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Consolidation moves ahead, on both sides of the Atlantic

Analysis

29-Oct-08 has seen two major developments in international airline consolidation, that will resonate in the world's two largest aviation markets.

The first is the announcement from Delta Airlines and Northwest Airlines that they have formalised their merger, shortly after receiving the blessing of the US Department of Justice's (DoJ) Antitrust Division. The resulting combination, simply named 'Delta', is a giant by any measure, with more than 125 million passengers p/a, USD35 billion in revenue, 75,000 employees and a fleet of 900 aircraft. Its debts are equally monstrous: according to the International Association of Machinists and Aerospace Workers the unified carrier will have USD28.8 billion in combined debt and USD15.6 billion in unfunded pension liabilities.

Based on share prices at the time of the announcement, approximately USD800 million has been wiped off the value of the all-stock merger, since its announcement in Apr-08, as shares prices at both carriers have tumbled under the twin lodestones of fuel prices and the global financial turmoil.

The question remains whether the merger will result in a more efficient airline, instead of just a larger one. The union between the two is something of an uneven match: Northwest has now become a subsidiary of Delta, and will adopt much of the Atlanta-based carrier's branding through 2009. Full integration will take place over the next two years. The carriers expect USD2 billion in new revenue and cost savings through the merger, and the DoJ concluded that the combination would result in "substantial and credible efficiencies". The past success rate of US airline mergers has been somewhat mixed, however.

Further consolidation in the US is now evolving along the lines of global alliance partnerships. United Airlines and Continental Airlines are seeking permission to tie up with their Star Alliance partners, Air Canada and Lufthansa, across the North Atlantic. Another such alliance is being considered by the carriers for South America.

Lufthansa meanwhile, has announced that it will acquire 50% of the UK's third largest carrier, bmi, after its Chairman, Sir Michael Bishop, exercised an option on 10-Oct-08, which requires the carrier to acquire his controlling stake. The German airline has set aside EUR400 million for the purchase, a bargain price, particularly as the UK carrier valued its slots at London Heathrow at approximately GBP770 million (EUR970 million) earlier this year.

The acquisition still requires the necessary legal and competition approvals, but has been a long time coming. The put option exercised by Sir Michael was agreed to when Lufthansa acquired a 30% shareholding in bmi from SAS, in Nov-99.

Virgin Atlantic immediately tossed its hat into the ring, stating it saw a "compelling opportunity" for a combination of the Virgin and bmi, with their complimentary respective long- and short-haul networks, which would create a strong competitor for British Airways (BA). The acquisition of bmi will give Lufthansa control of the 12% of the 9,000 weekly slots at London Heathrow the carrier operated, compared to Virgin's 3% and BA's 40%.

This puts the German carrier in a prime position to exploit the opportunities of EU-US open skies at one of Europe's most vital hubs and creates a new headache for BA in an already challenging environment. The fate of bmi's subsidiaries, bmibaby and bmi Regional, are less than certain.

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