The board of Aer Lingus has rejected two takeover bids from IAG and the rumour is that the owner of British Airways and Iberia is preparing a third attempt.
Aer Lingus has staged a remarkable recovery over the last few years. They were in dire trouble even before the Irish financial crisis. The successful turn-around of the airline in these circumstances is a major achievement. Unfortunately, the end-result is probably not quite strong enough to survive by itself much longer. There is the question of Ryanair’s shareholding which might be resolved by a Court hearing and, even if this is sorted out, the Irish state surely does not want any involvement in the airline. A new owner is needed and the airline also needs a strong airline partner. It has done very well to develop its routes to the US and keep its European network together but, by itself, it can only go so far.
IAG would give Aer Lingus access to the the group’s powerful joint agreement with American Airlines which would surely be a huge boost to their transatlantic flights. It would also give them two hubs (Heathrow and Madrid) to funnel traffic through to other destinations in Europe and around the world.
Of course, a link with Air France/KLM or with Lufthansa could achieve much the same – but Air France/KLM are struggling to stay in business themselves and Lufthansa certainly do not have any appetite for further acquisition. A link with a non-EU carrier such as Etiahd (who already own a small percentage) would not achieve very much.
The deal would also be good for IAG providing it with further ammunition for the Atlantic and more traffic into and out of its hubs. However, it is not the type of deal that is worth over-paying for – and IAG are very cautious with money at the best of times.
Other than the sticking point of Ryanair and its shareholding, there is an emotional hang-up which could wreck the deal. Selling Aer Lingus to a British company would be unthinkable, selling it to IAG will still be seen by some as almost as bad.
If IAG walk away, the future will be very difficult for a solitary Aer Lingus and it is hard to see any other credible bidder, who could actually add to the airline, coming along.
This is a deal that makes so much sense to all concerned. Yet I have a feeling the Irish will allow emotion to cloud the issue.
The announcement that Etihad had picked up a 24% share in India’s Jet Airways was generally seen as a coup for Etihad. Jet is probably the best of India’s airlines and the only one capable of being a credible international partner. The Indian government also agreed to an increase in the bilateral agreement which allows seats between India and Abu Dhabi to increase from 13,300 a year to 50,000 in the next three years.
India’s laws regarding foreign ownership of companies are hugely complicated. As part of the deal, and a way of ensuring their sway over Jet amounts to rather more than the stated 24%, Etihad have also purchased Jet’s Heathrow slots and leased them back to the airline. They have also taken a majority stake in the airline’s frequent flyer programme.
They did something rather similar with Air Berlin last year. When the German airline was running out of cash again, they generously bought a majority stake in their frequent flyer programme. Many people thought this was just a way of circumventing EU rules on overseas ownership and ignored Etihad’s comments that they were serious about building a worldwide loyalty programme based around their airline and its partners.
The Gulf airlines like to talk about the profit they make – or are close to making – but making a longterm profit in the airline industry is incredibly hard. On the other hand, the loyalty card business is booming and hugely profitable. Qantas was memorably described as a profitable loyalty scheme with an unprofitable airline attached and there are many other airlines where the same applies.
India is surely ripe for a massive growth in the general consumer loyalty business. AirBerlin’s loyalty scheme is already fairly strong and capable of much more. Add in a few more countries and some investment (a pittance compared with the cost of running an airline) and you could suddenly have a very powerful worldwide loyalty scheme.
Etihad have surely accepted that they will never beat their neighbours, Emirates, in the airline business but they might have the last laugh. Owning the world’s largest consumer loyalty programme is a much more attractive proposition than owning the world’s largest international airline.
Lufthansa has admitted to having general talks with Turkish Airlines about co-operation but the Turkish Prime Minister appears to have let the cat out of the bag by suggesting this could lead to the creation of a joint-company.
We could be wrong but this does not sound likely. It looks rather that the Turks are putting pressure on Germany to come up with some sort of deal.
