Cross-Border Aviation Deals Take Off
Amid restrictions to full mergers, airlines are seeking other ways to work together
ENLARGE
BERLIN—International airline bosses are increasingly buying up small stakes in other carriers, aiming to wring out cost savings.
The scope for full-blown, cross-border mergers is limited in the airline business, with laws often prohibiting them. So, a small but growing group of airlines have sought more limited deals. Carriers from Abu Dhabi-based Etihad Airways to Delta Air Lines Inc. have sought cost savings and higher profits through minority stakes in overseas carriers.
Qatar Airways in January entered the fray when it took a nearly 10% stake in British Airways parent, International Consolidated Airlines Group SA, or IAG. Last week, Akbar Al Baker, chief executive of the Doha-based carrier, said he may buy more.
Caps on foreign airline ownership are almost as old as the industry itself. Foreigners can own no more than 25% of a U.S. carrier, based on a 1938 law. In the European Union, the limit is 49%. Mergers are allowed for European airlines based inside the EU, as in the 2004 Dutch-French tie-up that created Air France-KLM .
But even inside Europe, governments have offered a host of reasons why aviation is different to other industries that have already globalized. The Irish government last month, for instance, rejected a proposal by IAG to take over Irish carrier Aer Lingus Group PLC, despite backing by both companies’ boards. Dublin said it was worried about the loss of jobs and whether service between Ireland and other destinations might suffer in a tie-up.
Amid restrictions and resistance to full-blown mergers, airlines have sought other ways to work together. Code-sharing, in which airlines essentially sell seats on the same flight and share costs, became popular in the 1990s. Carriers also set up alliances, cooperating on back-office offerings such as frequent-flier programs.
Those efforts boosted sales, but they have disappointed in yielding significant cost savings. The industry as a whole continues to deliver mostly poor shareholder returns. The International Air Transport Association expects airlines to make a $25 billion profit this year, an industry record. But that is only a 3.2% return on sales.
The financial gains from consolidation are clear. North American carriers have become the most profitable after a wave of domestic mergers. In Europe, IAG has been the most aggressive in squeezing savings from its own combination in 2011 between British Airways and Spain’s Iberia, and then with its purchase of budget airline Vueling two years later.
Minority investments have been tried before. British Airways once held a stake in US Air, but exited when it sought closer ties with American Airlines in the 1990s. Around the same time, Swissair embarked on a strategy of buying up stakes in other airlines, largely in Europe, but overstretched, leading to a 2001 bankruptcy.
This time, airline executives are trying to dig deeper to wring out cost savings where previous efforts failed.
Qatar Airways and IAG, already partners in the oneworld alliance and in the freight market, are assessing what more can be done with Qatar’s new stake in IAG. Qatar Airways wants to “see where we could add value to them, and where they could add value to us,” Mr. Al Baker said at a travel-industry show in Berlin last week.
His IAG counterpart, Willie Walsh , a longtime champion of allowing airline mergers, has said the two could cooperate on buying and maintaining aircraft.
Virgin Atlantic Airways Ltd. on Tuesday said it ended a three-year period of losses in 2014, aided by its cooperation with Delta. The American carrier took a 49% stake in the Crawley, England-based carrier in mid-2013.
The partnership has spurred sales and lowered costs, Virgin Atlantic Chief Executive Craig Kreeger said. Delta President Ed Bastian in January said the partnership with Virgin Atlantic should yield $200 million in profit.
Etihad Airways has been among the most active buyer of stakes in other airlines. Chief Executive James Hogan has said that jets the Mideast carrier is buying in bulk could be allocated to its partners. Etihad also says it can wring out cost savings with its affiliated airlines by sharing training facilities, seeking group deals buying things like software, and joining forces on maintenance. Air Berlin , in which Etihad owns almost a 30% stake, is now using some of the same seats as the Mideast carrier, saving costs.
http://www.wsj.com/articles/cross-border-aviation-deals-take-off-1426079767
Amid restrictions to full mergers, airlines are seeking other ways to work together
BERLIN—International airline bosses are increasingly buying up small stakes in other carriers, aiming to wring out cost savings.
