Mergers and Consolidation
1,070 total articles
169 total articles
The new ultra low-cost airline competition is more aggressively probing the soft underbelly of established pricing at Cleveland and Cincinnati as Spirit Airlines plans to enter the Cleveland market in early 2015. Spirit’s moves follow a rapid expansion by fellow ULCC Frontier Airlines in Cleveland after United dramatically downsized its smallest hub by cutting roughly 60% of its daily departures from the airport.
Now that Spirit plans to introduce flights from Cleveland, the market is also set to become the most visible test case of the US market’s ability to support two ultra low-cost airlines. Spirit and Frontier will compete on most of Spirit’s new routes from Cleveland alongside major airlines.
It is also Spirit’s most blatant competitive response to Frontier since Frontier was purchased by former large Spirit shareholder Indigo Partners. Spirit has offered little public comment about Frontier’s transition to the ultra low-cost model Spirit pioneered in the US roughly a decade ago; but perhaps Spirit’s network moves speak volumes about how it views a new ULCC entrant in the market place.
IATA's latest airline industry financial forecasts highlight the different performance of the different regions of the world. North America is the most profitable region, measured by its net margin (net profit as a percentage of revenues) and Africa the least profitable. Europe has the second lowest margin, but has gained a little on fourth ranked Asia Pacific. Latin America has improved the most since 2012 to rank second, just ahead of the Middle East.
North America has had a relatively good recovery, while Asia Pacific's margins have fallen from their 2010 peak. Even North America's net profit is only 4.3% of revenues, its best since the late 1990s, but still a very thin margin.
Analysis of the relationship between net profit margins and various explanatory factors appears to confirm that market concentration is a key one. Europe's perennial underperformance in airline margin terms – in spite of the region's wealth, high propensity for air travel and high load factors – owes much to the fragmented nature of the market. Nevertheless, a European deal that is truly transformational in terms of its market structure remains unlikely for now.
Similar to its US legacy peer Delta, American Airlines recorded positive 1Q2014 financial results in what American’s management described as “the most difficult winter season any of us have ever experienced in this business”.
American recorded a profit despite canceling roughly 34,000 flights (which is approximately double the flights cancelled by Delta) and taking a USD115 million revenue hit from the disruptions in its operations. Even as the storms wreaked havoc for most carriers, the US domestic market was one of American’s best performing regional entities during 1Q2014.
While the carrier is expressing positive sentiment about the demand environment through its estimated 4% to 6% passenger unit revenue growth in 2Q2014, American’s executives admit the company faces the toughest integration challenges in 2015. One major challenge is in migrating to a single reservations systems platform.
Meanwhile, American is moderating its public optimism, preferring to adopt a modest understatement of the outlook - while hoping for a successful outcome.
The saga that ensued after the US Department of Justice in Aug-2013 sued to block the merger between American Airlines and US Airways is now officially over. Arguably, not too much will change once the conditions of the settlement are implemented - which begs the question of why the two sides did not act more responsibly in the first place to prevent a protracted and futile legal exercise that only added extra expense to the already expensive proposition of combining two airlines.
The whole affair smacks of wasteful macho grandstanding. In the end, only limited concessions were imposed - but presumably the airlines had not been prepared to concede them in negotiations - and nobody comes out of this looking clever.
The bulk of the concessions agreed to by American and US Airways – slot divestment at Washington National Airport – was not surprising since speculation was rampant that the carriers would likely have to shed some slots at the airport in order to move forward. While American and US Airways opted to stick to their bullishness that no divestment was necessary, in the end holding stubborn to their beliefs resulted in a three month delay of the merger moving forward – hardly responsible behaviour for a company that is attempting to build a powerful global carrier.
US Airways believes it can recoup lost revenue triggered by a 16 day US Government shut-down after recording reasonably solid 3Q2013 results, including higher than expected unit revenues for the three months ending 30-Sept-2013.
As the outcome of the US Department of Justice (DoJ) challenge to block the merger of American Airlines and US Airways is tough to predict, both carriers are moving forward in network expansion on a stand-alone basis. For US Airways it means international expansion from its Charlotte hub as a means to close the gap in a variable financial performance from 2Q to 3Q, while American appears to be crafting a Pacific strategy that entails a build-up in Dallas/Fort Worth to strengthen its position in the trans-Pacific against United and Delta.
On 9-Oct-2013, the European Commission (EC) approved the acquisition of loss-making Olympic Air by loss-making Aegean Airlines. Although a previously proposed merger of the two was blocked by the Commission in early 2011, its analysis now indicates that Olympic would go broke in the near future if it were not acquired by Aegean.
This would leave Aegean as Greece’s only significant domestic carrier. The EC argues that the competition provided by Olympic on domestic routes would disappear regardless of the acquisition. It concluded that any competitive harm caused by the removal of Olympic as an independent competitor is not caused by the merger, which “is compatible with the internal market and must be authorised.”
This raises some interesting questions. For example, why did the EC not give fuller consideration to the possibility that new entrants might fill the gap left by Olympic? And why is Aegean paying EUR72 million for a loss-maker that the EC says is “highly unlikely to become profitable in the foreseeable future under any business plan”?