Tue Dec 2, 2008 1:06pm EST
* BA says prior merger talks with Iberia still going on
* BA shares rise as much as 17.5 percent
By Dan Lalor
LONDON (Reuters) - British Airways said it is in merger talks with Australia's Qantas, signalling further consolidation in an industry desperate to cut costs in the global economic downturn.
Shares in British Airways surged as much as 17.5 percent after the airline said it was exploring a potential tie-up with fellow OneWorld alliance member Qantas in which it used to own a 25 percent stake
BA, whose market value of 1.8 billion pounds is only a fraction smaller than that of Qantas, also said merger talks already underway with Spain's Iberia to form the world's third largest airline were continuing.
A tie-up between BA, Iberia and Qantas would create the world's biggest airline with combined scheduled passenger kilometres flown of almost 270 billion a year, comfortably overtaking American Airlines (AMR.N: Quote, Profile, Research, Stock Buzz) on 222.8 billion.
Blue Oar Securities airline analyst Douglas McNeill said BA's latest move was in line with its strategy of taking a lead in consolidation in an industry battling wild swings in fuel prices and falling demand as global recession looms.
"They are out to create a global player, which is an audacious goal that would be difficult for any management team to pull off," he said.
Analysts said a three-way combination looked a long way off, however, given that talks with Iberia were first announced in July and have stalled on worries over BA's pension deficit.
BA acquired 25 percent of Qantas in 1993 in the first step towards privatisation of the Australian carrier but sold out 11 years later.
"I would see the priority of things being the Iberia merger talks and the Iberia/American anti-trust immunity before any deal is done with Qantas," said NCB analyst Neil Glynn.
"I would be surprised if any deal with Qantas is placed ahead of those in the pecking order."
British Airways, Iberia and American Airlines said in August that they had filed for antitrust immunity in the United States in order to be able to cooperate commercially on flights between North America and Europe.
"REVENUE CONCERNS"
Shares in BA climbed as high as 164.1 pence following the announcement before settling down to close 12.5 percent higher at 157.1 pence, valuing the airline at around 1.8 billion pounds ($2.7 billion), little different from Qantas's market value of around 4.4 billion Australian dollars ($2.83 billion).
Earlier on Tuesday, Australian transport minister Anthony Albanese said Qantas would remain majority Australian-owned with a cap on foreign ownership maintained at 49 percent.
But Albanese said he would not be opposed to one foreign airline buying 49 percent of Qantas, the world's 10th largest airline by market value, which has slashed jobs to combat the economic downturn.
News of the talks follows Aer Lingus' rejection on Monday of a fresh approach from rival Irish low-cost carrier Ryanair, and October's move by Germany's Lufthansa to become British bmi's majority shareholder.
BA said in a short statement that any merger with Qantas would be via a dual-listed company structure and cautioned there was no guarantee the talks would result in a deal.
NCB's Glynn said a merger would be strongly positive for British Airways over the medium term and likely to help its share price in the very short term.
"However, there is potential for significant revenue concerns to ultimately outweigh positive sentiment on this announcement," Glynn said.
Elsewhere in Europe, Lufthansa is vying with arch-rival Air France KLM to strike an alliance with Italy's bankrupt national carrier Alitalia. The German carrier is also planning to buy Austrian Airlines.
*Writing by Paul Hoskins, additional reporting by Matt Scuffham and Paul Sandle; editing by David Cowell)