Vigilance warning from Virgin Blue’s Brett Godfrey

Steve Creedy in The Australian says that Virgin Blue boss Brett Godfrey has warned consumers and regulators to be vigilant about competitive disadvantages arising from the proposed Qantas-British Airways merger.

The warning came as the proposal left analysts and the market underwhelmed and prompted BA’s other suitor, Iberia, to demand that the British Airline clarify its position.

Qantas shares lost altitude yesterday closing down 6c at $2.29.

Mr Godfrey said the effect of the merger would depend on how closely the airlines were wedded.

“In the absence of too much detail, vigilance is the key,” he said. He would be concerned that a full-blown merger could reduce competition.

He warned also against giving companies an easy ride because of economic conditions, noting that both Qantas and BA had recently been prosecuted over freight price-fixing allegations.

The Qantas merger move has angered the Spanish-based Iberia, which has been in merger talks with BA but was only told about the talks with Qantas an hour before they were made public.

Iberia chief executive Fernando Conte said at a lunch in London that he had demanded a meeting with BA “very soon” to clarify the issue.

Mr Conte made it clear he was unhappy with the added complications Qantas brought to the situation and said a three-way tie up with Qantas would be “too complex”.

It was more reasonable for European carriers to consolidate first before looking at a trans-continental deal, he said.

Analysts in Australia questioned the value of the merger and whether it could overcome some of the hurdles facing it.

Credit Suisse analysts were among those struggling to find the rationale behind the merger.

“In our opinion, a merger with BA provides relatively little cost and revenue benefits above those provided by the Joint Services Agreement, assessed at $43 million over five years, as well as doing little to reduce the competitive threat of Asian and Middle East carriers in the medium to longer term,” they said in a note.

Analysts at Citi said cost synergies between Qantas and BA would be less than the 3 per cent generated by the merger of Lufthansa and Swiss or the 5 per cent enjoyed by KLM-Air France.

ABN Amro viewed the Qantas attempt to stay ahead of the consolidation as positive but not enough to change its hold rating.

“A merger is far from certain, is complicated by foreign ownership and control restrictions, and does not seem to offer a compelling synergistic argument,” it said, noting cost synergies were likely to be in the range of 1 per cent to 2 per cent.

Deutsche Bank said a merger with an Asian carrier would be more appealing because forecast growth for the region was twice that of Europe.

It said potential problems could arise from increasing Qantas’s exposure to the lower growth European and North American markets.

The move also raised questions about the airline’s ability to spin off its frequent flyer and freight arms.

Meanwhile, one of the carriers with which Qantas is believed to have held discussions, Malaysia Airlines, revealed it was also talking to potential partners.

“We are in talks with a number of airlines on collaborating and creating synergies for growth,” Malaysia chief executive Idris Jala said.

“This ranges from joint ventures and code shares to interlining partnerships,” he said. 

A Report by The Mole