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Airline privatisation requires track record of profitability and no government interference

Analysis

As with other industries, airline privatisation tends to be motivated broadly by the desire to access private sector capital, private sector management or both. Working against this is the desire of governments to retain ownership of their national airline as an extension of economic policy, whether for reasons of maintaining connectivity or for less defined reasons of national pride.

The required balance between these aims (and foreign ownership limits) determines the approach to privatisation. A public listing of shares or a trade sale? Sale of all or only part of the state's shareholding?

Summary

  • State ownership remains the default ownership structure for many national airlines around the world
  • Most major airlines have been at least partly privatised, typically through IPOs, but there is no 'one size fits all' solution

Many governments persist in owning their airlines

In many parts of the world, state ownership (whether partial or whole) remains the default model for national airlines, although this varies by region and within regions.

In North America, private sector ownership is the dominant model (US airlines have never been state owned, although Air Canada once was).

The Middle East's three Gulf-based super connectors have grown rapidly without opening up their capital to the private sector, although they have opened themselves up to a wide pool of management talent.

Perhaps the region that has successfully carried the highest number of airline privatisations is Europe. However, even here, there is still a divide between Western and Eastern Europe.

Almost every major Western European national airline has been privatised, although governments retain stakes in Finnair (55.8%), TAP Portugal (50%), SAS (42.8% split between Sweden, Denmark and Norway) and Air France-KLM (17.6%).

In Eastern/Central Europe, most national airlines remain state controlled, although several are seeking private sector investors. These include airBaltic, Air Malta, Croatia Airlines and LOT Polish Airlines. In 2013, Air Serbia was partially privatised through the sale of a 49% stake to Etihad.

Western European privatisations tended to follow the route of IPO (initial public offering), floating shares on the stock market This secures access to private sector funds, whether for investment in the airline itself or as cash to the government in exchange for selling its shareholding (or both).

Privatisation through the sale of shares (often a minority stake) to a strategic partner additionally brings access to private sector management skills. The strategic partner is typically another airline and often also brings a commercial partnership.

The UK government's privatisation of British Airways was a pioneer of the model

The 1987 IPO of British Airways was a pioneering example of an airline privatisation carried out by the UK government led at the time by Prime Minister Margaret Thatcher, whose government implemented a wave of privatisations across a wide range of industries.

BA's stock market flotation was 11 times oversubscribed, but the key to the success of this privatisation was the 1983 appointment of Colin Marshall as CEO. An airline industry outsider at the time, he helped to change the bureaucratic culture at BA ahead of its privatisation.

Other leading Western European countries followed the UK's lead, with Lufthansa  and Air France undergoing IPOs in the 1990s and Iberia in 2001. KLM had long been a listed company, but became 100% privatised in 1998.

The privatisation of Europe's biggest airlines then led to consolidation in the sector, facilitated by better access to capital and a less nationalistic mindset under private ownership. BA acquired local rival British Caledonian very soon after the IPO in 1987, although more significant cross border transactions took longer to realise (helped by EU liberalisation).

The first big European airline merger was the 2004 combination of Air France and KLM. Lufthansa bought SWISS in 2006, Austrian in 2009 and Brussels Airlines in 2017, effectively completing the privatisation of neighbouring European airlines.

BA and Iberia merged to form IAG in 2011 before IAG then acquired Vueling in 2013 and Aer Lingus in 2015 (the Irish national airline had been part privatised through a stock market listing in 2006). IAG itself is now 20% owned by Qatar Airways, in a further illustration of how a stock market listing can widen the shareholder base and facilitate trends towards consolidation.

Lufthansa Group, IAG and Air France-KLM are now three of the five biggest European airline groups by passenger numbers (the other two are LCCs Ryanair and easyJet, which have never been state owned).

The only Western European national airline not to be listed in its privatisation is TAP Portugal. A multi year search for a strategic partner ended in 2015, when the Atlantic Gateway consortium took a 61% stake, subsequently reduced to 45% due to EU ownership requirements. The Portuguese state retains a 50% holding (employees own the balance of 5%).

In addition to raising fresh capital, through Atlantic Gateway TAP has gained closer commercial relationships with three airlines outside Europe: Brazil's Azul, China's Hainan Airlines and JetBlue of the US.

The IPO approach favoured in most of Western Europe has also been adopted elsewhere in Europe, where governments have sought to combine wider access to capital for their airlines with retaining significant stakes.

Examples include Turkish Airlines and Aeroflot, respectively the number six and number seven European airline groups. Both are listed and subject to the reporting disciplines of the capital markets, but each is still partly owned by its national government (49% for Turkish Airlines and 51% for Aeroflot). Although they follow different strategies, both Turkish Airlines and Aeroflot are agents of their respective government's economic policy and expressions of national identity.

Another track to sustainability has been through strategic investors

Notable exceptions aside, the preferred approach to privatisation in Central/Eastern Europe has been to seek a strategic investor to take a partial stake in the national airline. In the majority of cases, the airline is smaller and less profitable than the listed airlines found in Western Europe and has first had to undergo a period of restructuring.

In 2016, after a restructuring and a four year search for external shareholders, AirBaltic found a private investor to take a 20% stake (German investor Ralf-Dieter Montag-Girmes). In fact, the Latvian airline has found two investors, since the 20% stake was transferred to Danish investor Larss Thuesen in Apr-2017. AirBaltic is continuing to search for a strategic airline investor.

