Mergers and Consolidation
European airline margins have underperformed other regions for years. There are many reasons for this, but our analysis suggests that Europe’s relative lack of consolidation may be a significant one, since margins appear to be correlated with market concentration. Even after a number of significant deals over the past decade, the European market is less concentrated than North America, where consolidation has gone further, to the benefit of margins. Europe is also less concentrated than Asia-Pacific (analysed as its sub-regions), whose margins have consistently been the highest.
If consolidation brings structural benefits, are there still European deals that can make a difference? Europe has a long tail of small carriers, which are unlikely to have a significant impact, but comparison with North America points to the potential for further combinations among the top five. Nevertheless, there are hurdles to such deals, not least of which are the ongoing restructuring programmes at Europe’s Big Three and the incompatibility of LCC/FSC mergers, but some second tier groups could be targets.
African airlines are calling for greater unity among themselves to better compete against much bigger foreign airlines in their own skies and for African governments to liberalise the continent’s air space.
Kenya Airways believes a merger between itself, Ethiopian Airlines and South African Airways is necessary to create a single large carrier representing Africa and able to compete globally. And Africa’s numerous regional airlines are looking to these three big carriers to support their growth and improve the industry’s safety performance on the continent.
But first, protective governments need to be persuaded of the benefits of open skies, while smaller carriers fear for the futures if big carriers are given greater freedoms.
Poland’s LOT and Turkish Airlines highlight Eastern European flag carriers investor/seller shortfall
Several Eastern European flag carriers are clearly struggling as competition in their markets, particularly from low-cost carriers, continues to increase, threatening their survival as independent entities. Many of these carriers are reliant on regular capital injections from their respective governments simply to maintain operations. In an effort to ensure their long-term survival and a more sustainable future, several are seeking to secure strategic partners in 2012.
Being acquired by, or partnering with, larger airlines from Turkey and the Middle East is proving to be the most likely of scenarios for these Eastern European operators as Western European airline groups are attempting to reduce expenditure significantly in 2012. While Turkish Airlines and the three major Gulf carriers have the cash and interest to pursue investments in Eastern European carriers in 2012, such investments do not appear to be on the radar at all for Western airlines.
Last week’s Chapter 11 filing by American Airlines (AA) and American Eagle (AE) parent AMR marks the end of the post-deregulation period as well as possibly signalling the beginning of the end of US legacy consolidation as many believe the shedding of American’s baggage will position it for the US industry’s final merger with the only other independent legacy, US Airways (LCC).
Across the board the feeling is this is the best thing for both AMR and the US industry because it means more capacity cuts. Delta and United are expected to be the principal beneficiaries. JP Morgan expects a 10% capacity cut from American, which translates to a USD1.4 billion, or 1-3% revenue jump for United, Delta Air Lines, US Airways, Alaska Airlines, Southwest and JetBlue in 2012. US Airways was already slated to benefit from the capacity cuts of competitors this quarter.
American Airlines' (AA) bankruptcy has renewed discussion of the inevitability of an eventual merger with the other single in the room, US Airways. While perhaps expedient, is it a good match? A closer look at the shared dowries is in order.
The old regional airline, capacity-purchase model is well and truly broken and airlines must evolve to find a more profitable model, Dahlman Rose analyst Helane Becker said in her latest briefing in a harsh evaluation of the sector based on losses and current efforts to restructure.
Regionals have been evolving, expanding capacity purchase portfolios or acquiring branded operations such as Republic’s acquisition of Midwest and Frontier to form Frontier Airlines. Even so, that doesn’t seem enough simply because they are still so many aircraft in a vastly shrinking regional airline system.
The impact of the changes in legacy-regional relationships, illustrated in stark relief by SkyWest Airlines on 02-Nov-2011, was shown again on 03-Nov-2011 when Pinnacle Airlines Corp posted a third quarter loss of USD3.5 million. The loss was a USD13 million swing from 3Q2010 when it earned USD9.4 million. It also projected a loss in the fourth quarter, with expectations for a loss in 2012.
Projections had expected a profit on USD317-328 million in revenues. It did meet revenue expectations posting consolidated operating revenue of USD319.8 million, a 5.8% increase largely owing to the increase in Q400 operations as well as a year-on-year increase in United Express rates.
TAP Portugal’s privatisation process has gathered speed with Prime Minister Pedro Passos Coelho calling on serial-acquirer Lufthansa to consider investing in the national carrier and fellow Star Alliance member. IAG has previously expressed interest in TAP and has reportedly appointed JPMorgan to advise on a possible bid. We examine why the Portuguese flag carrier is in play.
El Al Israel Airlines swung to a net loss of USD19.7 million in the three months ended 30-Jun-2011 (2Q2011) from a USD14.8 million net profit in 2Q2010, as costs grew at nearly three times the rate of revenue. The Tel Aviv-based carrier felt the impact of increasing fuel costs, a stronger shekel and rising competition in the quarter, prompting CEO and President Elyezer Shkedy to note that the company is working to adapt its strategies to meet challenging commercial realities.
Ryanair, Europe’s largest airline, posted results that missed expectations in its fiscal first quarter as higher fuel costs weighed on the net result.
Air France has announced plans to move away from its Paris-centric strategy and moved into regional French market in a bid to counter the growing threat of low-cost carriers in its home market, which remains one of Europe’s few remaining spaces for growth in the sector.
As headlines in Jamaica touted the end of an era, Caribbean Airlines, which acquired Air Jamaica in May, promised to become a “truly Caribbean airline” to serve the Caribbean as one airline but two brands. The two brands are now operating under the Caribbean Airlines BW code as they continue to integrate operations, ending Air Jamaica’s troubled 42-year history.