Merger Mania

Merger Mania

The merger merry-go-round in the USA is in full swing, prompted by high fuel prices and a slowing US economy. Many airline leaders see consolidation as the only hope of survival in the current climate, and the best way to tackle global competitive pressures. Delta Air Lines, having successfully fought off a hostile takeover bid latelast year from US Airways, which itself had completed its integration with America West in September, is now in advanced talks with Northwest Airlines, and is also said to be talking to United Airlines.

A successful outcome would make the combined airline the world's largest after American Airlines, with 130 million passengers a year. United appears to be hedging its bets by considering restarting talks for a tie-up with Continental Airlines, should the Delta-Northwest merger fail. United and Continental discussed a possible merger last year, but after DeltarejectedUS Airways' overtures, this relationship cooled, but has been reignited. In another twist, Continental has also been reported to be discussing a potential fusion with American Airlines. The financial arrangements may be relatively straightforward, but securing support from pilots and workers may be more problematic. In any case, full integration of such large and diverse entities is likely to take a number of years.

 © Serge Bailleul/

Less Frenetic

In Europe, moves towards consolidation have been much less frenetic. The most significant, and one that would give Air France-KLM a third major hub, is its non-binding bid for struggling Italian flagcarrier Alitalia. A hub at Rome, to add to Amsterdam and Paris Charles de Gaulle, would strengthen and largely complement the Air France-KLM market reach.

Air France-KLM is one of two suitors, the other beingItalian carrier Air One. The Alitalia privatisation has been the longest-running saga,but the Italian government may add yetanother twist before the final chapter is written. British Airways, having dropped its interest in bidding for Oneworld partner Iberia, continues to lookout for potential strategic targets, but, according to chief executive Willie Walsh, sees few opportunities at present.

However, BAis monitoring the situation at BMI, the second-largest holder of slots at London Heathrow. Minority holder SAS Group is selling its 20% stake, and Lufthansa, a 30% shareholder, and largest shareholder Sir Michael Bishopalso hold put-and-call options, which come into play at the end of this year. Virgin Atlantic, too, is keeping a close eye on BMI, theacquisition of which would boostits position at Heathrow.

With merger opportunities limited, both BAand Virgin Atlantic are planning a series of services from continental Europeto take advantage of the implementation of the EU-USA open skies agreement in March. BA'splans are the most advanced, the airline having announced it will be flying to New York from Paris or Brussels this summer. Flights will be operated by a new subsidiary, appropriately named OpenSkies, using Boeing 757s configured in three classes, but with an emphasis on the business traveller.

Virgin's initial enthusiasm has given way to a more pragmatic approach. Chairman Sir Richard Branson saysit will not consider entering the market before 2010 or 2011, preferring to wait until a second-stage open skies deal is ratified. Under the second-stage agreement, the EU would try toforce a loosening of US airline ownership restrictions.

Leisure Shake-up

In sharp contrast to the scheduled services market, the European leisure industry has undergone a significant shake-up. The June 2007 mergerof Thomas Cook and MyTravel, followed in September by a similar deal between TUI and First Choice, has created two huge tour operators with annual turnover of £20bn($40bn) and a fleet of about265 aircraft. As a direct result, the UK's MyTravel Airways and Thomas Cook Airlines began operatingas a single company on1 April 2008 under the Thomas Cook Airlines label, andThomsonfly and First Choice Airways have operated under a single AOC since 1 March. Both will continue trading under their individual titles for the summer,witha rebranding, probably under the TUIfly name, by the year-end.

Air Berlin has emerged as the third major player in the leisure market after acquiringLTU International Airways in March 2007. Its grip could be further strengthened if it receives the go-ahead to merge Germany's biggest holiday charter airline, Condor Flugdienst, into its operation. An agreement has been reached with Thomas Cook, which holds 75.1% of Condor, through which Thomas Cook will become the major stakeholder in Air Berlin. The acquisition is still subject to approval by the German Bundeskartellamt, the anti-monopolies authority, whosedecisiion is imminent, and is also subject to Lufthansa -which holds the remaining 24.9% ofCondor's shares -not asserting its contractual pre-emption rights. If approved, the Air Berlin/Thomas Cook deal will be completed by 10 February 2009. Thomas Cook wouldexercise its call options for the 24.9% and will assign the shares to Air Berlin.

Mixed Success

Despite the mixed success of US trailblazersEOS Airlines and MAXjet -the latter collapsed on 24 December 2007 -several airlines are jumping on thepremium bandwagon. UK-based Silverjet and French airline L'Avion joined the growing band in January 2007, the former operating Boeing 767-200ERs in a 100-seat configuration with inclined lie-flat seats, the latter Boeing 757-200s with 90 seats. These operations are still small, but they havepoached valuable business-class traffic from the major airlines, which are fighting back.

Lufthansa, which started a business-class-only operation between Düsseldorf and New York in 2000 and later added a similar route from Munich, albeit contracted out to PrivatAir, has begun its own service between Frankfurt and Newarkusing a Boeing 737-700converted into a Boeing Business Jet with 44 seats. The Munich-Newark PrivatAir 737 operation will become a full Lufthansa service, to be flown with the Airbus A330.

BAintends to enter the market in 2009, linking London City Airport with Newark. Itwill use an Airbus A319fitted out with just 32 seats. Virgin has put its plans on hold for the timebeing. Singapore Airlines has announced aplanto convert five of its Airbus A340-500s with 100 seats in a 1-2-1 configuration, to start the first trans-Pacific premium service from Singapore to New York and Los Angeles. New York will be phased in from May 2008, with Los Angeles following in September.

If there is concern abouta recession in the USA and, to a lesser extent, in Europe, such gloom did not extend tothe Middle East, where airlines placed orders worth more than $80 billion at list prices, headed by Emirates Airline and Qatar Airways. Emirates' firm orders for 93 aircraft included 11 more A380s, bringing its total for the double-decker to 58. The A380 entered service with Singapore Airlines in October 2007 and will be seen on Emirates routes later this year.

This order spree defies predictions by the International Air Transport Association of a downturn in the market, although these aircraft will not be delivered for some years. IATA cites the spike in fuel prices, the impact of the credit crunch and the capacity expansion as the main reasons for a downward outlook for 2008. The challenges will get tougher, saysIATAchief executiveGiovanni Bisignani. "The peak of the business cycle is over and we are still $190 billionin debt. So we could be heading for a downturn, with little cash in the bank to cushion the fall."According to IATA, Latin America will be the only region to seean improvement in profitability, largely because ofindustry restructuring.

No major and secondary carriers fell by the wayside in the last year, but if the more pessimistic forecasts prove accurate, even some established carriers may not be safe this year.Butnew carriers are likely tofill the gaps almost as soon as they appear.

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