Which Asian airlines might be interested to buy into Virgin America?

Photo courtesy Virgin America

Photo courtesy Virgin America

UP for sale, Virgin America has some suitors lining up. It has received takeover bids from JetBlue Airways Corp and Alaska Air Group Inc. In this era of the mega carriers (consider the mergers of United Airlines and Continental Airlines, Delta Air Lines and Northwest Airlines, and American Airlines and USAir), a tie-up with another carrier strengthen Virgin’s competitive ability. And while it is almost certain that the merger would be with another American carrier, with analysts placing bets on JetBlue as the best fit, apparently some unidentified Asian carriers have also expressed interest. Still, be that as a remote possibility, one cannot help but be curious and speculate who the likely candidates might be.

Two big names come to mind immediately because of their successes, networks and financial capability, namely Cathay Pacific Airways and Singapore Airlines. Both airlines are keen on expanding their US market. Cathay flies to Boston, Chicago, Los Angeles, New York and San Francisco while Singapore Airlines (SIA) operates to Houston, Los Angeles, New York and San Francisco. Both airlines have codeshare access to several other destinations. Cathay’s codeshare partners include Alaska Airlines and American Airlines while SIA already codeshares with Virgin and with JetBlue.

So it looks like SIA more than Cathay would be favoured on relationships alone. Since foreign ownership rules governing US airlines require the bid to be submitted jointly with a US partner. It would be convenient for SIA to join hands with JetBlue. Of course, Cathay may partner Alaska Airways, but historically Cathay is not quite interested in equity participation. Although it has a 20.3% stake in Air China and 49% in Air China Cargo, that could be a matter of expedience to secure its market in the growing China mainland market.

SIA on the other hand, limited by a hinterland market, tried in its early years to grow through acquisitions. In 1999, it bought 49% of Virgin Atlantic and subsequently 25% of Air New Zealand. Although both buys subsequently proved to be lemons, resulting in heavy losses, the misstep might be less strategic than circumstantial. Unfortunately that has hurt SIA deeply more psychologically than financially as the airline became more cautious about such moves. In subsequent years it failed in its seemingly reluctant bid for a stake in China Eastern Airlines, and the SIA Group was plagued by the poor decisions of its budget subsidiary Tigerair in joint ventures in Indonesia and the Philippines. In Oct 2012 SIA bought a 10% stake in Virgin Australia, joining tow other foreign partners namely Air New Zealand and Etihad Airways. In much the same way that Cathay needed to secure its market in China partnering with Air China, SIA needed to secure its Australian market against the competition by Qantas. Six months after, SIA increased its stake to 19.9%.

But is SIA even interested in a stake in Virgin when its codeshare partnership with JetBlue already places it in an advantageous position to benefit from a JetBlue takeover of Virgin? Would a bid jointly with an Asian partner jeopardise JetBlue’s chances if the powers that be preferred an all-American merger a la the big three of United, Delta and American?

Besides Cathay and SIA, one should not ignore the voracious appetite of the China carriers in the national trend to acquire foreign assets. And why must it be premised on full-service carriers that are already serving destinations in the US? What about a budget carrier with dreams of new frontiers? Maverick AirAsia chief Tony Fernandes who models himself after Virgin guru Richard Branson and who had been where others were hesitant, even afraid, to go may yet surprise with an expression of interest even if it is no more than just that. He is one of the few airline chiefs who, like Ryanair’s Michael O’Leary and Qantas’ Alan Joyce, understood what an opportune good dose of publicity could do.

All this, of course, is speculative. Asian carriers are likely to be less concerned this time than when the mergers of the American big three took place. Together with Southwest Airlines, the big three control 80% of the American market. Virgin and its alleged interested parties JetBlue and Alaska are all largely domestic carriers. Even if Southwest throws in a bid (but for its size that may not pass the antitrust law as easily), it is still the same scenario. SIA’s connections with JetBlue and Virgin will continue to stand it in good stead, but if it’s Alaska that carries the day, then it is Cathay that stands to benefit from the new, extended connection. Or does it really matter when there are already subset agreements across partnership lines that allow you to fly an airline of one alliance and connect on another in a rival group? That’s how complex today’s aviation has become.

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American Airlines/US Airways merger cleared hurdles: Will fares increase?

Courtesy Bloomberg

Courtesy Bloomberg

American Airlines expects to formalize its merger with US Airways by 9 December now that it has cleared the legal anti-competition hurdles by giving up slots at several airports including Reagan National Airport in Washington DC and LaGuardia Airport in New York City. Low-cost carriers like JetBlue and Southwest will vie for these slots.

