Mergers and Alliances
Istanbul Technical University
Air Transportation Management, M.Sc. Program
Aviation Economics and Financial Analysis
Module 12
23 November 2013
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• A. Trends in M&A Activity
• B. Factors Affecting M&A Activity
• C. Overview: Mergers and Alliances
Outline
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A. Trends and M&A Activity
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Global Airline Industry Performance (old slide 18)
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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
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• 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)
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• 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
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Source: Bloomberg data, InterVISTAS analysis
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B. Factors Affecting M&A Activities
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• 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
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Source: Borenstein (2011), US DOT BTS P-12 data
U.S. Domestic Net Income Per Available Seat-Mile
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Source: U.S. Department of Transportation
U.S. Airline Industry Passenger Yield (CPI Adjusted): 2004-2010
Factors Affecting M&A Activity
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• 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…
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Source: IATA
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Jet Fuel Historical Prices
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Source: U.S. Energy Information Administration
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Jet Fuel Post Recessionary Prices
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Source: U.S. Energy Information Administration
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• 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
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Major Airline Bankruptcies
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C. Overview: Mergers and Alliances
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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
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• 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)
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• 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.
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• 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)
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Source: ICAO (2013) “Antitrust Immunity for Airline Alliances”
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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.
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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.
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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)
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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
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Star Alliance
Global alliances: Star Alliance
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SkyTeam
Global alliances: SkyTeam
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oneworld
Global alliances: oneworld
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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)
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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
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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
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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
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A++
Select Recent Mergers and Joint Ventures
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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
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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
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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)
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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
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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%
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Non-Aligned Joint Venture Other Alliance
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What makes an alliance successful?
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• 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
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Source: AirLearn (2013)
Thank You! www.intervistas.com
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