Qantas has had another escape from a lunacy contemplated by the airline’s board, this one only a year ago.
It came 18 months after the May, 2007 attempt by private equity to snatch control of the airline.
That failed at the last minute as a group of private equity investors, led by TPG (who is now being chased by the Tax Department over some of its Myer float profits), Macquarie, an enthusiastic management and board, with former CEO, Geoff Dixon, out in front, lost out to shareholders, and one big hedge fund that messed up its acceptance.
A year ago there merger talks were resurrected with British Airways, again driven by the old management of Mr Dixon, with the support of some board members.
That BA, which was the cornerstone investor when Qantas floated back in 1995, was also talking to Spain’s Iberia, about a possible merger at the same time, was dismissed by the Qantas merger cheer squad.
But suddenly it became too hard as investors (and the Federal Government), Iberia and BA went cold on the idea which then collapsed last December, when Alan Joyce replaced Geoff Dixon as CEO of Qantas.
Then the world airline market flopped into recession, dragged down by the crunch and the global slowdown.
Qantas’ profits plunged, at BA and Iberia, profits became heavy losses.
But one crucial difference has remained through all of this: Qantas retained an investment credit rating, along with one other airline around the world (Southwestern in the US).
Now financially weak BA and Iberia are to merge, subject to quite a few important conditions.
In fact It’s a 4.4 billion pound all share merger that will create an unrated sluggish giant with no financial strength and lots of cost headaches. Neither airline can afford cash.
Qantas shares closed at $2.74 on Friday (down 8% in about two weeks).
At that price, Qantas is worth around $6.2 billion, or around 80% of the value of the BA-Iberia bid.
It is valued more than either BA or Iberia.
The first problem for BA and Iberia is that the deal is overly complicated to try and get around the basic rule of the international airline business.
That is airlines’ landing rights are awarded to airlines and countries, not to just anyone.
That’s why airlines can’t be taken over by foreign-owned carriers (there is a blanket ban on foreign ownership in the US) because to do so would place all the routes at risk outside the countries.
Those rights are awarded by Governments to the various airlines, not the acquiring airlines which might control landing rights of their own.
IF BA was owned by Iberia, it could loose its landing rights in the US, Australia and in many other countries. Iberia could lose as well if it was owned by BA.
But BA brings the better routes to the deal, and those had to be protected, as do Iberia, to get the deal approved in Spain.
It was one of the reasons why the BA talks with Qantas foundered.
So BA and Iberia will continue to be separate airlines, with a third company (called "TopCo" in the merger documents) sitting on top as a holding group, 55% owned by BA shareholders and the rest by Iberia’s holders.
There will be three boards, each of which will be divided equally between representatives of the two airlines.
In the all-share deal , BA shareholders will get one share in the combined company for every existing share they hold in BA, and Iberia investors will get 1.0205 shares in the enlarged company for every Iberia share they hold.
The unnamed merged company will be led by Willie Walsh of BA; the chairman of Iberia, Antonio Vazquez, will become chairman of the enlarged company and the airline will be registered in Madrid, with its main offices in London.
Both airlines are heavily unionised and yet the main UK union has threatened industrial action if there are forced redundancies; and yet the biggest part of the 400 million euros of savings will come from lowering the wage and other labour costs.
There is a pay disparity: BA cabin crew get around 29 thousand pounds a year, Iberia’s are paid more, around $US44 thousand.
BA lost 292 million pounds in the six months to September, Iberia lost 182 million euros in the nine months to September.
Both losses were wracked up despite the normally profitable summer holiday period.
Then there’s BA’s huge pension deficit. It could cause the entire merger to be aborted.
BA plans to keep the liability for its pension deficit in the BA operating company that would sit as a subsidiary below the merged top company.
The idea is that this would mean Iberia shareholders would not have any responsibility for the deficit, whose size is uncertain. London reports suggest it could 3 billion pounds, more 500 million pounds more than BA’s stockmarket value.
Iberia had inserted in the agreement a clause that allows it to call the whole deal off it is not happy with the way the pension deficit will be treated (so as avoid Iberia paying for any of the cost).
Michael O’Leary, CEO of Ryanair (and the most aggressive airline chief in the business) dismissed the merger with this quote in the London Telegraph newspaper.
"I would characterise it as two drunks holding each other up on the way home," he said. "All you get when you put two high-fare, loss-making airlines together is even higher fares and even bigger losses."
And yet London reports say BA also is eying a tie up with American Airlines, its long time US alliance partner.
American (and its parent, AMR), are eying some sort
