Mergers and acquisitions in the competitive airline world are often highly complicated transactions with enormous global market implications for the sector. For airlines, the benefits of such a transaction can be far-reaching. By providing an expansion of alternative routes, a merger or acquisition can give a carrier access to an already established market without having to build up a network from scratch. Whilst passengers may complain that airline mergers spell a hike in airfares due to the reduced market competition, it enables the airlines involved to reach much higher operating margins.
Joining forces with another carrier can also powerfully strengthen an airline’s dominance in the global industry as evidenced by some of the high-profile airline mergers in the US and Europe. But as the rate of growth amongst the Middle East’s airlines continues to outpace its western counterparts, has the time come to witness an upsurge in airline acquisitions and mergers in the region? According to Emma Giddings, an Abu Dhabi-based partner specialising in asset finance at international law firm Norton Rose, airlines are currently having to make long-term decisions regarding major capital investments (primarily fleet-related) on the basis of business plans which are subject to a large number of uncertainties. This challenging environment is compounded by the usual suspects, such as volatile fuel price, ever increasing passenger duties and new environmental taxes, all topped off by an increasingly uncertain outlook for the global economy. In theory, Giddings suggests, all of these factors point in the direction of consolidation for the sector. “Larger airlines are better positioned to negotiate favourable deals with aircraft manufacturers, financing banks, lessors and other suppliers,” she explains. “They are also better positioned to withstand the impact of volatility in their cost base.” An acquisition can also give an airline access to valuable assets which it may not have been able to obtain otherwise, for example slots at congested airports. “The outcome of many mergers may lead to financially stronger airlines better able to invest in their fleets and other infrastructure, thereby allowing them to compete more effectively,” says Giddings.
With so many benefits, it comes as no surprise that some of the Middle East’s stronger airlines have begun dabbling in the mergers and acquisitions game in an attempt to further consolidate their leadership position in the industry. Earlier this year, Etihad Airways looked set to make its second airline acquisition in an agreement to acquire a 40% share in Air Seychelles. This involves both Etihad and the Seychelles government pumping US$20 million into the state-owed carrier with the Abu Dhabi-based airline taking on a five-year management contract to boost Air Seychelles’ growth long-term. The development comes hot on the tails of Etihad’s announcement last year that it would be spending $94.9 million to increase its stake in Germany’s airberlin from 3% to more than 29%. Not to be left behind, the highly ambitious Qatar Airways acquired a 35% stake in one of Europe’s biggest all-cargo operators, Cargolux last year, and has been openly eyeballing Europe for further potential acquisitions.
Despite this recent spate of activity, full-on mergers along the lines of the infamous Air France-KLM union in 2004 appear to be much less likely to happen in the Middle East. “Many carriers are state owned, which would make consolidation difficult,” Giddings points out. “The most successful regional carriers may be more inclined to acquire airline businesses outside of the region as a means of pursuing their growth strategy rather than within the Middle East or otherwise pursue strategic alliances to expand their route network.” But why is the usually fearless Middle East’s airline industry so reserved when it comes to major mergers? “Consolidation tends to require a catalyst,” suggests Giddings. “This might for example be regulatory change facilitating airline mergers, or simply financial difficulties resulting from economic condition which effectively force consolidation.”
Aviation business