Air Malta has been in an on-off search for a strategic investor for some time. A proposed sale of a stake to Alitalia fell through before the Italian airline entered administration in spring 2017 and Air Malta is now focusing on restructuring and returning to profit before more actively resuming plans for partial privatisation (the Maltese government is likely to want to retain a majority stake).

For Croatia Airlines, in profit since 2013, a long running search for a strategic partner may be returning to the top of its agenda. The Croatian government, owner of a 97% stake, has been considering privatisation since the airline recovered in 2013 from a previous four year period of losses.

LOT Polish Airlines has also been through a period of restructuring, returning it to profit, and hopes that this will help in its own search for a strategic partner. However, its improved outlook reduces the urgency for a capital increase.

The Czech Republic has agreed to sell a majority stake in CSA Czech Airlines to Prague-based privately owned Travel Service, a leisure group that owns and operates the SmartWings scheduled airline brand, in addition to ACMI and charter operations.

Air Serbia's 2013 part privatisation through the sale of a 49% stake to Etihad has been a relatively rare example of a Central/Eastern European airline finding a strategic investor. Since the sale, the Belgrade-based airline has almost doubled its passenger numbers (from 1.37 million in 2013 to 2.62 million in 2016) and reported three successive years of profit in 2014-2016 (after a loss in 2013). It also returned to long haul flying, with the launch of Belgrade-New York in Jun-2016, improved its commercial proposition and broadened its commercial partnerships.

Outside Europe, airline privatisation has met with mixed results

One of the more successful examples is Australia's 1995 sale of national airline Qantas. Since then, its fleet has more than doubled and its passenger count has more than tripled. In the private sector, it has also developed the fleet footedness necessary to cope with competition (from Virgin Australia), to launch its LCC subsidiary Jetstar, to grow its loyalty scheme and to embrace new technology to improve the customer experience.

The flotation of a 75% stake in Qantas followed the 1992 announcement of British Airways as a trade investor in a 25% stake. In this way, Australia combined the two privatisation approaches of selling a stake to a strategic investor and an IPO (BA sold its stake in 2004).

Across much of Northeast Asia, although there are plenty of listed airlines, there tends to be a strong alignment of national airline strategy with government interests, irrespective of the precise details of the ownership structure.

China's big three airlines Air China, China Eastern and China Southern are listed on the stock market, but they continue to be controlled by the Chinese state. Hong Kong's Cathay Pacific has a 20% stake in Air China and Delta has a 3.6% holding in China Eastern, in both cases to give access to wider strategic insights from global airlines.

Japan Airlines was originally privatised in 1987, but its more recent history revealed the ongoing watchful eye of the state, which bailed out the airline following its 2010 bankruptcy. In the subsequent 2011 listing of JAL, the government recouped the bailout cost.

Korean Air was privatised as long ago as 1969, when the Hanjin Transport Group took control of the airline.

Malaysia Airlines' experience of privatisation has been mixed. In 1985, the Malaysian government sold a 40% stake to the public, making the airline the first partial privatisation in the country. In 1994, the Malaysian Central Bank sold its 32% stake to Malaysia Helicopter Systems, removing the government as the largest shareholder, although the state retained a golden share giving it a veto over certain decisions and other state entities retained a minority stake.

Following a period of losses, the Malaysian government took control again in 2000, although a small free float remained listed on the stock market. In 2014, the government took back full control after the loss of two aircraft in highly exceptional circumstances.

In Vietnam, the government's sale of a 3.47% stake in Vietnam Airlines through a small cap listing in 2014 and the sale of 8.8% to ANA Holdings in 2016 reflects the country's piecemeal approach to selling holdings in state owned companies. However, state ownership in the airline is set to fall to 51% in 2019

In Latin America, the 1990 privatisation of Aerolineas Argentinas took the form of a sale to a consortium led by Iberia, then still owned by Spanish state holding company SEPI. In the subsequent years, SEPI, American Airlines' parent AMR Corp and two US banks were also shareholders at various times. Aerolineas Argentinas filed for bankruptcy protection in 2001, in which year a controlling stake was acquired by Spanish company Grupo Marsans.

Although the airline came out of administration in 2003, the Argentine government eventually took back full control in 2008 and has kept tight control over matters such as route approvals to the benefit of Aerolineas. The airline has struggled with profitability and industrial relations and seems likely to remain government controlled for the foreseeable future.

A more successful example of Latin American airline privatisation is Aeromexico, although it has switched between private and state ownership more than once since its founding in the 1930s. It most recent privatisation was in 2007, when the Mexican government sold the airline to Banamex, a bank owned by Citigroup. This paved the way for an IPO in 2011 (following the bankruptcy of rival Mexicana, itself privatised in 2005) and the subsequent investment in Aeromexico by Delta Air Lines and a joint venture between the two.

Locally tailored financial solutions are necessary

As these examples show, there is no 'one size fits all' solution when it comes to airline privatisation. IPOs have worked well for larger airlines, while those needing more active support from a partner have fared better through a trade sale.

In general, however, two requirements for a successful privatisation are a track record of profitability and no government interference in the running of the airline.

(This article by our CAPA Analyst team appeared originally in Dec-2017 in the 64th issue of ECAC News on Privatisation in Aviation)

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