from Commentaries:
Consolidation Air, nobody’s favourite airline
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.
Lufthansa flies into Ryanair’s sights
You’ve got to admit that when Ryanair’s chief executive Michael O’Leary (left) told journalists in London on Tuesday that the low-cost airliner was studying a bid to buy Germany’s flag carrier Lufthansa, he must have meant it as a joke.
For Ryanair to acquire Lufthansa is a bit like taking ice to the North Pole: a bit far-fetched now, but certainly plausible in the near future. “We are having a serious look at Lufthansa. We could almost buy it for cash,” O’Leary confidently told the media.
But he also qualified those comments with his usual effusive charm, saying: “We are not planning any bids for Lufthansa in the foreseeable future, but it is the only one of the other three large airlines that we would be interested in.” That rules out British Airways, which is still in merger talks with Iberia. O’Leary doesn’t want the hassle of its pension fund. It also excludes Air France-KLM, the world’s largest airliner by revenues.
Despite Ryanair’s market capitalisation being almost as big as those two other carriers combined, it is nevertheless Lufthansa’s cheap market price that O’Leary says attracts him.
But even he has tacitly admitted that he has missed the most opportune moment to make a bid approach. While Lufthansa’s shares have taken a bashing during the current economic downturn, they are already on their way back up, in line with the DAX-30. In March, Lufthansa’s shares hit a low point of €7.90. Now, they are hovering around €10. Nevertheless, with Ryanair’s market cap at €5.4 billion and Lufthansa’s at €4.7 billion, a paper merger is still plausible, with Ryanair taking majority control, but only if Lufthansa’s shareholders and the German state were to give their approval.
However, a cash deal looks unlikely, after Ryanair reported its full-year results today. Its net debt increased by 25 percent to €120 million and it made a net loss of €169.2 million compared with €390.7 million last year, mainly thanks to a €222.5 million write-down on its 29.8 percent stake in Aer Lingus. That raises the other question: How can Ryanair even contemplate taking over Lufthansa when it has tried twice and failed to acquire Ireland’s national carrier?
I strongly doubt this will ever happen, running a full service airline is not the same as running a no frills budget one. Mr O’Leary also seems to forget that Lufthansa is a national icon to the Germans that has to stay German at any cost. I must admit that Mr O’Leary is a talented marketeer, he always knows when and where to stir things up and how to make publicity for his airline.
European airlines merging, U.S. talks to take off next?
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.
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.
Ryanair’s cut-rate merger bid
What a difference two years makes. After being foiled by EU regulators in 2006, Ryanair CEO Michael O’Leary is back with another bid for Aer Lingus, but in the midst of an economic slowdown he has cut the offer price in half, to 750 million pounds ($970 million).
The sharply reduced price is unlikely to endear Ryanair to Aer Lingus management, trade unions or the Irish government. But amid broader consolidation trends in the industry, analysts give the low-cost upstart a slightly better chance of success with EU regulators this time around.
More deals of the day:
** Irish banks will move in the coming weeks to facilitate investments of up to 10 billion euros ($12.94 billion) in fresh capital from government, private equity and other sources, the Irish Examiner reported.
** American International Group Inc said it has agreed to sell its wealth management provider AIG Private Bank to Abu Dhabi-listed investment company Aabar Investments Co .
** Kuwait wants to reduce the value of a proposed $19 billion petrochemicals joint venture with U.S. firm Dow Chemical to $16 billion, a Kuwaiti newspaper said.
** Spanish builder Sacyr Vallehermoso has sold its Itinere highway business to Citigroup for 7.9 billion euros ($10.20 billion), cutting its massive debt pile by a third during a housing slump.
