But the company said that there was no guarantee a transaction would be implemented soon.

However, Qantas did acknowledge that the industry was heading towards a period of consolidation, and last week the company said that it would be in their interests to merge with a rival sooner rather than later.

Wayne Swan, the Australian treasurer, said no proposal had been given to the government, but any merger would have to abide by local regulations restricting foreign ownership of Qantas to 49 per cent.

"Our bottom line is that the 'flying kangaroo' [the Qantas logo] remains majority Australian-owned and based," he said.

But the government has said it will alter other foreign ownership rules, which currently limit individual foreign airlines to a 25 per cent holding and aggregate foreign airline interests to a 35 per cent stake.

Difficult choices

Neil Hansford, chairman of Strategic Aviation Solutions said that Qantas' main rivals, including Singapore Airlines, would be unhappy with the news but said that a merger with BA made the most sense.

"Qantas has got a choice, it either gets into bed with somebody like BA or Lufthansa [the German carrier] or it retreats to being an Asian carrier with a couple of routes to Europe," he told the AFP news agency.

"It will allow Qantas to stay servicing Europe meaningfully and will make it [in combination with BA] about the third biggest fleet in the world."

But some traders say that Qantas, which is one of the world's most profitable
airlines, would be unwise to link itself to a carrier with a less robust bottom line.

"Qantas has low debt, a protected US-Australia route and an oligopoly on one of the most profitable short-haul legs in the world between Melbourne and Sydney," Patrick Crabb, a senior trader with Goldman Sachs JBWere, told AFP.

"If I am a shareholder of Qantas, my initial response is cold feet, as the potential groom has a good name but his short-term financial prospects look challenged," he said.