Consolidation talk among European airlines has stepped up a level, led by speculation around UK leisure carrier Monarch Airlines, Lufthansa's moves to expand its Eurowings concept, and Alitalia's opening of talks to acquire a stake in Air Malta.
The fresh round of speculation comes after several European carriers had already secured investors over last 12 months, including Aer Lingus, TAP Portugal, Air Baltic and, most recently, Adria Airways.
The Maltese government has been seeking a strategic investor for its national carrier as part of restructuring efforts. While Etihad had been linked with extending its acquisition spree with a move for Air Malta, it is one of the airlines the UAE carrier has already invested in – Alitalia – that has made the move. Late in April, Alitalia signed a memorandum of understanding and began due diligence with a view to acquiring a 49% stake in Air Malta.
"There are strong cultural and commercial bonds between Italy and Malta, and this MOU is a first and important step, but we will only make a decision once we have completed an exhaustive examination of a possible deal," says Alitalia's new chief executive Cramer Ball. "We will need to establish unequivocally that a deal with Air Malta will not undermine the progress of our three-year turnaround programme, or prejudice our financial position. Until then, it's business as usual."
Air Malta itself was a former shareholder in the Italian joint-venture regional carrier AzzurraAir, which conducted some franchise operations for Alitalia when active between 1996 and 2004.
Maltese tourism minister Edward Zammit-Lewis confirms that the agreement with Alitalia means the nation "will cease talks with other airlines and start detailed discussions".
Loss-making Air Malta has been working through a restructuring aimed at restoring its profitability, for which it secured European Commission clearance in 2012. That was completed in the autumn of 2015, and while Air Malta has indicated it expects to remain in loss for the year to March 2016, sources suggest that there will be no legal consequence for failing to return profit this year because it has met capacity reduction and divestiture commitments.
The restructuring efforts of UK leisure carrier Monarch Airlines, after its rescue by Greybull Capital 18 months ago, has put it in the shop window. Speculation has linked EasyJet with interest, perhaps driven by the chance to secure more slots at London Gatwick airport. EasyJet has not commented on the reports.
Monarch chief executive Andrew Swaffield says the UK leisure carrier has generated "attention from a whole variety of potential investors, both trade and non-trade, since it became clear that we had delivered a successful turnaround". He adds: "The reality is, we didn’t have a queue of people wanting to buy us in 2014; we may have a queue now."
But he adds the carrier does not have the "For sale" sign and that it is also "looking at external acquisitions ourselves". It has appointed Deutsche Bank to advise it and its shareholder Greybull, which is offering its "support" in the search for potential investment opportunities.
Deal speculation has also reignited around Lufthansa, which since a major round of airline acquisitions before the financial crisis has shown little interest in adding to its roster of carriers. The change in emphasis is driven by its ambition to build up its new Eurowings concept. "Long-term scale effects you achieve only through size," explained Lufthansa board member Karl Ulrich Garnadt in March. "A crucial point will be other companies joining us."
One such carrier under consideration is Brussels Airlines. The two sides have been discussing a concept of migration into the Eurowings group. Lufthansa already holds a 45% stake in its Star Alliance partner, and has a call option on taking full control of the operator. But it has pushed that back to enable the airline to focus its operations in the aftermath of the bomb blast in March at its Brussels airport hub. "We have agreed with Brussels Airlines to give ourselves a further three months to conclude our negotiations on the acquisition terms and devise the migration concept required," says Lufthansa chief executive Carsten Spohr.
Lufthansa has also been linked with partnership discussions around the Eurowings concept with both Thomas Cook's German unit Condor and its long-time Star partner SAS.
Other European carriers also continue to seek investors. LOT's chief executive Rafal Milczarski says the Polish flag carrier is still on the hunt for a strategic partner. "We don't need any partner: we need a good partner. An average or weak partner, we don't need," he said during April's Routes Europe event in Krakow.
