British Airways Plc, once the world's most profitable airline, risks falling from the first rank of global carriers following the breakdown of merger talks with Qantas Airways Ltd.
London-based BA must now revive flagging negotiations with Spanish carrier Iberia and win approval for a long-delayed alliance with American Airlines if it's to match competitors after failing in a dozen transactions in the past decade.
While the U.K. carrier pursued deals that were potentially lucrative but tough to execute, rivals pulled off a series of acquisitions that gave them broader networks and higher earnings. Air France bought Dutch carrier KLM in 2004 to become world No. 1 by sales and may soon get a chunk of Alitalia SpA. Deutsche Lufthansa AG purchased Swiss International in 2007 and this year added Brussels Airlines and Austrian Airlines AG before striking at British Airways' London Heathrow base by buying BMI.
``BA is getting left behind,'' said Geoff van Klaveren, an analyst at Exane BNP in London. ``They're playing a desperate game of catch-up because they've missed out on quality mergers over the years. Lufthansa and Air France have played the game much better. They always knew what they wanted. BA spent too much time milking the market across the north Atlantic.''
British Airways' failure to seal purchases has seen a carrier that once billed itself as ``The World's Favorite Airline'' slip from first to third place in Europe over the past two decades. The gap is no longer even close, with the carrier generating the equivalent of $17.6 billion in annual revenue, compared with $34 billion at Air France-KLM and $30.7 billion at Cologne, Germany-based Lufthansa.
Qantas Flop
The reduced size of British Airways was also a factor in the failure yesterday of talks with Sydney-based Qantas. The merger stalled because the carriers couldn't agree on who would control the new company, BA spokesman Tony Cane said, with the U.K. airline's market value having fallen to less than that of its potential partner.
``There's a danger that British Airways will get left behind,'' said Nick Cunningham, an analyst at Evolution Securities in London with an ``add'' recommendation on the stock following its 44 percent decline this year. ``This puts pressure on them to do the Iberia deal and also to complete the cooperation agreement with American.''
The pressure to secure partners has increased as British Airways suffers more than most in a recession that's wiping out the London business travel on which the airline overwhelmingly relies. Financial institutions account for 13 of its top 50 clients, Chief Executive Officer Willie Walsh said Sept. 24.
Traffic Tumbles
BA's passenger traffic plunged 5.9 percent last month, led by an 11 percent fall in business- and first-class sales. Air France-KLM reported a 1.8 percent increase, excluding a four-day strike, and Lufthansa posted a gain of 0.7 percent.
Consolidation may help airlines survive the global slump by reducing shared costs and feeding more passengers through hubs. Better networks also attract larger company accounts with guaranteed custom, said Henri Courpron of Washington-based consultant Seabury Aviation and Aerospace.
Already the biggest carrier across the north Atlantic, in good times the industry's most profitable market, British Airways has long viewed securing a U.S. partner as the top priority as it seeks to better tap the world's largest economy.
In 1989 the U.K. carrier failed in an attempt to buy a 20 percent stake in UAL Corp.'s United Airlines and in 1992 missed out on 21 percent of US Airways Group Inc.
AMR Saga
BA has expended most effort in seeking a tie-up with AMR Corp.'s American. The pair announced plans for an alliance in 1996, only to be refused the U.S. antitrust immunity they needed to share revenue and coordinate pricing. They tried again before scrapping a proposal in 2002 after regulators said they must surrender flights at Heathrow.
British Airways' focus on winning an alliance with AMR left it at a disadvantage after Lufthansa won clearance to cooperate with Star Alliance ally United and Air France secured approval for partnerships first with Northwest Airlines Corp. and later with Delta Air Lines Inc.
BA and AMR renewed their antitrust application on Aug. 14, buoyed by an Open Skies agreement that freed up trans-Atlantic flights to increased competition, and analysts say the venture now has a better than even chance of succeeding. U.S regulators are likely to rule on the application in the first quarter.
In Europe, British Airways concentrated on establishing overseas units rather than bidding for existing carriers. The units were later closed or sold and BA tried four times to merge with KLM before Paris-based Air France finally secured a deal.
Last Chance
Short of intervening in the bidding for Italy's unprofitable Alitalia, Iberia represents BA's last chance of combining with a major European airline. The carriers announced a merger in August, when Walsh said the deal would allow his company to ``compete much better on a global scale'' and particularly in Latin America, where Iberia -- along with AMR -- is the dominant foreign carrier.
The deal, though, is being jeopardized by British Airways' widening pension deficit, which Iberia shareholder Caja Madrid has cited as the main obstacle to negotiations. This week's failure to reach agreement with Qantas could also weaken BA's negotiating position over the balance of ownership.
``British Airways is in a difficult position,'' said Exane's van Klaveren, who has an ``underperform'' rating on the company. ``They have no other options and Iberia knows it.''
The U.K. airline has completed just two purchases this decade; this year's 54 million-pound ($81 million) acquisition of L'Avion, a French carrier with one route, and the takeover of franchise operator British Regional Airlines in March 2001.
Lufthansa Expansion
Lufthansa, meanwhile, has been doing deals right and left. Swiss International added Zurich as a third hub with Frankfurt and Munich, while the addition of BMI will make the airline the second-biggest slot holder after British Airways at Heathrow.
Virgin Atlantic Airways Ltd., BA's biggest U.K. competitor, has since expressed interest in a tie-up with BMI, while Nordic carrier Scandinavian Airlines said Sept. 23 it was seeking a ``structural solution'' in response to reports that it would be bought by the German carrier.
For British Airways, the concern is that there may be precious little left to purchase if the AMR and Iberia tie-ups founder, said Andrew Lobbenberg, an analyst at Royal Bank of Scotland in London with a ``buy'' rating on the stock.
``They were skeptical about Air France and KLM and about Lufthansa and Swiss, but they've seen those work and now they're converts,'' he said. ``The problem is that they're so late to the game.''
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