Brokers Do Not Welcome Potential Qantas-BA Tie-Up

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This story features QANTAS AIRWAYS LIMITED.
For more info SHARE ANALYSIS: QAN
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Broker commentary on the announcement that Qantas ((QAN)) is in discussions with British Airways about a potential merger indicates there appears to be few compelling reasons for the deal to go ahead.

As ABN Amro points out, the fact the companies have only minimal network overlap means there would be limited synergies to gain from any merger. JP Morgan agrees, but points out a combination of the two companies would at least present a unique structure in the global aviation market given there would be operating bases on both sides of the world.

As well, the broker notes any such deal may result in increased utilisation of the combined group’s long-haul aircraft, which would suggest some efficiency gains. To maximise this, a US partner in the enlarged group would also be beneficial, hence reports in the media American Airlines could eventually join the combined entity.

Having said that, the broker takes the view Qantas has less to gain from the merger proposal, as it has stronger positions in the more attractive routes and faces less competition than does British Airways. As well, there would be regulatory issues to be addressed before any deal could be completed. One condition of each airline’s flying rights is Qantas remains Australian-owned and British Airways British-owned.

According to Citi, while the deal makes intuitive sense in that the airline industry is currently facing significant demand pressures, the lack of synergies on offer suggests the merger is less than compelling. Along with Credit Suisse, the broker suggests Qantas would do better by pursuing a merger with an Asian airline instead. Singapore Airlines is the most suitable candidate in its view.

The FNArena database shows six Hold ratings compared to three Buys and one Accumulate recommendation.

As Citi suggests with its Hold rating, forgetting about the merger and focusing on fundamentals remains the key. The broker suggests while the stock offers some value at present, demand weakness remains a serious concern. The benefits of lower fuel prices being are also not as substantial as hoped and are being somewhat offset by a weaker Australian dollar. This all adds up to earnings uncertainty.

ABN Amro agrees and sees the weakness in domestic demand as the group’s biggest issue at present, one that is enough to cause investors to take their time with respect to the stock. Credit Suisse agrees, suggesting the announcement of merger talks alone should have little positive impact on the share price.

Post news of the merger discussions, the average price target for Qantas according to the FNArena database is $2.89. Today the shares are trading slightly higher at $2.37 as at 10.55am. The trading range for the stock over the past 12 months is $2.10 to $6.06.

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