LOT and Turkish Airlines last August reached a preliminary on increased co-operation. In March, Turkish said these talks were ongoing. Asked during the summit whether Turkish could serve as the partner, LOT's Milczarski said: "I wouldn't rule it out, but there are other candidates for that 'reliable partner' title."
Croatia Airlines remains in the preliminary stages of privatisation, while Irish regional Stobart Air has been in talks with potential investors since the end of last year. It has been linked with a possible tie-up with fellow Irish carrier CityJet, which is itself in new hands after a buyout led by its chairman Pat Byrne.
While Alitalia has already secured investment through Etihad, Italy's second-biggest airline Meridiana is looking toward another Gulf carrier to secure its future. Qatar Airways is in talks over taking a 49% stake in the struggling carrier – the Gulf carrier showing renewed interest in European airlines after its short-lived investment in Cargolux in 2012. That has also included taking a 10% stake in British Airways parent IAG – a holding which, chief executive Akbar Al-Baker has been quoted as saying, is now nearer 12% after being increased.
Chinese conglomerate HNA Group – which has been active across sectors and regions including recent moves for European catering specialist Gate Gourmet and Carlson Hotels – continues to be linked with European operators. It has been touted as a potential investor in Monarch and Air Europa, while reports suggest that Air France-KLM is also interested in acquiring its Spanish SkyTeam partner.
For many carriers the current run of deals – or potential sales – mark an end-game for several long-running processes in Europe, many of which have been in play since the financial crisis.
"With the various methods of national subsidy having been squeezed continually out of the system through EU regulation, there are increasingly few options left for a number of national airlines in Europe to maintain their business model without being part of a wider alliance. So some may want to sell," says Peter Morris, chief economist at Flightglobal's consultancy Ascend.
Under European state-aid rules, airlines that have benefited from government-backed restructuring are unable to return to the national authorities for more money within a 10-year period – as the likes of Malev, Cyprus Airways and, most recently, Estonian Air have discovered to their cost.
A healthier operating environment – through a mix of restructuring measures, unspectacular economic growth, and the respite of low oil prices – has given struggling European carriers breathing space to make themselves more attractive to investors. But CTAIRA analyst Chris Tarry notes this is also a reason that might dissuade some investors. "If I was a potential acquirer, this would be a negative factor and detract from the attractiveness and indeed I would wait until they were a distressed seller," he says.
The improved profitability has strengthened the hand of European carriers in terms of potential acquirers. But both Tarry and Morris point to higher priorities. "While they may have higher profitability, I think any of the major players would find better use of funds than bailing out weak business models, unless there was a particular target market they believed could be only captured in this way," says Morris. "With a much wider range of distribution systems available across Europe in multiple currencies, the hold national carriers have over 'home' traffic is much weaker than it was, even in the corporate sector."
He adds: "The two options for EU airlines for growth are either to expand themselves, or to buy in to an airline with some established local market, and they will continually be evaluating which of these makes the most sense. The best options in terms of local market (eg Swissair, Austrian) have already been amalgamated, and the 'problem children' such as Alitalia and SAS have made several airlines wonder if it is in fact better to expand themselves (eg Norwegian in Scandinavia or Ryanair in Italy) rather than take over the problems through M&A."
He notes that airlines from outside of Europe may be prepared to invest in these carriers for wider strategic reasons.
Morris sees most of the recent merger activity among major European carriers as having been "pretty focused". He says: "Increasingly, it has been about adding to their long-haul feed, but not at any price. Probably the biggest business area they would like to capture is a viable low cost affiliate a la Vueling, or equivalent."
Tarry also points to the crucial requirement for investors to be sure the target airline is both worth acquiring and can be turned round. "There is also the issue of how an acquisition acts to divert attention – ie, to show investors that management is doing something, and also a diversion for management," he says, adding: "Why would you buy into a business which is going to get worse?"
Additional reporting by Oliver Clark
Source: Cirium Dashboard