It is one thing for shareholders in British Airways and Iberia to be persuaded to give up their individual holdings and take shares in a holding company instead but to expect shareholders in a tightly-regulated European company to swap their shares for a new company with extensive exposure in a country outside Europe, which does not have the highest reputation for shareholder disclosure, is surely a step too far.
However, there are many things that can be done without a full financial union. Lufthansa already has a joint shareholding with Turkish Airlines in a Turkish charter airline and Turkish Airlines is a big customer of Lufthansa Technik so the two companies are used to working together.
Turkish Airlines would gain much-needed prestige from any fuller co-operation with Lufthansa whereas Lufthansa would gain a partner that is a match for the Gulf airlines that it sees as such a threat to its longhaul market. Just looking at route maps, a deal could make sense.
The big danger in this is for Lufthansa. They might be a bit stodgy but they have a fine reputation for safety. Turkish Airlines have been spending a lot of money on polishing their image and their safety record has improved from the dismal situation some years ago but there are still too many stories of sloppy behaviour at all levels of the company which would not be tolerated in a true top class airline.
A number of co-operation agreements have been made between airlines recently and Lufthansa might feel itself under pressure to react. Maybe they do need a partner but we must hope Lufthansa does not allow itself to be pressurised into something it could well live to regret.
After the debacle of having to sell British Midland at a huge loss, you might have thought Lufthansa would have learned their lesson, but apparently not. According to the Financial Times, they are seriously interested in bidding for another airline basket-case, TAP.
Lufthansa have had a mixed – to be very polite – record in their recent investments. Aside from British Midland, they have had serious trouble with Austrian Airlines, Lufthansa Italia had to be closed almost as soon as it had started and Brussels Airlines is also looking dicey. Only Swiss has been a success.
Lufthansa is now very much under new management and the new bosses have been openly critical of their predecessor’s strategy. So why do they seem to be falling for the same trap?
Maybe they have learned one lesson from past errors. There is some point in going after a country’s flag carrier but no sense at all in trying to establish a second-string airline. Most European countries struggle to support one full-service airline and none have successfully managed to have two which compete head-to-head across the network. Of course, Portugal is in a very weak state financially, and has been since long before the current round of crises. The real attraction for Lufthansa lies in its routes to Brazil and its strong connections to South America. Oh, and the other big plus is that IAG are also interested in buying TAP and Lufthansa do not want to let them get a monopoly.
They are getting their towels out ready to reserve their space across the South Atlantic. You have a feeling that yet more hard-earned German cash is about to be blown in their determination to be a European leader.
We keep making fun of poor old SkyTeam – the alliance that specialises in airlines in too bad a state to join one of the big two. In fairness, we should point out that both Star Alliance and OneWorld have made some pretty odd decisions in their desperate rush to gain worldwide domination.
Star Alliance is a mix of large, quality airlines together with some definitely second-rate carriers which have been brought in to maintain its position as the largest alliance and the one with the best global coverage. OneWorld has remained rather more exclusive with some of the world’s strongest airlines and has emphasised quality over sheer number of members.
OneWorld currently has three new members going through the process of joining. Malaysia Airlines might not be the best of the Asian carriers but they do merit their position in an alliance. The other two airlines, Air Berlin and Kingfisher are rather a cause for concern and we wonder if OneWorld will have misgivings about getting involved with either.
As we showed in a recent post, Air Berlin is in a serious mess. It is an unwieldy mixture of charter airline, low-cost airline and normal full-service airline. It cannot do all three profitably. The move to join OneWorld was seen as an effort to re-position the carrier as a normal full-service, network airline but the chance of them succeeding in this against the mighty Lufthansa look slim. Maybe they had hoped that joining OneWorld would be a precursor to investment from one of the other airlines in the group (IAG being the obvious choice) but in their current state, no one is going to want to go near them. The airline is scheduled to join OneWorld in 2012. At the moment, we would not be sure of this happening and, even if tt does, Air Berlin will look rather different.
