DealZone

European airlines merging, U.S. talks to take off next?

February 3, 2009

airfrance-alitaliaEuropean 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Ryanair, Europe’s largest discount airline, has withdrawn its bid for Aer Lingus after the irish government rejected the $1 billion deal.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.

Comments
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I thik you are right, and we need to have a wave on continued consolidation in Europe. The dominance of Lufthansa however with stakes in SAS, bmi, SWISS, and now interest in Austrian is a little worrying from a competitive standpoint.

As you point out, the sliding pound puts the BA on the back foot. It is not just the currency valuation that is an issue- it is also grossly underfunded pension plans at BA.

Also what you article does touch on is the need for further US consolidation. We advocate further US/EU and other international consolidation, using Open Skies II as the catalyst to truly address the issues around cabotage and foreign ownership.

Take AA/BA; unfortunately for the two airlines, no agreement has yet been reached with the US and EU regulatory authorities. The question is: are consumers losing out as a result now that London Heathrow is open to full competition?

In addition, now we have this backlash in the UK about UK workers being displaced by EU “freedom of movement” workers. The Brown government is going to come under further pressure on this issue, and I hope that the BA/IB deal does not fall into this no-win political debate.

 

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