Smoke, fire and leveraged buy-outs: that American Airlines/British Airways merger

US and indeed world markets were rocked late last week with the news that the British were coming. British Airways, that is, was coming to buy AMR Corporation, the parent of American Airlines. The UK flag carrier would team up with Wall Street powerhouse Goldman Sachs to take AMR private for a sum between $8.2 billion and $11.1 billion, said a stock-touting columnist in the widely read Business Week magazine.

After the recent round of airline merger talks in the States, some people thought the report made sense, and others bought into it because the power of private equity has been demonstrated repeatedly by deals in the news, not the least of them the proposed $8.7 billion Qantas buyout by private equity.

And AMR and BA had done business with each other before. The two carriers are partners in the oneworld alliance and had sought a grant of bilateral antitrust immunity back in 2002 until the regulators blocked it. Airline shares shot up as frantic investors scurried to get in on the gold rush. By late Friday they were surrendering their gains to profit-takers, and to reality.
American obligatorily no commented but let it be known to the investor community that it was not about to start driving down the wrong side of the runway, British-style, and even the most consolidation-crazy analysts pooh-poohed the rumour. Calyon Securities analyst Ray Neidl said he was skeptical, noting that US regulators had just blocked foreign investment in a proposed US startup, Virgin America, that AMR has about $20 billion in debt plus underfunded pension liabilities and that the deal just didn’t make a lot of sense at this time.

Neidl suggests that if the two carriers actually talked, it may have been their “way of trying to get the attention of the regulators, hoping to gain antitrust exemption, as some other airline alliances have, or perhaps just to gain permission to codeshare across the important North Atlantic market, currently not allowed because regulators believe they would have market dominance”.

But the real motivator is the power of private equity and the fact that there’s a lot of cash out there looking for deals. This is a strong enough factor to make observers forget that this same Business Week tipster said that Alaska Airlines, not America West, would buy US Airways, a tip so far off base that Alaska took the rare step of publishing a denial.

But maybe people believed because someday, and maybe someday soon, airlines will be able to do business across borders the same way just about every other kind of business can, and maybe someday the largest English-speaking market in the world, the UK/US market, will be able to do business the way large markets elsewhere can.

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