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Mergers and Alliances

Istanbul Technical University

Air Transportation Management, M.Sc. Program

Aviation Economics and Financial Analysis

Module 12

23 November 2013

Realizing the vision together

• A. Trends in M&A Activity

• B. Factors Affecting M&A Activity

• C. Overview: Mergers and Alliances

Outline

2 23 November 2013

A. Trends and M&A Activity


Global Airline Industry Performance (old slide 18)

4

Source: McKinsey & Company for IATA, 2011

• Airlines have the lowest returns in the aviation value chain, well below that of travel agents and CRSs

• Airline returns are well below their cost of capital

23 November 2013


• Key airline industry trends:

• Rapid expansion of alliances and increased incidences of mergers.

• A deepening in the scope and depth of airline cooperation • Airlines are seeking cooperation beyond traditional codeshare and

joint marketing agreements.

• Metal-neutral joint ventures are a new form of super alliances.

• Increased liberalization of international skies facilitates the growth of alliances.

• The growth of international airline alliances and domestic airline mergers raises strong competition concerns.

Trends in Global Mergers and Alliances (old slide 14)

5 23 November 2013


• During 2001-2012 there was a total of 677 airline M&A transactions with a total value of $98 billion.

• Top markets by transaction volume: United States ($30 billion), Australia ($11 billion), China ($9 billion), Japan ($5 billion), Brazil ($4 billion).

Trends in Global Mergers

6

Source: Bloomberg data, InterVISTAS analysis

23 November 2013

B. Factors Affecting M&A Activities


• Airline yields have been decreasing or remained stable in real terms

• Real average domestic fares and yields have decreased after industry deregulation

• increased competition from Low Cost Carriers in domestic markets further erodes real yields and net profits for Full Service Network Carriers

Factors Affecting M&A Activity

8

Source: Borenstein (2011), US DOT BTS P-12 data

U.S. Domestic Net Income Per Available Seat-Mile

23 November 2013

Realizing the vision together 9

Source: U.S. Department of Transportation

U.S. Airline Industry Passenger Yield (CPI Adjusted): 2004-2010

Factors Affecting M&A Activity

23 November 2013


• The industry is facing higher operating costs, in particular due to increases in fuel costs which currently account for 25-40% of airline operating costs.

• Main cost drivers:

• Fuel; Labour; Depreciation, amortization and rent; Maintenance, materials and repairs; Landing and terminal fees; Other

Operating costs keep surging…

10

Source: IATA

23 November 2013


Jet Fuel Historical Prices

11

Source: U.S. Energy Information Administration

23 November 2013


Jet Fuel Post Recessionary Prices

12

Source: U.S. Energy Information Administration

23 November 2013


• Airlines benefit from larger networks

• cost advantage due to economics of scale and scope

• higher demand due to better connectivity, greater range of destinations and increased service frequency

• High incidence of bankruptcies in the airline industry following deregulation

• continuing trend among major carrier to restructure under bankruptcy protection

• E.g. United Airlines bankruptcy was the longest and most expensive in aviation history

• lasted 1,150 days

• cost $400 million in consulting and legal fees

Bankruptcies

13 23 November 2013


Major Airline Bankruptcies

23 November 2013

C. Overview: Mergers and Alliances


Airline Industry Consolidation

British Airways British Midland

Ryanair buzz

Lufthansa Swiss

Austrian Brussels

British Midland

US Airways America West Delta

Northwest

Air France KLM

Gol Varig

Aloha SkyEurope

Sun Country

Arrow Air

Champion Air

Mesa Air Sterling

Zoom JetsGO

EOS

MaxJet

ATA

Oasis Hong Kong

SkyBus

Southwest AirTran

United Continental

Mergers

Failures

Caribbean Air Jamaica

Air Berlin LTU

Big Sky

Comair

EasyJet go

23 November 2013


• After deregulation in 1978:

• 162 bankruptcy filings as of 2005

• Most failing airlines were small new entrants

• But 24 airlines had more than $100 million in assets

Airline M&A in the United States (old slide 17)

17

• After 9/11:

• Bankruptcy filings by airlines including Sun Country, ATA, Vanguard, Atlas Air/Polar Air Cargo, US Airways (twice), United, Hawaiian, Aloha, Northwest, Delta, American, Midway, etc.

Source: U.S. GAO, Airline Mergers: Issues Raised by the Proposed Merger of American Airlines and US Airways, GAO-13-403T, June 19, 2013.

23 November 2013


• An alliance is an agreement between two or more airlines that enter into a form of cooperation

• global alliances (Star, SkyTeam and oneworld) • bilateral or multilateral alliances (marketing alliances, joint ventures,

codeshare, etc.)

• Alliances are subject to regulatory approval

• US regulators may grant anti-trust immunity to international alliances • EU regulators may grant anti-trust immunity to international alliances

• Both the US and EU will consider whether or not there is a signed Open Skies Agreement with the foreign carrier’s government

• May be passenger or cargo (the two can overlap)

What is an alliance? (old slide 20)

23 November 2013

Source: ICAO (2013) “Antitrust Immunity for Airline Alliances”


Why alliances?

• Foreign ownership rules • Many countries prohibit or limit ownership of domestic airlines.

International or cross-border mergers are rare. Instead, the benefits of a merger can be achieved through an alliance.

• Restrictions on cabotage rights

• Countries generally restrict foreign airlines from operating domestic service. There are exceptions (e.g. the European Union).

• Access to a larger global network

• Airlines can increase service frequency and number of destinations served by participating in an alliance. Increased connectivity may improve load factors.

19 23 November 2013


Why alliances?

