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Airline Industry Consolidations

Virgin Atlantic, Qantas join the club, open to merger proposals

Steven Rothwell and Cornelius Rahn  Jun 08, 2010

Qantas Airways Ltd. and Virgin Atlantic Airways Ltd. said they’re open to merger proposals as efforts to cut costs and boost traffic push carriers to combine.

Qantas, Australia’s biggest airline, favors an inter- continental deal and would be “a great asset for anyone,” Chief Executive Officer Alan Joyce said in an interview. Virgin is exploring options as U.S. and European mergers squeeze its position in the North Atlantic market, CEO Steve Ridgway said.

“Consolidation isn’t easy to do and cross-border inter- continental mergers have not occurred yet, but I think they will and Qantas will be at the forefront of that,” Joyce said in Berlin, adding that the process “will take some time.”

Joyce didn’t say if he favored a combination with British Airways Plc, which held merger talks with Qantas in 2008 before agreeing to a deal with Iberia Lineas Aereas de Espana SA. Virgin, British Airways’s biggest competitor at London’s Heathrow airport, is reviewing its standalone stance after regulators said they’d approve an expanded alliance between British Airways and AMR Corp.’s American Airlines and after United Airlines agreed to combine with Continental Airlines Inc.

“We’re a small company still,” Ridgway said in an interview in Berlin where, like Joyce, he was attending the annual meeting of the International Air Transport Association. “We would be looking potentially just to grow ourselves, to become part of a bigger group. We just need to look at what happens in the industry over the next 18 months.”


Polish national carrier LOT said its forecasts of a return to profit this year are attracting interest from other carriers and private-equity firms, while SAS Group AB CEO Mats Jansson said a new wave of consolidation in Europe is likely to begin in earnest next year as prospects improve.

Sydney-based Qantas’s previous negotiations with British Airways were called off after the pair failed to agree on how to split ownership, the U.K. carrier has said. A combination would have created a carrier with $24 billion in sales and 500 planes. Talks were complex because the London-based company had more revenue and Qantas a higher market value. That’s still the case.

“I don’t think you can ever look back and have any regrets,” Joyce said. “I think you have to look forward, and we do look forward at what other opportunities do exist.”

Qantas is already partnered with British Airways in the Oneworld alliance, as are American Airlines and Spain’s Iberia, with which the U.K. company aims to complete a merger this year

British billionaire Richard Branson’s Virgin Atlantic isn’t in a global grouping and specializes in point-to-point travel to business destinations and high-end tourist resorts.

Singapore Stake

Singapore Airlines Ltd. owns a 49 percent stake in the Crawley, England-based company, though CEO Ridgway said it’s possible that the holding could be offered for sale as the Asian carrier modifies its strategy to reflect the expansion of the Indian and Chinese markets in the past 10 years.

“Singapore Airlines is a great shareholder, and I don’t think they’re in any hurry to do that,” he said. “At the end of the day it’s down to them, but it could be an opportunity.”

Malaysian Airline System Bhd., which like Virgin stands apart from the Oneworld, Star and SkyTeam alliances, also favors consolidation to boost earnings and cut costs, CEO Tengku Azmil Zahruddin said yesterday at the IATA event.

“As an industry we are far too fragmented and that is one of the reasons that we don’t make reasonable returns for shareholders,” the CEO said during a roundtable discussion.

‘Too Early’

SAS, the unprofitable owner of Scandinavian Airlines rescued by share sales that saw the Swedish, Danish and Norwegian governments increase their stakes, has said it’s unlikely to remain independent once earnings are restored. CEO Jansson said yesterday that the level of losses suffered by European carriers during the recession means it’s “too early” to contemplate consolidation this year.

“2011 is the time for new steps in the consolidation process,” Jansson said in an interview. “When companies feel they’ve done their homework, they’re in good shape and the market is stable, then boards will start to look at the acquisition list, but not now.”

Poland’s LOT, or Polskie Linie Lotnicze LOT SA, said right now is “a very good moment” to seek a buyer.

The company, which aims to post a profit in 2010 after losing money for the past two years, has sent “teasers” that attracted interest from “a few” airlines and investment funds and a transaction could in theory be agreed “very quickly,” CEO Sebastian Mikosz said in an interview.

At Qantas, Joyce said an investment-grade debt rating will be a major attraction for a merger partner. The Asia-Pacific market is also now “very healthy,” though demand on routes to Europe is weak and of most strategic concern, he said.

Air France’s purchase of KLM Royal Dutch Airlines in 2004 is the airline industry’s biggest deal to date. It would be surpassed by merger of United Airlines parent UAL Corp. and Continental in a $3 billion stock swap announced on May 3.

Virgin Atlantic, Qantas join the club, open to merger proposals
Photograph by Michael Meier


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