Merger and Acquisition Trends in the Global Airline Industry
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Merger and Acquisition Trends in the Global Airline Industry
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A Shift in Focus from Market Share to Profitability
The global airline industry is currently characterized by slack passenger demand, soaring fuel prices, and a slowdown in the global economy (the industry is cyclical, and its performance is closely linked to the GDP growth). Instead of engaging in competition and turf wars, currently, companies in the industry are focusing on improving profitability, especially in markets where they already have a strong presence. Mergers, joint ventures, and other strategic alliances are slowly becoming the norm for airline industry participants who are focusing on cost cutting and excess capacity reduction in order to combat the rising fuel prices and recession.
Executive Summary
Following the slowdown in the global economy, primarily caused by the Eurozone crisis, strategic and financial investors have become cautious and risk-averse about portfolio investments. This has negatively impacted merger and acquisition (M&A) activity in terms of deal value. Deal values declined in 2011 to $ billion from $ billion in 2010, a sharp percent.
The average value of transactions (excluding transactions of values greater than $1.00 billion) has declined by percent from $ million in 2007 to $ million in 2012.
Soaring fuel prices, declining passenger demand, and the economic crisis have led to excess capacity for airline carriers.
Instead of engaging in competition and turf wars, companies in the industry are currently focusing on improving profitability, especially in markets where they already have strong presence.
Mergers, joint ventures, and other strategic alliances are slowly becoming the norm for airline industry participants, who are focusing on cost cutting and excess capacity reduction in order to combat rising fuel prices and recession.
Research Objective
This research service analyzes the M&A transactions (announced, closed, or effective) in the global airline industry from January 2007 to December 11, 2012. Deals are analyzed by segments and geographies. Cross-border deals are also analyzed. The outlook for M&A is also provided.
Geographic Scope
Global Study
Analysis Includes
• Across segments
• Across geographies
• Valuation multiples
• Stock price variations
• Percentage of stake acquired
• Type of buyers
Study Period
January 2007 to December 11, 2012
Transactions Analyzed
446 transactions
Who Will Benefit?
• Companies operating in the global airline industry
• Private equity
• Venture capital investors
• Fund managers
• Retail investors
• Sovereign wealth funds
• Hedge funds
• Insurance funds and other members in the investing community
Sources
• Frost & Sullivan in-house research expertise
• Established business and financial databases, such as Capital IQ
• Company annual reports
• Reports of associations such as IATA*
• Published news
• Press releases
Note: Financial data used for analysis are as of December 11, 2012
Sectors Covered in the Study
Airline Industry: Sectors Covered in the Study, Global, 2007–2012
Commercial Airlines
Establishments primarily engaged in operating airplanes for commercial use, such as Boeing.
Private or Business Aircraft Services
Establishments primarily engaged in providing aircrafts/charters to fly from place to place on customers' own time schedules for personal or business use.
Helicopter Transportation Services
Establishments primarily engaged in providing non-scheduled helicopter transportation services.
Rescue and Safety Aircraft Services
Establishments primarily engaged in providing aircraft for rescue or emergency purposes.
Key Terms Used in the Study
M&A: Merger and acquisition
EBIT: Earnings before interest and taxes
EBITDA: Earnings before interest, taxes, depreciation and amortization
EBITDAR: Earnings before interest, taxes, depreciation, amortization and rent
EV: Enterprise value
BV: Book Value
FFP: Frequent Flyer Program
Airline Industry—Need for Consolidation
The airline industry is currently characterized by slack passenger demand, soaring fuel prices, and a slowdown in the global economy. The industry is cyclical and its performance is closely linked to the gross domestic product (GDP). Given this scenario, M&A activity is expected to gain momentum in the airline industry. Industry participants historically have expanded capacities and network unprofitably as well as engaged in price wars in an effort to gain market share.
Instead of engaging in competition and turf wars, companies in the industry are currently focusing on improving their profitability, especially in markets where they already have strong presence. Mergers, joint ventures, and other strategic alliances are slowly becoming the norm for airline industry participants who are focusing on cost cutting and excess capacity reduction in order to combat rising fuel prices and recession.
The United States witnessed several key mergers in the past five years. The most significant impact of this consolidation wave is the increase in load factor. Historically, the load factor for carriers in the region ranged between X and X percent. After the consolidation, the average load factor was over X percent. The direct implication of this increase has been more passengers per flight.
