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International Airlines Group

BA-Iberia earmark Asia as key region for expansion

Rhys Jones and Fang Yan  Sep 08, 2010

The acquisition plan outlined by British Airways and Iberia aims to land in Asia, with several viable companies waiting at the end of the runway.

BA-Iberia have earmarked Asia as a key region for expansion once their own merger completes, though restrictions on foreign investment could narrow their range of acquisition targets.

There was a time not so long ago when that target list would have been thin. But the airline industry's growth across Asia has put forth a strong list of possible candidates.

Analysts believe India's Kingfisher Airlines, with whom BA signed a codesharing agreement earlier this week, would be BA's prime target along with Australia's Qantas.

They also view Chinese carriers Air China, China Southern and China Eastern as willing recipients of foreign investment.

BA's Chief Executive Willie Walsh said earlier this week that BA and Iberia -- whose merger will create the world's third-largest airline by revenue and be called International Airlines Group (IAG) -- had compiled a list of 12 potential targets.

"Asia is where it's at. BA is looking for growth and Asia is the biggest growth market right now," said London-based Davy Stockbrokers' analyst Stephen Furlong.

While Asia's fast-growing economies are an attractive place to invest right now, obstacles do exist, particularly when it comes to dealing with local governments.

India does not currently allow foreign airlines to buy stakes in local carriers, while in China a single overseas investor is unable to take more than a 25 percent stake in a Chinese carrier.

"There are major regulatory barriers in India and China, so doing significant deals there will be tough," said BGC Partners analyst Howard Wheeldon. "BA has basically invited interested airlines to sort out the regulatory side of things themselves if they want to talk about doing a deal."

Kingfisher, controlled by Indian tycoon Vijay Mallya, has asked the Indian government to allow foreign airlines to take stakes of up to 25 percent in Indian carriers but the powers that be have yet to act.

In China, Liu Shaoyong, the Chairman of China Eastern, has previously courted outside investment. Singapore Airlines and its majority owner Temasek Holdings agreed in Nov 2007 to take a 24 percent stake in China Eastern for $920 million. The deal was vetoed by minority shareholders, led by Air China, in January 2008.

After that deal collapsed, China Eastern merged with smaller cross-town rival Shanghai Air, making it a more attractive acquisition target for outsiders eager to grab a bigger share of the world's fastest-growing major aviation market.

"Among the big three (airlines) in China, China Eastern should be the one," said Li Lei, an analyst with China Securities.


Aviation fell into a steep nosedive after the financial market collapse in 2008 but airlines are growing more confident as economic recovery takes hold.

So far, most airline mergers have been within continents, but recently more airlines are forging intercontinental ties via partnerships and joint ventures.

Kelvin Lau, an aviation analyst at Daiwa Securities believes airlines in Thailand, such as Thai Airways, and Malaysia would be keener to sell stakes to BA than their Chinese neighbors.

Japan Airlines earlier this year agreed to a joint venture with American Airlines on Pacific routes to tap revenue growth in a larger route network.

BA's first aim would be at South American carriers and then some smaller European carriers, said BGC's Wheeldon.

Irish bookmaker Paddy Power has installed Chile's LAN Airlines as BA's most likely target. LAN is itself set to combine with Brazil's TAM airlines to create the biggest operator in South America.

British analysts have also identified Air Berlin, British Midland, Finnair and Aer Lingus as possible targets in Europe.

However, others say BA has more pressing issues to tackle before considering more tie-ups. One banker who is familiar with BA's thinking said its short-term priority was still to execute the merger with Iberia successfully and deliver on promised synergies.

BA-Iberia earmark Asia as key region for expansion
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