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Oil price back above USD100 per barrel - Air France-KLM plots global domination?

  • Crude oil prices close above USD100 per barrel for first time;
  • Oil for delivery in December 2015 sets record high of USD92.50 last week;
  • Record oil prices despite a US economic slowdown creating ‘perfect storm’ conditions;
  • Air France-KLM aiming to be at the heart of new industry structure;
  • Preparing to invest USD1 billion for minority stake in Delta/Northwest;
  • Ready to inject EUR3 billion into Alitalia – seeks 100% ownership;
  • Expected to be bid for CSA-Czech Airlines;
  • In close negotiations for investments with (and possibly in) China Southern Airlines;
  • Malaysia Airlines stake could come on the market;
  • Virgin Blue’s majority shareholder looking for a buyer.

Crude oil prices closed overnight in New York above USD100 per barrel for the first time. It has also broken through the psychologically important barrier for the first time since early Jan-08, on heightened supply fears. Traders are concerned OPEC may reduce output next month to support prices in a USD85 to USD100 per barrel range.

Furthermore, oil for delivery in December 2015 set a record high last week of USD92.50. When oil for immediate delivery reached USD100 per barrel for the first time during intra-day trade on 02-Jan-08, the 2015 delivery price stood at USD88.33 – reflecting market expectations that there is unlikely to be any relief from high oil prices for years.

Record oil prices are occurring despite a US economic slowdown, which is creating the conditions for a 'perfect storm' for the airline industry.

But amid the turmoil lies an opportunity for a new industry structure, based on closer equity arrangements. Air France-KLM is aiming to be at the heart of this shift.

Industry consolidation moves are intensifying in the US and Europe, as well as Asia, and Air France-KLM is active in all three key regions.

The world’s biggest airline group by revenue (since the Air France merger with KLM in 2004) is preparing to invest USD1 billion to acquire a minority stake in the planned merger of Delta Air Lines and Northwest Airlines. Such an alliance would make it the largest carrier on the North Atlantic, holding approximately one third of the market. Northwest would add extra strength to the trans-Atlantic revenue and cost-sharing JV already planned between Delta and Air France-KLM.

At the same time, Air France-KLM is ready to inject EUR3 billion into Alitalia over the next six years and wants to eventually acquire 100% of the Italian carrier. But its European ambitions don’t stop there. Air France-KLM is expected to be a key bidder in the privatisation of SkyTeam Alliance partner, CSA-Czech Airlines later this year.

In Asia, Air France-KLM is already in exclusive negotiations to establish a JV cargo operation with the newest SkyTeam member, China Southern Airlines. An Air France unit also last month took over the Chinese airline’s catering unit, signaling cooperation is progressing well.

China Southern, a global top-ten carrier by passenger numbers and which recently stated it is seeking a partner to help improve the competitiveness of its passenger business, could eventually seek an equity arrangement with the European major. Timing could be influenced by the speed of the outcome of the China Eastern Airlines tussle between Air China/Cathay Pacific and Singapore Airlines.

Elsewhere, a stake in Malaysia Airlines (MAS) could come on the market soon, according to CEO, Idris Jala. The reformed Malaysian carrier is a much more attractive alliance proposition than when SkyTeam previously held talks with MAS.

In Australia, Virgin Blue’s majority shareholder is looking for a buyer. The “new world carrier” will soon have a long-haul airline subsidiary linking Australia to the US and North Asia, to go with its extensive domestic and regional Australian network, New Zealand and Polynesian operations.

A global airline group, linked under common Air France-KLM equity ownership, is a distinct possibility within the next few years.

The first step – a Delta/Northwest union, with Air France-KLM backing – could wreak havoc on the global alliances structure, as a cross-alliance pairing between United Airlines and Continental or American would be almost inevitable. Such dislocation could play into Air France-KLM’s hands.

Meanwhile, soaring fuel prices, an economic downturn and associated pressure on airline earnings (and valuations) could lower the overall cost of acquiring such a global position.

Such a development would re-write the global aviation structure. The cashed-up Air France-KLM is in the driver’s seat.

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