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.

Grim future for airlines: Is consolidation the answer?

ACCORDING to Qantas CEO Alan Joyce, the airline industry faces an overcrowding problem. At the recent International Air Transport Association (Iata) summit in Beijing, he said: “The number of airlines in the industry is too many. It’s too fragmented, and consolidation is a good thing.”

Mr Joyce is re-championing an old strategy that more than 20 years ago was predicted to inevitably see the number of competitors reduced to a few mega airlines. One suspects that Qantas, struggling with a money-losing international operation, is crying foul over the competition posed by better-geared airlines that also provide superior customer service such as Emirates and Singapore Airlines (SIA),

Not foreseen then was the impending flourish of budget carriers, which became more than just a temporary nuisance but a threat to the more established airlines like Qantas. Qantas would meet with more competition when Scoot, a new budget subsidiary of SIA, commences services between Singapore and Sydney.

The recent spate of new mergers, particularly of giants like British Airways/Iberia, Air France/KLM, Continental/United and Delta/Northwest, seems to suggest a return to a strategy that was a bitter pill for SIA to swallow when it bought stakes in Virgin Atlantic in 1999 and Air New Zealand in 2000. The Virgin stake was a not-so-glamorous-after-all marriage which SIA has for some time now indicated interest in dissolution if it could find a suitable buyer. The Air NZ marriage turned out to be a fiasco, and was subsequently dissolved at a loss. That perhaps explains a more cautionary approach that SIA seems to be adopting today, preferring a less binding collaborative relationship such as the commercial arrangement  inked with Virgin Australia.

Consolidation is expected to come with the merits of sharing costs and risks, and the hope of confining, reducing or eliminating competition. In the present climate, cost is likely to be the primary driver in this direction. The LATAM merger, made up of Chile’s LAN and Brazil’s TAM, is expected to save US$700 million in operating costs over four years.

Unity is strength, but a good marriage demands more than just an exchange of vows, particularly when it crosses culture and geography, when it is held together by unequal strengths, and when both parties uphold different management ideologies. Qantas itself went through that rough patch with British Airways, which outbid SIA for a 25-per-cent stake in the Australian flag carrier in 1993, then ending the partnership in 2004. In 2008, rumours resurfaced of a possible Qantas-BA merger that never did materialize.

Yet as circumstances change, with the global economy continuing to languish and fuel prices remaining volatile, joining forces and leveraging on each other’s advantages in whatever form may provide the stabilizer in stormy weather.