Kraft’s bid for UK confectionary company Cadbury continues to generate headlines. And given the personalities involved, this should not be a surprise. Some of London’s top rainmakers are set to square up against a superstar of the 1980s merger era, Reuters’ Victoria Howley notes.

And here’s a round-up of deal-related stories from Thursday’s press:

* Volkswagen is considering overhauling its trucks business in a move that could herald a tie-up with German truckmaking and engineering group MAN AG, the Financial Times said. Reuters story here.

* Twitter is closing a round of funding that will value the company known for its 140-character, stream-of-consciousness blogs at $1 billion, technology news site TechCrunch said.

* British Airways is interested in rival UK airline bmi and has spoken with bmi’s German owner Lufthansa, BA’s chief executive told the London Evening Standard.

* Steel-to-property conglomerate CITIC Pacific Ltd aims to list in China, joining other Hong Kong-listed top Chinese firms that would like to list in their home market, media reports said.

For the latest Reuters deals news, click here.

With airlines around the world struggling to survive the economic downturn, the time should be nearing to break the taboo of consolidation in the sector.

Airlines around the globe face losses of $11 billion in 2009, according to IATA. Margins are expected to fall this year and next, with analysts predicting carriers are likely to struggle for years to reach levels needed to produce an acceptable return for capital market investors.

Societe Generale estimated in a recent note that margins would drop to -3.1 percent in 2010 before recovering to 1 percent in 2011, well short of the 10 percent needed.

Effectively we are back to the ice age of 2001-2.

Eight years ago, the collapse of Sabena and Swissair kicked open the door of cross-border consolidation -- within Europe at least. But while deals like Lufthansa's merger with the Swiss airline allowed for some rationalisation, the merged entities remain hamstrung by national aviation regulations.

Replacing this patchwork of national carriers with viable global companies able to withstand economic shocks is the necessary next step.

The European Union's open skies agreement has shown what is possible. It has allowed M&A to take place within the bloc, and this has led to the creation of four major players -- Air France-KLM, British Airways, Lufthansa and Ryanair.

The challenges now are even greater than they were at the turn of the millennium.

High and rising fuel costs, environmental pressures to reduce CO2 emissions, overcrowded and often inefficient airports, limited landing slots and planning constraints on building new terminals and runways mean yet more financial pressure to reduce the number of planes in the skies and make airlines more efficient.

But despite the pressure on the sector, airline reform is still creeping forward at a snails' pace. Instead of making dramatic changes to the model, airlines are forced to find ways around the rules to eke out savings and to line themselves up for consolidation when it comes.

This is why Air France-KLM, Delta Air Lines and AMR Corp's American Airlines are showing such enthusiasm for taking a stake in loss-making Japan Airlines Corp (JAL) in a bid to expand in Asia via code-sharing arrangements (common ticketing agreements).

For the Japanese government, which is engineering the JAL restructuring after bailing it out, the deal represents an opportunity to push an open skies deal with the United States.

Oneworld and to a greater extent SkyTeam -- which includes Air France and Delta -- are both relatively under-weight in Asia and will seize on any opportunity that comes along. If winning the prize means providing cash to bail out an ailing airline such as JAL, then they see it as a necessary evil.

The barriers to rationalisation are many. Governments love having their "own" flag-carriers. Planes carrying the national flag are almost a statement of a country's prowess.

Airlines do come and go, but part of the problem is that the barriers to entry are low, while the barriers to exit are high.

In the United States, airlines fly in and out of Chapter 11 as their fortunes wane, while in Europe and elsewhere governments cannot resist protectionist intervention to save national carriers and the jobs that go with them -- just look at what Italy has done to keep Alitalia flying -- making market exits the exception.

Open skies agreements are meant to lead to further liberalisation, but nobody is holding their breath for the United States to relax its rules so far as to allow majority foreign ownership -- especially in the middle of a recession.

And attempts by British Airways and American Airways to ink their transatlantic deal have twice foundered at the hands of competition authorities. American is now seeking U.S. approval by next month to form a transatlantic alliance with BA and Spain's Iberia.

The EU has shown that cross-border consolidation is possible if the right structures can be put in place and governments are willing to accept losing economic control. Lufthansa has now bought Swiss, Austrian Airlines and bmi as it battles with rivals Air France-KLM and British Airways.

Japan's restructuring of JAL and the sale of a stake in the country's largest carrier could just be just another case of alliance pass-the-parcel. The brave thing to do would be to let a competitor buy and run the airline.

If nothing else, the economic crisis will force more airlines into alliances. But even the dire predictions for the industry probably won't be enough to get regulators and governments to contemplate fundamental change.

*This post was updated after the bond priced*

British Airways unveiled a $1 billion fundraising aimed at securing its future earlier on Friday, including $540 million in bank loans that had been earmarked for its pension funds as a safety net against the airline going bust.

The fundraising also included a 350 million pound ($570.5 million) convertible bond, which was over 7 times covered, pointing to healthy investor appetite.