• Marketing cooperation • Frequent Flyer Programs • Codeshare Agreements • Lounge Access • etc.

• Cost synergies

• Shared airport facilities • Joint scheduling • Reciprocal sales arrangements • Increased buyer power

• Decrease in competition

• Airline alliances have a potential to diminish or exclude competition. Pro- and anti-competitive effects will be discussed in Module 13.

20 23 November 2013


The Passenger Wants:

ESB CHO

Minimum Time

Lowest Fare

Predictable Quality

Maximum Frequent Flyer Credit

ESB CHO C Gateway Gateway

The Carrier Wants:

Increase global access for passengers

Seamless travel and brand awareness

Increase frequent flier loyalties

Lower costs and increase revenues

Passenger vs. Carrier Priority (old slide 16)

23 November 2013


JOINT VENTURE

COORDINATION (prices, schedules,

facilities, capacity, etc.)

FFP & LOUNGE ACCESS

Integration Level 0%

Types of alliances (old slide 23)

INTERLINING

100% In

tegr

atio

n Le

vel

100%

Alliances and Strategic Partnerships

CODESHARING

22 23 November 2013


Star Alliance

Global alliances: Star Alliance

23 23 November 2013


SkyTeam

Global alliances: SkyTeam

24 23 November 2013


oneworld

Global alliances: oneworld

25 23 November 2013


Trends in airline alliances • Many major airlines have joined a major alliance grouping (Star,

SkyTeam or oneworld) • Over 50 carriers are members of one of the three major alliances • These carriers represent two-thirds of industry’s ASKs • LCCs begin to join global alliances

• In 2012, airberlin joined oneworld

• There is a tendency towards seeking deeper cooperation by airlines

via bilateral and multilateral alliances • “metal neutral” joint ventures are a form of a super-alliance which is

very similar to a merger.

• Several major carrier that have deliberately avoided alliances seek increased cooperation on a bilateral basis (e.g. Emirates)

23 November 2013


Emirates’ and Etihad’s Strategic Partnerships

Sample of selected strategic partnerships of Etihad and Emirates Both Etihad Airways and Emirates have codeshare partnerships in place that penetrate all three airline alliances

27 23 November 2013


The emergence of Gulf/Middle East carriers has caused a paradigm shift in global traffic flows across major connecting hubs are depicted above.

Traffic Paradigm Shifts

28 23 November 2013


If you can’t beat them….

QANTAS Before Emirates Partnership: • 5 One-Stop Destinations in Europe (via QF

operations or codeshares) • No service to Middle East/North Africa

QANTAS After Emirates Partnership: • 32 One-Stop Destinations in Europe & 31 One-

Stop Destinations in Middle East/North Africa via DXB

• Revised service to SIN/HKG/KUL for better connectivity to Asia

29 23 November 2013


A++

Select Recent Mergers and Joint Ventures

30 23 November 2013


Metal-neutral joint ventures • Metal-neutral joint ventures

• High degree of integration • The most intensive form of an airline alliance • Revenue & profit sharing • Joint setting of prices and schedules • Similar to a merger but no ownership transfer

• Metal-neutral joint ventures in major aviation markets

• Transatlantic • Star A++ (Lufthansa Group, Air Canada, United/Continental) • SkyTeam Joint Venture (Air France / KLM, Delta and Alitalia) • Oneworld Joint Venture (American, British Airways / Iberia)

• Transpacific • Star Joint Venture (United / Continental, ANA) • Delta/Virgin Australia Joint Venture • American / JAL Joint Venture

23 November 2013


2013 Travel Forecast to/from North America (millions of passengers)

78.2 +50% 54.2

+98%

77.3 +61%

Source: FAA Aerospace Forecast Fiscal Years 2013-2033.

60.2

30.3

62.2

Passenger Traffic Forecast

32 23 November 2013


78.2 +50% 54.2

+98%

77.3 +61%

Source: FAA Aerospace Forecast Fiscal Years 2013-2033.

92.7 +54%

48.7 +61%

99.0 +59%

Passenger Traffic Forecast

2033 Travel Forecast to/from North America (millions of passengers)

33 23 November 2013


Source: U.S. DOT T-100

Ann

ual S

eats

(mill

ions

) Non-Aligned Alliance

81% 81% 81% 82%

83% 84% 78% 77%

75% 75%

19% 19% 19% 18%

17% 16% 22%

23% 25%

25%

81%

19%

80%

20% 83%

17% 84%

16%

88% 12%

North Atlantic Market Share

34 23 November 2013


North Atlantic Alliance Structure

Note: Virgin Atlantic included in Sky JV * Based on monthly flights Source: Diio Mi July 2013 Schedule Data

U.S. – Europe U.S. – U.K. U.S. – London LHR U.S. – Paris CDG U.S. – Amsterdam U.S. – Frankfurt

July 2013 Market Shares (Frequency)*

78.5%

94.5%

96.4%

90.3%

94.4%

81.8%

7.2%

2.0%

0.4%

5.5%

2.6%

6.1%

14.3%

3.5%

3.1%

4.2%

3.0%

12.1%

35 23 November 2013

Non-Aligned Joint Venture Other Alliance


What makes an alliance successful?

36

• Factors that affect success of an alliance: • Aligned expectations • Win-win financial provisions • Cultural compatibility (corporate and national) • Consistent quality and other customer relations • Network fit • Well-coordinated IT systems

• E.g. WestJet-Southwest failure • Smooth airport interfaces • Coordinated selling and distribution

23 November 2013

Source: AirLearn (2013)

Thank You! www.intervistas.com

Mergers and Alliances - Ituaviation.itu.edu.tr/img/aviation/datafiles/Lecture Notes/Aviation...

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