The AA/US Airways merger is the third and last of the mega mergers after United Airlines/Continental and Delta/Northwest, making it the world’s biggest airline.

Size matters. The crux of the case seemed to have hinged on the survival of AA that would otherwise go under, and this in itself might be worse for consumers. AA declared bankruptcy in November 2011. The task then was to ameliorate consumers’ post-merger concerns about the ability of not only AA/US Airways but also other strengthened collaborative entities to muscle in on higher airfares since logically, where once there were six big competing carriers and now only three, the competition has been reduced by half. The corollary is the reduction of choices for consumers through consolidation which can by the first economic principle of supply and demand mean the propensity for prices to rise rather than fall.

With more slots allotted to low-cost carriers, it would suggest renewed faith in the battle between David and Goliath. Not to be disparaged, the threat by these carriers to legacy airlines have brought about new angst among the latter, many of whom by their very size are saddled with inflated costs, low productivity and union problems. The game gets amplified. At the same time, the giants may become more aggressive in their own turf. Yet history has also shown that whatever the number of airlines – so long as there is competition and in spite of that – the nature of the industry is such that all it needs is for one bold airline to initiate a price increase or additional surcharges, others naturally follow suit. Ordinarily, you would say with resignation, c’est la vie.

What some airlines say about themselves

United Airlines used to “fly the friendly skies”, which have proven to be far from being so for competing airlines as more of them spread their wings. The sky may not be the limit after all. In 2010, United merged with Continental Airlines which has promised its customers: “We really move our tail for you.” Well, it’d better be, as no airline can afford to sit idle on the tarmac. The partnership realized a dream of United to “fly united”, professed through the depiction of two mating geese in the air.

BA to fly to serve
British Airways (BA) prides itself as “the world’s favourite airline”. But is it really, even when no one bothers to challenge the claim? Little wonder that Iberia Airlines, which has merged with BA, claims it is “one of the world’s best airlines”. There is no jostling with the dominant partner. The UK carrier says it swears by four words which have “always been at the heart of everything we do”: To Fly. To Serve. Isn’t that what is expected, you may ask. Trust the Brits to go nano on the language they own and to assume that foreigners do not quite understand the finer or deeper meaning of words as simple as “fly” and ”serve”. BA explains: “It’s what we do. It’s who we are.” Apparently those four words were painted on the tailfins of early aircraft and the pilots still wear them in the lining of their jackets and on the peaks of their hats. Do they even need to be reminded of their jobs? BA has said that will never change. It is after all British tradition.

qantas2
It is distant cousin Qantas that puts it better: “You’re the reason we fly”. It goes on to say: “While you might fly for many different reasons, we fly for one. You’re the reason we fly.” The attention shifts from the flyer of the airplane to the rider in the plane, and from the server to the person who is being served. Qantas clearly demonstrates a better understanding of marketing principles.

But Cathay Pacific Airways decided it might rephrase BA’s pride in reaching out to its customers when it rolled out a series of ads in 2011 under the banner: “People. They make an airline.” The campaign intended to showcase a team that would go the extra mile to assist someone, who, by implication, could be a customer. But when a scandal involving flying crew on board an aircraft began circulating on the internet, it had to curb its enthusiasm in extolling its staff.

Courtesy Singapore Airlines

Courtesy Singapore Airlines


Does the crew make it a great way to fly? Yes, very much so. Yet no one makes a better case of the ambiguity than Singapore Airlines (SIA) whose tagline – “Singapore Girl, You’re a great way to fly” – has become a self-fulfilling prophecy of sorts. The sarong-clad stewardess has become synonymous with the airline and everything that it represents; its name might well be Singapore Girl. Feminist activists have derided it as being sexist, but it has done the airline wonders. However, the Singapore flag carrier’s latest ad campaign, which draws on the theme of “the lengths we go to” to demonstrate its commitment to the customer, pales by comparison to the early poetic catch phrases such as “You’re as young as you feel” and “It’s the journey, not the destination”. While SIA insists that the Singapore Girl remains the protagonist in its latest ads, sometimes you wonder if you need to go to that length to drive home the point. When the Singapore Girl smiles, enough is said.

Lufthansa tries to go one-up. It says, “There’s no better way to fly.” But don’t we want to know why, if not how? But listen to American Airlines: “We know why you fly. We’re American Airlines.” That sounds a bit too arrogant, doesn’t it? In the same vein, the Northwest Airlines tagline: “Northwest Airlines. Some people just know how to fly.” Maybe it is an American thing; modesty has no place on the world stage. Yet Delta Air Lines simply promises: “Delta gets you there.” We certainly hope so, as says Air New Zealand: “Being there is everything.” Southwest Airlines wants to be known as “a symbol of freedom”, whatever that means – another American thing?