The scope for full-blown, cross-border mergers is limited in the airline business, with laws often prohibiting them. So, a small but growing group of airlines have sought more limited deals. Carriers from Abu Dhabi-based Etihad Airways to Delta Air Lines Inc. have sought cost savings and higher profits through minority stakes in overseas carriers.
Qatar Airways in January entered the fray when it took a nearly 10% stake in British Airways parent, International Consolidated Airlines Group SA, or IAG. Last week, Akbar Al Baker, chief executive of the Doha-based carrier, said he may buy more.
Caps on foreign airline ownership are almost as old as the industry itself. Foreigners can own no more than 25% of a U.S. carrier, based on a 1938 law. In the European Union, the limit is 49%. Mergers are allowed for European airlines based inside the EU, as in the 2004 Dutch-French tie-up that created Air France-KLM .
But even inside Europe, governments have offered a host of reasons why aviation is different to other industries that have already globalized. The Irish government last month, for instance, rejected a proposal by IAG to take over Irish carrier Aer Lingus Group PLC, despite backing by both companies’ boards. Dublin said it was worried about the loss of jobs and whether service between Ireland and other destinations might suffer in a tie-up.
Amid restrictions and resistance to full-blown mergers, airlines have sought other ways to work together. Code-sharing, in which airlines essentially sell seats on the same flight and share costs, became popular in the 1990s. Carriers also set up alliances, cooperating on back-office offerings such as frequent-flier programs.
Those efforts boosted sales, but they have disappointed in yielding significant cost savings. The industry as a whole continues to deliver mostly poor shareholder returns. The International Air Transport Association expects airlines to make a $25 billion profit this year, an industry record. But that is only a 3.2% return on sales.
The financial gains from consolidation are clear. North American carriers have become the most profitable after a wave of domestic mergers. In Europe, IAG has been the most aggressive in squeezing savings from its own combination in 2011 between British Airways and Spain’s Iberia, and then with its purchase of budget airline Vueling two years later.
Minority investments have been tried before. British Airways once held a stake in US Air, but exited when it sought closer ties with American Airlines in the 1990s. Around the same time, Swissair embarked on a strategy of buying up stakes in other airlines, largely in Europe, but overstretched, leading to a 2001 bankruptcy.
This time, airline executives are trying to dig deeper to wring out cost savings where previous efforts failed.
Qatar Airways and IAG, already partners in the oneworld alliance and in the freight market, are assessing what more can be done with Qatar’s new stake in IAG. Qatar Airways wants to “see where we could add value to them, and where they could add value to us,” Mr. Al Baker said at a travel-industry show in Berlin last week.
His IAG counterpart, Willie Walsh , a longtime champion of allowing airline mergers, has said the two could cooperate on buying and maintaining aircraft.
Virgin Atlantic Airways Ltd. on Tuesday said it ended a three-year period of losses in 2014, aided by its cooperation with Delta. The American carrier took a 49% stake in the Crawley, England-based carrier in mid-2013.
The partnership has spurred sales and lowered costs, Virgin Atlantic Chief Executive Craig Kreeger said. Delta President Ed Bastian in January said the partnership with Virgin Atlantic should yield $200 million in profit.
Etihad Airways has been among the most active buyer of stakes in other airlines. Chief Executive James Hogan has said that jets the Mideast carrier is buying in bulk could be allocated to its partners. Etihad also says it can wring out cost savings with its affiliated airlines by sharing training facilities, seeking group deals buying things like software, and joining forces on maintenance. Air Berlin , in which Etihad owns almost a 30% stake, is now using some of the same seats as the Mideast carrier, saving costs.
http://www.wsj.com/articles/cross-border-aviation-deals-take-off-1426079767