing consolidation efforts in the aviation sector. Ausbil does not own Qantas shares.
NO THREE-WAY DEAL
British Airways is also in merger talks with Spain's Iberia
Other airlines looking to deal include Germany's Lufthansa
Market ignored Joyce's warning and pushed up Qantas shares 7.2 percent to A$2.38. Traders said thin volume aggravated the stock up which was partly supported by easing oil prices. The broader market <.AXJO> rose 4.1 percent to a one-week closing high.
Joyce, in a speech to the lunch, said a BA merger had the potential for major revenue benefits and cost savings but, when later pressed by reporters on the issue, added it was still unclear if there were enough synergies to justify a deal.
He said BA and Qantas had only revealed the existence of the talks last week because they had been leaked, noting that it was not ideal to pursue discussion in the full glare of news media.
"There's absolutely no guarantee that transaction will be forthcoming. That's why I think we felt that the leak was a bit premature," he said.
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 declined to comment on the talks and gave no time frame for the negotiations, saying the remaining obstacles were major.
DUAL-LISTING EYED
BA and Qantas have only said that they are exploring a dual-listed merger, a structure that would preserve their separate London and Australian stock market listings but would galvanize their management so that the firms were run as one.
In forming a dual-listed business, two companies typically set a merger ratio whereby shareholders of each firm are entitled to a fixed percentage of the combined business's dividends and net assets, an arrangement which is kept in place by arbitrage.
Joyce said the proposed merger ratio was still to be decided, though Qantas is the larger of the two firms by market value. Qantas is worth around $3 billion versus about $2.6 billion for BA.
The proposed merger has caused disquiet among some Qantas shareholders and anxiety inside the 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.
Qantas is being advised by Macquarie Group Ltd
($1=A$1.54, 0.6796 pounds)
(Additional reporting by Mette Fraende; Writing by Mark Bendeich; Editing by Lincoln Feast)