By comparison, European airlines are more down to earth. Austrian Airlines is “the most friendly (sic) airline” and Virgin Atlantic “no ordinary airline.” Or, they are simply factual. Alitalia is “the wings of Italy” the way that EVA Air in Asia is “the wings of Taiwan” but not quite what Cathay Pacific claims to be “the heart of Asia.” Cut the French some slack about “making the sky the best place on Earth.” They have the airs. But when Swiss becomes “the most refreshing airline in the world”, it suggests a toothpaste-like struggle to impress anew. Sadly, speaking the truth may be detrimental to one’s fate, as when British Caledonian Airlines confessed before it was bought by BA: “We never forget you have a choice.”

Many of the airlines pay big bucks to have those words coined and put into their mouths. Yet does it matter what airlines say or how they say it when the test of the pudding is in the eating? Think it this way – it dresses the pudding to make it look more palatable. In advertising, it is referred to as “recall”. What happens after is reinforcement or disappointment. That is why SIA has for a long time become a great way to fly and BA, whether proven or not, the world’s favourite airline, but Austrian Airlines is forgettable as one of the world’s best airlines, an epithet that is universally applicable to one and many in fluid time. You do wonder though whether for some airlines, considering the cost of their words, what has been said may best be left unsaid.

It’s the age of mega carriers: Will Air France-KLM raise its stake in ailing Alitalia?

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons


Alitalia is fighting bankruptcy as its shareholders initiate efforts to raise funds in light of its main fuel supplier threatening to cut off supply. The Italian postal service will contribute 75m euros (US$101.6m) to the rescue package of 500m euros.

Meantime, Air France-KLM – already the biggest shareholder of the beleaguered airline – waits to see if it should increase, possibly double, its stake of 25 per cent. Air France-KLM chief executive Alexandre de Juniac is in favour of the takeover to gain greater access to the Italian market, but the Franco-Dutch board is cautious about the debt incurred by Alitalia. The Italian flag carrier last made a profit in 2002 and has so far lost 294m euros in the first half of this year. Air France once made a bid in 2008 to take over the airline but was thwarted by a consortium led by then Prime Minister Silvio Berlusconi. The timing today may not be right as the new Air France-KLM is itself struggling with restructuring and cost issues.

The age of the mega carriers has long arrived and it appears the trend, predicted in as early as the ‘80s, looks set to continue. In Europe, besides the Air France-KLM merger, there is the International Airline Group comprising British Airways and Iberia. Lufthansa wholly owns Austrian Airlines and Swiss, and owns 45 per cent of Brussels Airlines, 14.44 per cent of Luxair, and varying interests in a string of other airlines. The competitive field – not only in Europe but also in the United States and to a lesser extent elsewhere – has narrowed to a few mega groups of airlines with fiscal partner interests beyond mere marketing alliances.

In the United States, United Airlines is merged with Continental Airlines under United Continental Holdings; Northwest Airlines is merged with Delta Air Lines; and American Airlines is merged with US Airways. Delta made news when it acquired a 49-per-cent stake in Virgin Atlantic, the stake bought from Singapore Airlines (SIA) which until then had maintained a passive interest in its holding. For Delta, more than for SIA, it would materially increase its presence across the Atlantic.

In South America, LAN Airlines of Chile absorbed TAM Airlines of Brazil to form LATAM.

Somehow the trend is less prominent in Asia and the extended region where flag competing flag carriers generally prefer marketing alliances such as the partnership between Qantas and Emirates, and that between Singapore Airlines (SIA) and Virgin Australia. But it is changing as the competition intensifies in a tight market and as blocs begin to form to make bigger bites, and as countries relax their rules on foreign ownership. SIA now owns 19.9 per cent of Virgin, which is also 19.9 per cent owned by Etihad Airways and 23 per cent owned by Air New Zealand (ANZ). ANZ has announced it will increase its stake to 25.9 per cent, and thus continues to be Virgin’s largest shareholder outside the Virgin Group.

Cash-rich Middle-East carrier Etihad seems to be particularly active on this front, picking up stakes in Air Berlin, Air Seychelles and Aer Lingus, and targeting to complete a 49-per-cent acquisition of Air Serbia in January next year.

