BA selling £425m Qantas stake

BRITISH AIRWAYS is selling its £425m stake in Qantas to cut into its swingeing £5.6bn debt and give it the financial muscle to play a key role in the next round of industry consolidation.

Eleven years after buying shares in the Australian carrier, BA will dump its 18.25% interest in the airline over the next 48 hours in an underwritten offer managed by Citibank.

Rod Eddington, BA's Australian chief executive, said it was 'in the best interests' of the airline to raise the cash now and insisted it would not affect its joint working relationship with Qantas.

He added: 'A strong balance sheet will place BA in a robust position for any future European consolidation.'

BA has consistently denied speculation that it planned to bail out of Qantas, in which it took a 25% interest in 1993 as a cornerstone shareholder in the lead-up to the Australian airline's stock market listing.

The shareholding has been subsequently diluted when BA was unable to participate in Qantas rights issues.

Analysts believe that with the persistent threat from low-cost rivals easyJet and Ryanair, and looming competition from the newly-merged Air France-KLM, BA needs to act. It could now move for Spanish carrier Iberia, in which it holds a 9% minority stake.

Institutional demand for the Qantas shareholding is expected to be strong after its recent record annual profit and growing evidence the airline is withstanding the competitive threat from rival Virgin Blue.

BA paid A$665m for the 25% interest and it expects to raise no less than A$1.1bn (£425m), giving it a capital return of some 65% over 11 years. The airline has also received A$600m in dividends from its investment over the years.

'Our shareholders have had a good return from our investment in Qantas,' Eddington said. 'We now believe it is in our best interests to sell the shares to pay down our debt and continue to strengthen our balance sheet.'

Under the two airlines' joint services agreement, they have close co-operation on flight schedules and sales around the world, but particularly on the so-called 'kangaroo route' between London and Sydney.

Qantas chief executive Geoff Dixon had nothing but praise for BA. 'British Airways has been a supportive shareholder over a period of some 10 years and both airlines have formed a strong and constructive commercial relationship,' he said.

Today's announcement caps a terrible month for BA, which is struggling with the general industry downturn on terrorism fears, tough competition in Europe and the soaring cost of jet fuel.

Passenger figures for August revealed BA is fast losing ground in Britain and Europe to the budget airlines, with Ryanair's lead on the flag carrier now nearly 20%.

BA has blamed everything from staff shortages, bad weather, runway closures and technical problems with aircraft to 'baggage systems failures' for a near-3% dive in short-haul passengers last month.

The staff shortage fiasco that led to huge check-in queues during the run-up to the Bank Holiday weekend is expected to cost the airline about £5m.