Convertible bonds have become an increasingly important source of finance for firms in Europe. The instrument allows companies to raise capital paying less interest than standard bonds, while avoiding an immediate dilution of earnings per share because investors look to gains in share prices over a medium term.

With European stocks rallying some 33 percent since early March, the convertible market has rebounded with year-to-date issuance reaching $16 billion including the BA deal, according to Thomson Reuters data.

The convertible was the third UK deal this year and BA’s first in 20 years. It was arranged by Barclays Capital, Deutsche Bank, HSBC, Merrill Lynch and RBS Hoare Govett.

The coupon of the 5-year convertible was priced at 5.8 percent, and a conversion premium of 37.6 percent.
The deal, which attracted strong support from both long-only funds and hedge funds, was priced after the issuer tightened the indicative range of the coupon to 5.5-5.875 percent, while the conversion premium was revised to 36- 38 percent. The deal was originally launched with a coupon range of 5.5-6.25 percent and a conversion premium of 30-38 percent.

BA’s convertible followed Air France’s 661 million euro deal launched on June 18.

Air France’s convertible, arranged by Societe Generale, UBS, BNP, Calyon and Lazard-Natixis, was 9 times covered on an original size of 575 million euros and increased 15 percent in size due to the good response.

Air France’s deal had a coupon of 4.97 percent and a conversion premium of 35 percent. In terms of implied volatility, a yardstick commonly used to measure how expensive a convertible is to investors, BA’s deal was priced at 30.6 percent, compared to Air France’s 27 percent.

Air France’s convertible, maturing 2015, has gained 8 percent since the launch to trade at 108, or 41 percent implied volatility, on Friday.

In the first half, convertibles in the EMEA region (Europe, Middle East and Africa) gained 16.6 percent, according to Barclays Capital. After a summer lull, equity capital markets bankers expect another rush of deals come September.

European airline mergers, long expected, are now taking wing.

Air France-KLM in January bought a 25-percent stake in Alitalia after a failed attempt at buying the entire carrier last year. The airline fought it out with Lufthansa, which lost the battle but didn’t sit around moping. It quickly launched Lufthansa Italia, which took its maiden flight a few days ago.

Ryanair, Europe’s largest discount airline, has withdrawn its bid for Aer Lingus after the irish government rejected the $1 billion deal. Ryanair is now expected to look for alternative targets.

British Airways remains in merger talks with Spain’s Iberia. Those talks have become complicated by the pound’s recent slide against the euro, making Iberia’s market capitalization now higher than BA’s.

It’s not just European airlines engaging in merger talks. Australia’s native carrier — Qantas Airways — is looking at merger opportunities in Asia.

The question now is - when will U.S. airline merger talks take off again?  The Delta-Northwest merger last year led to a slew of other merger talks that yeilded no deals. But competing with the giant has become even more difficult as airlines struggle with a travel slump caused by a weak economy. And it’s not just leisure travelers that are pulling back: corporate travel, the main backbone for profits, is on a decline as well.

Last year, U.S. airlines were raising prices. This year, they are cutting prices to lure more travelers. With overcapacity and lower prices, U.S. airlines could probably sit up straight, tighten their seatbelts and brace themselves for another round of talks.

British Airways and Spain’s Iberia are in talks to create the world’s third-largest airline and inject some “long-overdue” consolidation in the industry, in the words of BA CEO Willie Walsh.

Where would a combined BA-Iberia leave American Airlines, which was in talks to form a transatlantic alliance with the two airlines? Would a BA-Iberia merger scuttle American’s chances at an alliance?

The argument for forming an alliance and seeking an antitrust waiver was that the “Open Skies” agreement — which frees up restrictions on carriers flying between the United States and Europe — is set to increase transatlantic competition among airlines. That’s a harder pitch to sell if a BA/Iberian merger, creating Europe’s largest airline, shrinks the number of major players in the market.

Getting regulatory approval for the alliance was uncertain to begin with. An immunized alliance between American, the largest U.S. airline, BA, Europe’s third-largest carrier, and Iberia, Spain’s largest airline and the biggest operator of flights to Latin American player, would create the most extensive network between Europe and the Americas.

To make things even more complicated, British Airways has 40 percent of takeoff and landing slots at Heathrow, by far the largest share of any airline. In 2006, BA and American held over half the capacity between Southeast England and the United States between them.

In the past, BA and American have tried to form an alliance and failed. U.S. antitrust authorities  asked the carriers to give up some slots at Heathrow if they wanted approval, but the airlines did not want to part with the slots. Times have certainly changed since — fuel prices have skyrocketed and the economy has weakened — but the same requirements for Heathrow would likely apply again.

What’s American to do? U.S. airlines have lost more than $35 billion in the past few years. Delta Air Lines and Northwest Airlines have agreed to merge, creating a formidable competitor as the world’s largest airline. And United and Continental have also agreed to a plan of global co-operation .

If BA and Iberian are off the table, an alliance with another carrier could be American’s best shot at surviving this downturn. US Airway, we’re looking at you.