Yet the interest seems more as a matter of pure investment or hedging against a shifting competitive landscape. There is no white knight appearing in the horizon to rescue ailing Kingfisher Airlines while many foreign carriers have expressed interest to enter the large and growing Indian market now that India has relaxed its policy on foreign ownership. Etihad is more interested in the less vulnerable Jet Airways. Malaysian budget operator AirAsia and SIA have initiated separate deals with local investors to start new airlines. There is really no valid reason to buy into debts unless the potential for recoup plus growth is visible, almost tangible. But the Indian market has been somewhat of a come-and-go melee, susceptible to changing regulations.

Yet what should make the Alitalia case different for Air France-KLM? It is probably one of market proximity, where the impact may be more immediately felt by the suitors. It goes beyond passive investment – a case in point as mentioned earlier is the SIA/Virgin deal compared with Delta/Virgin deal – to more strategic considerations of how the acquisition would advance the Air France-KLM cause vis-à-vis its competitors within the same region. It becomes an issue of survival in itself.

Interestingly, Etihad was asked if it would be interested to buy into Alitalia, and chief executive James Hogan sidestepped the issue, telling AFP: “At the moment I’m focussed on India, transactions in India. We look at many businesses but we are primarily focused on Jet Airways.” Yet it is rumoured that Hogan has been meeting up with Air France-KLM to discuss the matter, purportedly to persuade Air France-KLM to raise its stake or let someone take its place. Does it appear obvious enough who that “someone” may be? You make a guess.

Merger blocked: Do American and US Airways have a case?

Courtesy Associated Press

Courtesy Associated Press

The long awaited merger between American Airlines and US Airways has been blocked by the US Justice Department – after sanctions by a federal judge early in the year and by the European Union.

Head of the Justice Department Bill Baer said the merger would “eliminate competition between US Airways and put consumers at risk of higher prices and reduced service.” He added: “Both airlines have stated they can succeed on a standalone basis, and consumers deserve the benefit of that continuing competitive dynamic.”

In refuting Mr Baer’s concerns, US Airways CEO Doug Parker said the airlines would “fight them. We are confident that by combing American and US Airways we are enhancing competition, providing better service to our customers and improving the industry as a whole.”

The US$11-billion merger would have made the American and US Airways the largest airline alliance in the world.

The irony is that American initially snubbed the merger proposal by US Airways, and insisted it could emerge from bankruptcy without help from the latter. So, Mr Baer had been listening, but his concern is one of protecting the consumer. The timing is unfortunate for American and US Airways, coming after the other compatriot airlines have done their deals that saw Delta Air Lines acquiring Northwest Airlines in 2008, United Airlines merging with Continental Airlines in 2010, and Southwest Airlines acquiring AirTran Airways.

So too has Mr Baer learnt a lesson, it would appear. He said: “We learned what happened to competition in prior acquisitions.” While that may seem unfair to American and US Airways, allowing the merger would mean aggravating the problem, instead of reducing it. Two wrongs do not make a right.

US Airways – more than American – may feel targeted by the Justice Department. In 2001, its proposed alliance with United Airlines was shot down. It had to also abandon a proposal to merge with Delta under circumstances. But the Justice Department approved its acquisition of America West Airlines in 2005, which but only demonstrates the Department’s concern about how consolidation of large entities can be bad for the consumer even though it had sanctioned the mergers between the other big names.

Mr Baer’s concerns are real. Merged airlines will find it easier to push up prices in the context of absent or limited alternatives for the consumer. Reeling from years of losses, they have shown that by cutting capacity in the present far-from-being-exciting times, coupled with higher fares, they have managed to turn their performances round. The greater fear is not confined to the merger of American and US Airways, but that with only three big blocs left in the market, it would be easier for all of them to collude, in an environment that prefers “tacit coordination over full-throated competition.”

In response, American/US Airways may make out a case for survivorship; Mr Parker said the merger was necessary to build a global network. It is a valid argument since this has become a global trend across the industry, and American carriers cannot stay out of the loop to effectively compete with foreign carriers in the international arena. However, for now and within the US at least, Mr Baer is convinced that both American and US Airways would thrive financially and that neither needs the merger in order to succeed.

In Australia, when Virgin Australia applied to acquire a 60-per-cent stake in Tigerair Australia, the Australian Competition and Consumer Commission granted its approval on the ground that objecting might result in the exit of Tigerair and that would mean reduced competition and therefore not a desirable outcome for the consumer.

A case of the lesser evil?

While American and US Airways hold out the hope that the Justice Department will eventually allow the merger, it is unlikely that any final decision will come before the year is out. That will give the Department more time to determine if indeed there is an even stronger basis to its fear, and for the two airlines to offer reassurances and convince it otherwise. This is an industry that is constantly in a state of flux – more so in present times than ever = and things can change.

