Qantas shares had a solid 7.2% rise yesterday in the up market after new CEO, Alan Joyce made a major set piece speech to a Sydney business audience where he made it clear that a merger with British Airways wasn’t the sure deal that some market analysts and media might be suggesting.
Qantas shares closed at $2.38, up 16c on the day. The overall market was up around 4%.
He told the lunch that "significant matters” need to be resolved before a merger with British Airways can be achieved.
He didn’t rule it out, nor did he rule it in.
It was one of those speeches which laid out some of the issues in the merger, and some for the airline to confront and on the whole it read like a fairly non-confrontationist discussion, unlike some of the commentary from his predecessor, Geoff Dixon.
"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 – all to the benefit of our customers, our employees and our shareholders.
"But the fact is: these are still only talks. There is no guarantee that any transaction will be concluded.
"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 pension fund and the broader economic outlook," he said in the speech.
Points such as the "merger ratio" can be sorted out by talks between the two companies.
Qantas has had a higher market value now for some time compared with BA’s market cap and that small gap has been maintained through the week since the talks were raised.
The merger ratio relates in part to the economic outlook: Qantas is operating in Asia mainly which is still growing, although more slowly than it has been.
Compared with the recessed markets BA services principally in Europe and the US, Asia is a beacon of strength for the airlines here.
That has to be worth some premium, especially as the gains for any merger will be hard to come by as both airlines have strong government regulations and ownership rules (for some routes) to maintain.
Qantas can’t be taken over: the maximum shareholding that any one group can own looks like being changed to 49%, the same as the maximum cap on foreign ownership.
He also a ruled out a three-way deal including Iberia, the Spanish airline that has been in simultaneously talks with BA.
“BA and Iberia and us are all conscious that only one of the transactions can take place,” he said. He refused to be drawn on reports BA favoured the Australian carrier over its Spanish rival.
But the comment was enough to throw doubt over the BA approach, as it is currently structured towards a three way deal.
Joyce took up the role less than two weeks ago. The talks with BA started with his predecessor. More talks are reported to be happening this week.
Joyce told the audience: "Qantas comes to these negotiations from a position of strength. We will only proceed with this transaction if we are assured that it will maximise value for Qantas shareholders.
"Meanwhile the broader logic for consolidation is strong.
"The aviation world is in flux right now. It is caught between the old post-war national model and a more global basis for the industry.
"The future aviation environment is likely to resolve into three types of carriers: hub carriers, mega-carriers and niche carriers.
"There has been a bit of fear and loathing about what participating in global consolidation might mean for Qantas.
"What I can say to all Australians is this: whatever happens, Qantas will remain majority Australian-owned, the vast majority of our employees will always be Australian, and Australia will remain our headquarters.
"We are comfortable with the Government’s stipulation of majority Australian ownership under the Qantas Sale Act, and we are pleased that the Government is reconsidering other restrictions relating to ownership under the Act.
"Our fantastic brand is built around our Australian identity and our special role in Australian life – that’s a big part of what makes us attractive to potential partners. This will never change.
"And I also want to stress that consolidation is just one of the items on our agenda and we will not allow the current discussions to distract us.
"The global competitive environment is getting tougher.
"We need to stay focused in all aspects of our operations if we are to deserve the loyalty of our customers and outperform our competitors.
• We need to ensure that all our customers understand our core commitment to safety.
• We must continue to be a leading user of technology right across the Group.
• And we must set new standards of excellence in customer service."
