By Mark Bendeich and John Bowker
SYDNEY/LONDON (Reuters) - Australia's Qantas Airways and British Airways have called off talks for a $6.4 billion merger that analysts said could have helped transform an industry grappling with falling demand and volatile fuel prices.
Qantas and BA announced the end of talks in a three-paragraph statement issued to the Australian and London stock markets on Thursday, saying they could not agree on key terms for a deal.
"Despite the potential longer-term benefits for Qantas and BA, the airlines have not been able to come to an agreement over the key terms of the merger, at this time," Qantas said.
Qantas Chief Executive Alan Joyce had warned last week that the merger faced major hurdles and would only go ahead if Qantas could secure major revenue and cost benefits. He also lamented the fact the talks had been leaked and forced out into the open.
A Qantas-BA marriage faced major challenges, not least the ownership split of the combined business, which was proposed to be formed through a dual-listed merger whereby the two firms would have kept their existing listings but be managed as one.
BA added on Thursday it would not agree to Qantas owning more than 50 percent of the merged entity, though Qantas is the larger firm by market value. Qantas is worth about $3.3 billion and BA about $3.1 billion, based on latest exchange rates and share prices. BA was down 4.2 percent in early London trade.
"The leak created an expectation about the merger ratio that could not be delivered considering the relative value of the airlines," a BA spokeswoman said. Asked if Qantas wanted more than 50 percent of the combined entity, she added: "Yes."
IBERIA ANOTHER HURDLE
Under Australian law, Qantas must remain majority-owned by Australian investors and its head office, stock market listing and major facilities must remain in its home country.
But a source familiar with Qantas's plan said the Australian carrier was still open to airline mergers, especially in Asia, though it was not in any active talks.
Qantas has had previous dialogue with Singapore Airlines and Malaysian Airline System, the source noted, adding: Qantas continues "to work on and keep the door open for discussions with an airline."
The hurdles to a Qantas-BA deal also included BA's $2.2 billion in pension-fund liabilities and also the British carrier's separate merger talks with Spain's Iberia.
Qantas had ruled out a three-way merger with BA and Iberia, though this would have created the world's biggest airline, ahead of American Airlines.
BA said on Thursday the Iberia talks continued.
Iberia declined comment, though Chairman Fernando Conte is likely to be heartened by the news. He told journalists in London this month that deals between airlines within regions were more compelling than cross-regional tie-ups.
Qantas shares rose 7.5 percent in heavy trade ahead of the announcement, which came after the Australian market had closed.
Aviation analysts had said a Qantas-BA merger would lead to other big marriages in the airline industry, which has been slashing capacity this year as fuel prices rallied to record highs in July. Fuel prices have tumbled since then, but so has demand for air travel, keeping alive the forces of consolidation.
Germany's Lufthansa last week signed a deal to buy Austrian Airlines, a move that will make it Europe's biggest airline. Lufthansa is also vying with Air France KLM to secure a tie-up with bankrupt Alitalia.
But some analysts had doubted a Qantas-BA deal would take off.
"It was always going to be a difficult marriage and clearly there are a lot of pressures from outside the relationship that are being applied -- not least from Iberia and also within Qantas's institutional base," said Ian Thomas, analyst at aviation consulting firm CAPA Consulting.
"There were questions being asked about how much value it was going to bring to the organization and whether they would be better off pursuing an Asian partner...," he added.
Qantas and BA remain code-sharing partners in the Oneworld alliance.
Qantas is being advised by Macquarie Group Ltd, while BA is being advised by UBS.
(Additional reporting by Sonali Paul, Bruce Hextall and Denny Thomas in Sydney, and Ben Harding in Madrid; Editing by Ian Geoghegan)