Boeing blues

Three months after the grounding of the B787-Dreamliner and while Boeing struggles to resolve the issue to get the plane back up in the sky, a new problem has landed on its lap – this time, concerning the B737 jets. The US Federal Aviation Administration has issued an airworthiness directive for more than 1,000 B737 planes operating in its airspace (which also applies in Canada) to be inspected for faulty tail pins that may have prematurely corroded, causing pilots to lose control of the plane.

The FAA said: “We are issuing this AD to prevent premature failure of the attach pins, which could cause reduced structural integrity of the horizontal stabilizer to fuselage attachment, resulting in loss of control of the airplane.”

It is a precautionary move, but likely a costly one for the airlines that have a large number of the B737 jets in their fleet, such as WestJet Airlines of Canada. Since the B737 is a short to medium-range aircraft, it is likely that regional airlines including cargo operators are likely to be the most affected. But safety is not something that you can or want to downplay in the business of flying.

This could not have come at a worse time upon the heel of a Lion Air crash into the waters, short landing at Bali’s Ngurah Rai International Airport in Indonesia just this week. Fortunately all passengers survived. There was no connection between the incident and FAA’s directive – the way that the grounding of the B787-Dreamliner was consequent upon sparks aboard a Japan Airlines plane initially suspected to be caused by the lithium-ion battery pack – and investigators have yet to establish the cause. It might even be extraneous to Boeing. Lion Air, which is Indonesia’s second largest airline and one of the fastest growing in the region, is banned from operating within the US and European Union over safety concerns.

Photo: Reuters/Stringer Indonesia

Photo: Reuters/Stringer Indonesia

But what came across as frightfully familiar was how the fuselage of the Lion Air plane broke apart, recalling similar mishaps experienced by four other airlines that include Continental Airlines in 2008, American Airlines in 2009, Aires Airlines (Colombia) in 2010 and Caribbean Airlines in 2011. Mind you, the B737 has been around since the 1960s and is a favourite plane for regional flights. It is in fact the best selling jet in the history of aviation.

Boeing will have much to do to repair its image. The aircraft business is dominated by two players – Boeing itself and Airbus, and the competition is such that for the bigger jets, the decision to buy which make and model usually comes down to either one of them. Aircraft orders can span several years, and timing is important.

Then, of course, as things settle, there is the looming question of compensation for downtime if Boeing is found to be contributory to its customer airlines losing out on opportunities. At least one airline – Qatar Airways – affected by the grounding of the B787-Dreamliner has publicly announced it will seek compensation from Boeing. Qatar chairman Akbar Al Baker said: “Definitely we will demand compensation. We are not buying airplanes from them to put in a museum.”

KLM advances green effort

Courtesy Boeing

Courtesy Boeing

KLM last week becomes the first airline to operate a regular weekly transatlantic flight, using an eco-friendly fuel mix of 25 per cent Dutch airline cooking oil and 75 per cent jet fuel.

The cooking oil, which comes from restaurant wastes, is able to reduce carbon emissions by up to 80 per cent. This is noteworthy, considering that aviation is responsible for 2 per cent of global emissions, and that number continues to grow.  

Captain Rick Shouten, who piloted KLM’s maiden transAtlantic biofuel flight from Amsterdam’s Schiphol to New York’s JFK, told the New York Post: “For pilots, it’s totally transparent. It’s as if you’re flying a normal aircraft.”

Back in Jun 2011, KLM too was the first airline to operate the world’s first commercial biofuel flight when it carried 171 passengers from Amsterdam to Paris, also using cooking oil. It was a major step forward in the green pursuit. Since then, a number of airlines have powered either test flights or commercial flights using a mix of jet fuel and plant alternatives that include jatropha, algae, camelina, carinata, coconut and babassu.

The list of airlines championing the green effort include Virgin Atlantic (which flew the first biofuel test flight from London to Amsterdam), AeroMexico, Air Canada, Air China, Air France, Air New Zealand, Alaska Airlines, Continental Airlines, Etihad Airways, Finnair, Brazil’s GOL, Iberia, Interjet, Japan Airlines, Lufthansa, Canada’s Porter Airlines, TAM, Thomson Airways and United Airlines.

However, still in its infancy stage, biofuel is expensive, and may cost as much as three times the price of regular jet fuel. “A lot still has to happen before biofuel will be available on a large scale and for it to be economically competitive in relation to fossil-fuel kerosene,” said KLM. “We cannot achieve this alone. We absolutely need the commitment and support of all the relevant parties: business, government and society.”

For it to be sustainable there has to be cheaper refining methods and widespread use across the industry. Support from national agencies at this stage is imperative, if only because saving the environment is everybody’s business.