British Airways and Qantas on Thursday called off their merger plans after failing to agree terms.

The talks foundered after the two airlines, which had been in negotiations since August, could not agree on what proportion of a combined business would be owned by each set of shareholders.

The Times understands that, while BA had argued strongly for a 50-50 merger, Qantas had insisted that its shareholders should own 55 per cent of a combined business and BA's shareholders 45 per cent. This was despite the fact that, as of Wednesday night, the market capitalisations of the two airlines were almost identical.

Qantas had argued that, despite BA's revenues being larger than its own, its shareholders deserved a larger slice because of the size of BA's pension deficit. The Australian airline was also uneasy, as The Times reported last week, about BA's planned merger with Iberia, the Spanish carrier.

Iberia declined to comment on the breakdown of the negotiations, but it is understood that executives of the Spanish airline were pleased by the surprise development. Iberia's shares rose by 5.4 per cent to €1.95 in Madrid on Thursday.

Initial reports of a possible merger of BA and Qantas this month had caught Iberia's management by surprise and caused unease within the Spanish airline. However, the Qantas withdrawal has revived hopes of a union between the British and Spanish airlines.

Aviation industry sources suggested that circumstances had forced Alan Joyce, the Qantas chief executive, to push BA unusually hard. They pointed out that the early leaking of negotiations on Crikey, an Australian website, had been especially unhelpful. “News of the merger talks leaked on his third day as chief executive,” one source said. “The Australian media quickly picked up on it and it became an anti-Pom story - ‘How dare the Poms try to take over our airline' and so on. Accordingly, Alan Joyce was obliged to drive a hard bargain.”

Julia Simpson, BA communications director, said: “We were clear from the outset that this had to be a merger of equals. We were not prepared to do a deal that was not in the interests of our shareholders, our customers and our employees.”

BA and Qantas began talks in August when Geoff Dixon, the Australian carrier's former chief executive,approached Willie Walsh, his BA counterpart, about a possible merger.

The argument over ownership of a merged company was further complicated by the legal situation. Australian law requires that Qantas remain majority-owned by Australian investors and that its head office, stock market listing and major facilities stay in Australia.

Shares in BA closed up ½p, at 172½p, on the news, which emerged after the market closed in Sydney, where Qantas shares had earlier risen by almost 8 per cent to A$2.43.

Douglas McNeill, of Blue Oar Securities, said: “Paradoxically, this increases the likelihood of the deal with Iberia succeeding. They were right to explore the Qantas merger, but it would have been very difficult to do.”

Speculation was raging last night that Qantas would seek mergers elsewhere, particularly in Asia, where it has previously talked to Singapore Airlines — which owns 49 per cent of Virgin Atlantic — and Malaysian Airlines. Malaysian said on Tuesday that it was in talks with several airlines including Qantas about possible tie-ups.

Qantas received another blow yesterday when Delta Airlines, the American carrier announced plans for a non-stop daily service between Los Angeles and Sydney, one of Qantas's most profitable routes. Virgin Blue, the Australian subsidiary of Virgin Atlantic, is also due to start flying between Australia and the West Coast early next year.

Qantas and US Airways are the only airlines operating on the route.

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