One of the most frequently uttered refrains from airline bosses in recent years is "consolidation is inevitable". There is one in this issue from that man of relatively few words: United's chief executive Glenn Tilton.
While the pace of mergers and acquisitions has accelerated in the past troubled year, the truly game-changing merger moves are few and far between. The coming together of Air France and KLM began back in 2003 while the more modest takeover of Swiss by Lufthansa was revealed in 2005.
The Europeans were leading the way in creating mega-carriers. By revenue Air France-KLM is the world leader with $34 billion, followed by the Lufthansa Group at $30 billion.
As of 29 October Delta Air Lines had got in on the act for the US. On that day its merger with Northwest Airlines was officially consummated, producing a carrier with revenues of nearly $32 billion into the bargain. For Delta's chief executive Richard Anderson, who also once led Northwest, size is important. "The new Delta will be at the front of the pack in achieving the benefits of consolidation and is well positioned to navigate the tough waters ahead in a difficult economy," he said of the merger milestone.
United's Tilton would like to be a consolidator, in particular with Continental. Together these carriers would join the select band of $30 billion plus players, with revenues of over $34 billion, but for now it has had to settle for a wide-ranging commercial pact with the Houston-based carrier. This is surely merely a precursor to the real thing at a later date.
Only the briefly mooted British Airways/Qantas combination came close to joining the $30 billion club. The other tie-ups currently in the air will not reach such scale. The BA and Iberia pact will create a carrier of $25 billion, for instance. This deal makes a lot of sense and will cement the leading positions of the big three European network players. For many the BA/Qantas deal did not make sense. How could these carriers get around ownership and control regulations? Where were the cost synergies? Where were the network synergies?
It was probably the kind of discussion that takes place from time-to-time between many carriers, but which don't go any further and quietly vanish. The difference this time is that news of the talks was leaked. But regardless of the practicalities of whether BA and Qantas could actually merge, the mere suggestion has provoked bigger intercontinental partnership thinking. BA has always had its eye on the bigger global picture, most naturally on a transatlantic alliance with American.
Lufthansa has an eye on the Atlantic as well, It caused much consternation a year ago with its $300 million investment for a 19% stake in US low-fare carrier JetBlue Airways as it sought to strengthen its New York market presence. That teaming will begin working on the commercial realities of the partnership later in 2009. Lufthansa's steady move into new markets via the acquisition route now includes Austrian Airlines, the UK's bmi and Brussels Airlines. Add these to the mix and the Lufthansa Group's revenues climb to a cool $37.5 billion.
Lufthansa is shoring up the local markets where it can move with relative freedom. The bigger intercontinental moves, which are viewed as inevitable "one day", will have to wait until this industry is allowed the long-awaited freedom to merge, buy and consolidate as it sees fit. Don't expect even these tough times to push fast and fundamental changes to these rules. The prospect of continental players called America Air, Europe Air and Asia Air is still, what, decades away?
So it will be at the local level and among the middle ranks that the consolidation game will play out this year, and there will be plenty to report. However, the rush to take part must be rooted in a sound business rationale. Mergers must yield the basic benefits of growth, cost savings and synergies and the ability to better defend a market. These rules are true in any market conditions, but can be blurred in the turmoil that recession brings.
airline distribution 2009
British Airways chief information officer Paul Coby and Copa Airlines vice-president commercial Joe Mohan will speak at Airline Distribution 2009. The event is organised by Airline Business and UATP, and will take place between 31 March and 2 April in Vienna, Austria.
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