While the first preliminary deal has been struck for one of several European airlines up for grabs, it remains to be seen if more will follow in a new round of consolidation activity.
There has been little movement on acquisition and mergers since Lufthansa, British Airways and Air France-KLM led a consolidation wave in 2008-2009. All have since been quiet, integrating their new-found partners and battling the economic crisis.
Now a string of second-tier European carriers are either up for sale or in the process of putting themselves on the market. And the first high-profile preliminary deal has been done - British Airways' parent International Airlines Group agreeing terms with Lufthansa to buy UK Star Alliance partner British Midland International.
"BMI has long been an acquisition target for BA, and the deal would give it the store of slots to provide for growth," says CTAIRA analyst Chris Tarry. "Issues are the price of the deal, the cost of implementation and transition, and whether the routes it creates can be profitable."
The deal provides the opportunity for BA to grow at London Heathrow, crucially through the addition of BMI's much-prized slots at the airport. For the winter 2011-2012 season, BA is scheduled to hold 43.1% of Heathrow slots, while BMI has 8.7%, and the acquisition is set to give BA more than half the slots available. However, this is likely to come under the scrutiny of competition regulators. Rival bidder Virgin Group - which insists it remains in the race to acquire BMI despite the initial deal - has already outlined its competition concerns.
IAG chief executive Willie Walsh, speaking on a third-quarter results conference call after announcing the agreement, was upbeat on the chances of regulatory approval, insisting neither IAG nor Lufthansa would have progressed the deal if they were not confident of approval.
"The UK domestic market is where the greatest competition is [between BA and BMI]," suggests Tarry. "The deal will mean that there is a diminution of competition and the regulators will want to know what sort of remedies there might be."
Tarry believes another key challenge is how the airlines are brought into a single entity. He says BMI has "a significant labour-cost advantage" and wonders if BA can retain this. "Look at all the other examples of BA acquisitions in the UK - eg BCAL, Dan Air - their costs have migrated up to the BA level."
IAG has said little of its plans for BMI should it complete a deal, although Walsh noted: "The BMI of the future will look very different from the BMI of today." But he did suggest the deal would give BA the opportunity to expand its long-haul network to emerging-market destinations in locations such as Asia.
Lufthansa acquired BMI group under a long-standing agreement in 2009, but has been looking at the airline's future as it continues to lose money. In the nine months to the end of September, BMI made an operating loss of €154 million ($208 million). Lufthansa Group chief financial officer Stephan Gemkow does not expect BMI to meet last year's operating result.
BMI comprises mainline, regional and low-cost operations. Separately, investors are close to finalising a deal for BMI Regional. However, the future of BMIbaby remains unclear.
The airline is one of a number of European carriers up for grabs. Strategic advisors have been studying the future of UK operator Virgin Atlantic since the end of last year; Ireland and Portugal have outlined their intent to sell stakes in Aer Lingus and TAP Portugal; while future sales remain a goal at carriers such as SAS, LOT Polish Airlines and Malev.
Meanwhile, Baltijas Aviacijas Sistemas, fresh from resolving its stand-off with its Air Baltic co-owner the Latvian Government, emerged as the only interested investor in Serbia's JAT Airways.
"I think consolidation in itself is good for the industry and I think that view is shared by most of the major airlines," says London-based RBS analyst Andrew Lobbenberg. But he notes the major European groups face their own challenges which may dampen their appetite for deals. "They will look at most things, but they are only going to move forward on the assets that have a very strong strategic logic."
Moves to tackle the Eurozone crisis could tighten availability of finance for European carriers to fund deals, although Lobbenberg notes most of the companies that are in play are not going to be that expensive and deals could be structured through shares rather than cash. "The question then becomes how much debt you take on, the pensions position and the cash-out needed to restructure the carriers."
Gulf carriers have also been linked. Qatar Airways has already acquired a stake in European freight operator Cargolux this year, and Etihad has been reported as a possible suitor for both BMI and Aer Lingus. "I think it is an open question to what extent the Gulf carriers get involved," says Lobbenberg. "They have got the money and an evident taste for the industry, but it's fairly challenging to see the industrial logic, even before you consider the aeropolitical complexities."
Read more on how ownership rules are impacting consolidation
Source: Airline Business
