British Airways in merger talks with Qantas

British Airways PLC and Australia's Qantas Airways Ltd. said Tuesday they are holding talks about a potential merger, sparking hopes of consolidation in the hard-hit aviation industry.

The two companies both issued statements saying they are exploring a "potential merger" with each other "via a dual-listed company structure."

Neither BA nor Qantas provided any further details. In their statements to the London Stock Exchange and the Australian Securities Exchange, the two companies said: "There is no guarantee that any transaction will be forthcoming and a further announcement will be made in due course, if appropriate."

BA's chief executive Willie Walsh has long advocated industry consolidation, arguing that closer cooperation will help airlines cut costs in the current difficult economic climate.

BA, the third-largest airline in Europe, is already pursuing a revenue-sharing deal with American Airlines and Spain's Iberia SA. It said that its discussions with Iberia on a potential merger are continuing.

It provided no further detail on the structure of the potential deal with Qantas but confirmed that talks began in August after it was approached by Australia's largest airline.

The London-based carrier's stock jumped after the announcement and closed 12.46 percent higher at 157.10 pence ($2.33) at the end of the day.

Virgin Atlantic Airways, which has already objected to the BA-American-Iberia tie-up, said that BA was attempting to increase its dominance to the detriment of competition.

"One day it's Iberia, then it's American, and now Qantas," said Virgin Atlantic chief executive Steve Ridgway. "The only strategy BA seems to have is to lock-up some of the busiest routes in the world, against the consumer interest."

BA and Qantas are already code sharing partners in the Oneworld global alliance, which brings together 10 of the world's carriers including Japan Airlines.

The BA confirmation on the talks came a day after the Australian government disclosed that it plans to increase the level of foreign ownership allowed in Qantas, but will not permit a takeover. Australian law currently limits a single foreign holding to 25 percent, while a group of foreign holdings can total 35 percent.

A federal government policy paper released Monday proposes lifting the foreign ownership limit - whether by one company or a group of companies - to 49 percent. That would allow Qantas and BA to swap equal stakes in each other.

Qantas last month slashed its full-year profit forecast to around 500 million Australian dollars ($316 million), down from an August forecast of AU$750 million. It also said it would cut flights to cope with plummeting demand, despite a recent easing in the oil price.

Walsh last month warned that the industry was still "heading into the eye of the storm," shortly after BA reported a first-half net loss of 49 million pounds ($77 million).

Analysts have been expecting greater consolidation in the airline industry after the global economic crisis combined with soaring oil prices earlier this year to severely crimp passenger demand.

The International Air Transport Association has reported international passenger traffic declined 1.3 percent in October compared with 2007, following a 2.9 percent drop in September, and forecasts industrywide losses of $2.3 billion this year.

Budget airline Ryanair Holdings PLC on Monday launched a new takeover bid for Aer Lingus, seeking to capitalize on labor unrest at its Irish rival along with the country's economic difficulties.

BA already has filed for worldwide antitrust immunity from U.S. authorities for a revenue-sharing deal with American and Iberia that would see the trio set prices together and share seat capacity on trans-Atlantic flights. American would be the non-merged member of the BA-Iberia linking.

The agreement is the closest alliance the trio can form under strict U.S. airline ownership laws that all but rule out a full merger and follows two earlier failed attempts by BA and AMR Corp.'s American to forge closer ties.

Virgin Atlantic claims that proposed deal will seriously damage the competitiveness of the lucrative trans-Atlantic route and increase fares for passengers.

But American and BA contend that the partnership will merely allow the trio to better compete with the other major airline alliances, Star and SkyTeam, which already have antitrust immunity on trans-Atlantic flights and a large presence at other European airports.

BA and American have failed in the past to win an exemption from U.S. competition laws to work more closely together because of their dominance at London's Heathrow Airport, where the pair have more than half the capacity to and from the U.S.

Walsh has argued that the competitive situation has changed since the "open skies" agreement between the U.S. and the European Union came into force in March, allowing airlines to fly to and from any point in the U.S. and any point in the EU.