British Airways Qantas merger collapse - but is that all there is?


When British Airways and Qantas were caught in flagrante delicto talking about a merger just a couple of weeks ago, they really didn't have time to slip their underwear back on before declaring that any marriage was off.

The premature spotlight of global media attention clearly didn't help, but it does leave the British carrier looking somewhat bedraggled.

The would-be-deal faltered on Qantas' desire for a majority holding of 51% in the Air France-KLM style holding company, with each individual airline still conforming with bilateral requirements.

That BA would enter into discussions knowing that Qantas intended to be boss is surprising if true. For the world's favourite airline to be owned by Australians and headquartered in Sydney is hardly the sort of development that does wonders for British pride. Getting the process approved by competition authorities would have been a breeze compared with managing public sentiment.

Clearly the issue of control was still seriously under discussion - and was eventually the breakpoint, so at least the seeds of an understanding were there.

Undoubtedly it was an opportunistic move by Qantas, while it was still riding a wave of profitability and while BA was at perhaps its weakest point for along time. Suffering from a falling share market which had exposed its pension liabilities and beleaguered by European competition from LCCs and the two other leaders of global alliances, British Airways needed something special.

That said, the main merit to this deal appeared to be that it was easy to talk. The two have been fully operationally merged on Australia-Europe routes for over a decade, so that longstanding links existed at most levels. The chemistry between two alumni of Aer Lingus, in the CEOs of the carriers was presumably good - although Qantas now has a chairman who would have been very much involved too.

And a new guard at Qantas was keen to seize the moment. But that itself suggests something of where British Airways was positioned.

While the talks were on, both carriers managed a little glow on the markets, with British Airways enjoying most of it. Qantas enjoyed a 6.6% lift in its share price and British Airways a 10% gain, while Iberia retreated 2.5%. But now that is behind them and life must go on.

The Asian connection

And so that is apparently it. But one other piece of the jigsaw has been overlooked.

Qantas, in a wildly optimistic moment, might have imagined it alone could generate the grunt that would get BA excited about a merger. But seriously, this would have been like BA marrying its younger sister.

The British carrier already has all the access to the low yielding Australian market that it wants. And if it wanted money, there must be better places to look than Qantas. Certainly there were potential benefits to be gained if Qantas' low cost subsidiary, Jetstar, were to be used as a low cost alternative within Europe.

But there had to be another shoe to drop.

The real long term growth money is in Asia

No European airline has yet been able to establish a strong foothold there.

Lufthansa invested years in cultivating Thai Airways, which delivered little more than continuing frustration and that relationship is now moribund. Air France still has some useful colonial relationship remnants in Indochina, as shown by the French street signs in Vietnam, Cambodia and Laos, as well as the French department of New Caledonia, off the Australian coast.

But no airline has been able to entrench itself locally. The prize for the first to do so could be substantial.

While the global talk was going on about Qantas-BA, there was also a much lower-key leak concerning a Qantas-Malaysia Airlines tie-up. That has quietly been buried, but it looks very much as if the real attraction for British Airways would have been Qantas' ability to coordinate a home-grown Asian operation that would feed into the British carrier's network. On that level, a Qantas link looks much more attractive.

And Qantas already has established the Jetstar brand locally in Singapore (Jetstar Asia) and Vietnam (Jetstar Pacific), with cross border joint ventures in each country. It has looked at doing the same in Indonesia; it would almost certainly do so in India, once the government there relaxes its foreign airline ownership rule.

These JVs are losing money but they are long term strategies. And the synergies among a European network carrier, an Asian-based grouping and Qantas/Jetstar starts to build something much more formidable than the sum of its parts.

And all this enhances Qantas' attractiveness to a European partner. That more exotic side to BA's younger sister might just be what caught the British carrier's attention.

Back to Europe, for now

BA is in a stronger position now than two weeks ago to do battle with Iberia over a merger formula - that is assuming it has not lost too much goodwill with the Spanish girl-next-door. Good to bed that one down if possible.

But the Asian expedition is not over. There will be more to come on that front.

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