Posts Tagged ‘Airline mergers’
In my view, there are few carriers that can compare to Lufthansa for both strategic vision and execution. Their move to acquire the Austrian Group is just another in a series of decisions that demonstrating this strength. Unfortunately for Lufthansa something went a little amiss in this latest anschluss, but we do not think it is irreparable.
Ripe for Takeovers; but who can spare the cash?
Everyday more and more carriers are seeking shelter from the stormy marketplace through alliances, investment, and mergers. In just the past few months alone we have witnessed Ryanair’s hostile attempt to takeover Aer Lingus, as well as Italy’s new “Alitalia” emerge from a massive state-sponsored bailout. There has also been unprecedented consolidation in the Russian markets.
What is the source of Lufthansa’s Strength?
While certainly not a secret, Lufthansa goes about its business in such a way as to not court attention. While there has been some negative news for the Lufthansa Group, particularly in terms of their Cargo operations, they are still posting overall respectable €599 M profit today for the combined group which includes wholly owned SWISS, and Germanwings. Have a look at just how diverse the Lufthansa holdings really are. (Please note, this opens a new window to the Lufthansa site, and the source file is in German- but you can get the idea.)
In February, Lufthansa made public its intention to add struggling carrier Austrian to its portfolio of fully owned subsidiaries. During the months of failed bids which included Russia’s S7, as well as several Gulf funds, Lufthansa carefully put together a deal to see that the integration of Austrian would success
What is wrong at Austrian and how does it affect the consumer?
Austrian suffered from the credit crunch much like any other carrier, and their latest strategy to expand their focus on long-haul connecting traffic did not get them either the load factors or yields that they had hoped for. After months of offers and due-diligence from an array of suitors, nothing materialised other than the deal from Lufthansa who are now offering €4.49 a share.
Even Austrian’s COO has gone on record as saying “the global economic crisis has now reached all markets, demand is collapsing and the outlook offers very little reason to be optimistic. We will continue as an airline, but not independently.” Now Austria’s State Holding Company obtained permission from the EC to keep the airline with a bridging loan flying while the deal with Lufthansa is being finalised.
From our view the integration of Lufthansa and Austrian makes sense. It has a complementary fleet type, the cultural ties are obvious, and Austria as a nation needs a carrier with a more diverse network of connections. Have you ever tried to fly from London to Salzburg? Your choices are fairly limited.
So what went wrong in Europe?
Enter stage right the cries of “foul state support and aid” from SkyTeam carriers who filed a motion with the European Commission to investigate the possibility that this deal could violate laws prevented so called “state support”. Where were these carriers when Italy’s Prime Minister was re-writing Italian Bankruptcy Code and making back end deals that resulted in the Italian State owning all of Alitalia’s debt, while it continues flying? Oh wait, Alitalia was one of SkyTeam’s very own.
Where are we now?
What we have now is a 200M Euro bridging loan that is keeping Austrian afloat, as the immediately slash costs and cut capacity while the issue of Lufthansa and Austrians tie-up is finalised by EU officials. In the meantime, SAS is looking to sell its stake in British Midland (bmi) along with their other holdings such as Spanair in a fight to get cash. Who might be the prime buyer for the bmi shares? I would think Lufthansa would have an interest.
One has to stand in awe of the Lufthansa strategic ability to position themselves in a weak market. From their negotiating majority ownership of British Midland (bmi) to their new investment in Lufthansa Italia the carrier has a strong strategic portfolio that is likely to pay off in the long term. They possess the diversity and required cash to survive this current economic downturn.
TWC’s Carter Stewart says, “If I were playing cards with Lufthansa I would be very conservative. We all know that Lufthansa is holding a winning hand, and unlike most carriers today they have the cash to make the bet. The question for all of us is how and when they are going to play it.”
In our next installment
In our next blog we will have a look at what we think the “Fantasy Playbook” for Lufthansa’s bmi holding could be.
- There will be wave of additional industry consolidation in Europe over the next year
- Pension Underfunding is playing a key issue in failed merger talks from BA/Iberia to even BA/Qantas. While it is talked about as “valuation issues”, one of the largest is pensions and benefits
- While the EU Competition Commission is not likely to have changed its view on EI/FR, another suitor could put together a new bit Irish and EU regulatory backing
- Failed startup carriers like Silverjet and Eos may have been underfunded, but they avoided some of the legacy cost issues now plaguing the industry.
- BA needs to gain approval for its Merger with American Airlines- which we support fully. That union is becoming even more important as the economic climates- and cargo and passenger numbers fall
- There are parallel lessons for the airline and auto industry when it comes to organized labour.
To say that Aer Lingus has been on defense as of late is an understatement. I am personally impressed by both the airlines management and Irish Governments handling of the Ryanair bids, with the exception of the golden parachute for senior execs, that was later retracted. Today there is even rumour of fresh takeover talks from the Merrion Stockbrokers team.
No potental takeover bid can be successful until the potential suitor has an answer for what will happen with under-funded pensions and long-term labour contracts. Until this happens nearly all airline merger talks will end in tears.
In the case of Aer Lingus, the Irish State should not be left holding the bag for the debts, Alitalia style. Nor should the good people of Ireland need to face up to what US Authorities did with United Airlines in 2005, where the Federal Pension Guaranty Corp took over the airlines pensions for an exchange in a stake in the new United Airlines.
There are some also some new harsh realities out there that airline labour needs to face up to. No where is this more true than at Air France where pilots routinely appear to strike due to minute changes in retirement dates and work rules.
This is a now all too recurring theme in the airline sector, as earlier this week BA was said to have been valued below fellow oneworld partner Iberia. One of the key reasons for this financial faux-pas is that BA owes its pension fund a good deal of cash and is not current with contributions. While Walsh is out there claiming the any deal that does not value BA above Iberia is “not acceptable” to BA shareholders- why are those same shareholders not demanding answers on the pension underfunding?
I am no fan of these pension obligations, and were I a shareholder I would be asking management some serious questions about how they are going to solve this pension shortfall, or ultimately it is not the shareholder, but rather the EU taxpayers that will start footing the bill.
One of the reasons that we as consumers should be sad to see some airlines like Silverjet, Eos, and Sterling go is that that they knew the secret: don’t create a labour contract or pension plan that you cannot afford. Instead, be good to your employees, and create an innovative, agile, and fun environment in which to work. We feel that Virgin may well have the right balance here at the moment. In addition, American Airlines has managed to create through shared-sacrifice a stronger relationship with its organized labour, at the cost of ousting of their former CEO (Bob Crandall) in order to regain credibility.
This bring me back to a key point that I plan to continue supporting which is the AA/BA anti-trust application should be given fast track approval by the EU Competition Commission, as they currently are in a position to make a merger work. They have the cash, the teams, and will be able to get concessions to harmonise workforce rules. These are going to be keys to long-term viability. Other truly viable applications should also be given the same treatment. Ryanair and their bid were unrealistic and bad for EU consumers.
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