Evolution of the Airline Industry after Deregulation
The airline industry in the United States is much ahead of other regions. Understanding the evolution of the industry after deregulation provides a base for analyzing the M&A climate.
Pre-Deregulation
• The airline industry in the United States was heavily monitored by the government before the deregulation. Government had control over the fares, routes, and entry of new market participants.
Late 1970s
• The Airline Deregulation Act of 1978 resulted in the shift from a regulatory oversight environment to a free market environment.
• Airlines were allowed to set fares and operate new routes; deregulation also paved the way for new market participants.
• The airlines that emerged out of deregulation are referred to as legacy carriers.
1980s and 1990s
• Though there were around a dozen airlines that emerged from deregulation, only a few survived through the 1980s and 1990s. This period also saw airlines operating new routes, not because there was a need for it, but because they were able to do so.
• Despite the intense competition, the carriers did not merge. They either went bankrupt or liquidated or emerged with new cost structures. Eastern Airlines and Pam Am were some notable causalities in this period.
• This period also saw the emergence of low-cost carriers such as Southwest Airlines entering the market. The business model of these carriers (bulk transfer of passengers from point to point rather than the hub-and-spoke model) resulted in cheaper fares and faster travel for passengers.
2000s
• Since 2000, the industry saw M&A activity picking up momentum. Instead of going bankrupt, carriers started to be acquired by stronger ones. The deal between American Airlines and TWA in 2001 was one of the first significant acquisitions in the region. This was followed by America West acquiring US Airways in 2005. The late 2000s saw major deals such as the Delta-Northwest deal, Continental Airlines-United Airlines deal, and Southwest Airlines-AirTran deal.
• The late 1990s and early 2000s also saw the emergence of airline alliances. This period saw carriers entering code-sharing agreements with other airlines.
Code-sharing Agreements and Airline Alliances
Code sharing is an aviation business agreement wherein more than two airlines share the same flight. In other words, code sharing is an inter-airline partnership in which one carrier issues tickets from another carrier as though the tickets were its own. The marketing carrier places its code on an operating carrier's flights and markets its services (codes are generally two-character airline identifiers in accordance with IATA). Code sharing has several advantages—it allows carriers to have greater access to cities without the need to offer additional flights, allows carriers to fly passengers in routes they do not operate in, and simplifies the booking process by allowing single booking across multiple planes. A majority of passengers, however, do not support code sharing. This is because they book a ticket through one carrier and have to travel through another.
Airline alliances were formed to enhance the cooperation among industry participants in the global aviation industry. The level of cooperation is largely dependent on the specific alliance, and these alliances typically are formed with member-carriers from different regions. Many airline alliances are an extension of code-sharing networks. In the civil aviation side, there are three main alliances; namely Star Alliance, oneworld, and SkyTeam. Alliances among cargo airlines include SkyTeam Cargo, WOW Alliance, and ANA/UPS Alliance.
The benefits Of airline alliances include the following:
• Expansion in the network through code sharing among member carriers
• Cost savings through sharing of maintenance facilities, sales offices, and operational staff
• Lower prices for passengers (as a result of lower operating costs), flexibility in terms of availability of different carriers and departure/arrival times, and access to a wide variety of lounges
Potential disadvantages of airline alliances for passengers are higher fares in routes where competition is removed.
Compared to mergers or acquisitions, it is much easier for airline carriers to collaborate with other carriers through code-sharing networks and airline alliances. The costs involved, time taken, and the processes (and rigor) to be followed to enter into an alliance are less than mergers. However, the returns that can be expected out of entering into an alliance are less than can be realized through a merger or acquisition. Airline alliances are also referred to as poor man's mergers.
Table Of Contents
Executive Summary 3
Research Objective and Scope 5
Merger and Acquisition Trends 11
Analysis by Type of Buyer 31
Analysis of Cross-border Deals 34
Analysis by Valuation Multiples 39
Analysis by Other Key Metrics 43
Top Deals, Transaction Advisors, and Companies Looking for Investments or Buyers 47
Conclusions 54
The Frost & Sullivan Story 61
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Airline Industry: Merger and Acquisition Trends in the Global Airline Industry
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