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Talks may create world’s largest airline

London, Dec. 14

Copyright Observer News

Consolidation in the airline industry appeared to be gathering pace last night (Dec13) amid reports that US rivals United Airlines and Continental Airlines are in talks to create the world’s largest carrier, while Australia’s Qantas was reportedly close to accepting a private equity-backed bid.

 United and Continental are in preliminary talks about a merger, according to reports, while Qantas was believed to be tying up a deal with a financial consortium only a day after rejecting its overtures.

 The airline sector has been galvanised by a wave of merger and acquisition activity, led by Ryanair’s EUR1.48bn hostile bid for Aer Lingus and an unsolicited $8.7bn offer from US Airways for Delta Airlines. Both bids were rejected, but further momentum was generated yesterday by the reports over United and Continental. Their tie-up would create an airline with control of a quarter of the US market. Continental has said it would prefer to remain independent but would consider a deal if consolidation was needed to remain competitive.

 Glenn Tilton, chief executive of United Airlines, told analysts this week that airline consolidation was ‘‘good and overdue for the industry’’.

 United’s strongest routes are on the west coast of the US, China and over the Atlantic due to its slots at London-Heathrow, while Continental also flies to London via London-Gatwick and has a strong presence in Latin America. Analysts warned that a deal could be blocked by Northwest Airlines, which holds a golden share in Continental. United and Continental did not return emails and phone calls requesting comment yesterday.

 The industry’s most surprising recent development was emerging last night, following reports that Qantas had agreed an A$11.1bn takeover by the investment arm of Australia’s Macquarie Bank and Texas Pacific Group, the US private equity fund.

 If the Australian flag carrier accepts the bid it would represent a dramatic about-turn in the airline’s stance after it threw out the consortium’s initial A$10.9bn bid yesterday. Qantas’s non-executive directors said that ‘‘the terms of the proposal are not acceptable’’ because they included ‘‘complex conditions’’ including an A$100m break fee. The deal will be financed by a A$10bn debt package, despite the sector’s notoriously volatile revenue profile and unpredictable fuel costs.

 The bid structure meets airline ownership restrictions, which state that foreign entities can own no more than 49% of Qantas shares. The deal needs the formal approval of the Australian government. Macquarie will own less than 15% of Qantas with Melbourne-based Allco Equity Partners controlling 34%. Sir Rod Eddington, the former head of Qantas and British Airways, is a non-executive director of Allco Finance. Last week Sir Rod said consolidation in the ‘‘economically dysfunctional’’ airline industry was inevitable. ‘‘It’s going to happen one day, the industry will consolidate,’’ he said. ‘‘Governments will get sick and tired of bailing [airlines] out.’’

Consolidation is taking place while the sector continues its post-September 11 recovery. The International Air Transport Association reported this week that the global industry is expected to return to profit in 2007 after six years of losses.