Qantas says BA merger faces hurdles

By Denny Thomas

SYDNEY (Reuters) - Qantas Airways warned investors its proposed $5.6 billion (3.77 billion pound) merger with British Airways (BA) faced major obstacles over the terms of the deal and stressed there was a reasonable chance talks would fail.

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 to form the world's third-largest airline, but Joyce said a BA-Iberia combination would not go ahead if Qantas and BA merged. "BA are conscious, I think as Iberia are and as we are, that only one of the transactions could take place," Joyce added.