Kingfisher is, if anything, in an even worse state. It has long been on our “airlines to avoid” list – only just above the dreadful Air India. The airline has a shocking reputation for not paying suppliers and seems to take threats of repossession of leased aircraft as a daily occurrence. Staff have had to get used to their salaries being paid around the 7th of the month rather than by the 1st but, this month, they still have not been paid. The owner of the airline spends money lavishly and paints a picture of great wealth. We wonder if his airline will be in good shape to take up its membership in 2012 as planned.
Alliances want to grow but they do need to choose their members with more care or they risk diluting the whole point of having an alliance.
Air India is in a mess and has been in a mess for years. With each government restructuring plan it simply gets worse. For the last few years it has been on our list of airlines to avoid and it is hard to see that changing.
The airline was supposed to be going through the process of joining Star Alliance but the alliance has clearly got fed up with the interminable delays as the airline has struggled – presumably unsuccessfully – to bring its operations into line with the other members of the alliance. A terse announcement from Star Alliance said that the application was now “on hold”. It now seems likely that Star will try to bring in Jet Airways which would be a good move since it is by far the best airline in India (though that is hardly a major compliment).
The next step for Air India was almost inevitable – a rumour that the airline is now looking to join SkyTeam. We have been saying for so long that this alliance is so desperate to grow it will take almost anyone but it is now becoming a joke. Even without Air India, it is quite obviously the alliance for airlines that cannot join either of the two proper alliances. Sadly for the couple of decent airlines in the alliance, Air India looks to be a near perfect fit.
Until now, One World has been the most exclusive of the three alliances. Its core airlines, BA, Qantas, American Airlines and Cathay Pacific are all leaders in their respective markets. Star Alliance also has a few quality airlines within its alliance but has signed up some far less attractive carriers in a rush to achieve its global network. SkyTeam is the alliance of remaining airlines, many of which have a poor reputation for various reasons, and has very little to recommend it.
The announcement that Malaysia Airlines will join One World (in around eighteen months when all the necessary computer systems have been realigned) changes this a little. MAS is certainly a useful tactical partner for Qantas as it seeks to grow within Asia but it brings a rather questionable reputation to the alliance. Many will remember the scandal of the airline allegedly flying in aircraft to Heathrow with virtually no spare fuel in an effort to cut costs. Hopefully that has long since changed but we wonder if the mentality of the airline has changed so much. Cathay and Singapore Airlines lead the local market in product development and Cathay has a far better reputation for safety and sophisticated management than any of them. At various times, MAS has been caught up in local political and corruption scandals and has only recently become financially stable. With its past problems, it is quite a triumph that the airline is still in business.
MAS has a long-established working arrangement with KLM so SkyTeam might have been a more natural home for the airline – and arguably a more suitable one in view of its position in the market. Qantas is certainly very pleased to have secured MAS for One World but we very much doubt that its entry will do anything to enhance the alliance overall.
In their rush to sign up the few remaining non-aligned airlines, SkyTeam have really been going for broke as this blog has kept pointing out. The original leading members (including Air France/KLM, Delta and Aeroflot) are no great shakes but the addition of Garuda, Aereolineas Argentinas and China Airlines has done nothing for the overall reputation of the alliance – let alone its combined safety record, which was dreadful to start with.
Now, the Lebanese airline, Middle East Airlines is set to join the alliance. Before the troubles in Lebanon, this airline was regarded not just as one of the best but also had very strong and innovative management who were much admired in the industry. Times have changed and MEA has done amazingly well to survive as a recognisable airline but it is still very much in business. Maybe not at the forefront of the business as it once was, but able to stand its own amongst the middle-rank.
Presumably, their long-standing commercial arrangement with Air France pushed them towards SkyTeam. That seems rather a shame – they deserve a place in one of the two better alliances.
All the alliances have been in a rush to sign up the few remaining non-aligned airlines. Star Alliance is the biggest, One World is slightly smaller but probably has a greater concentration of quality airlines and that has left SkyTeam to try to grab any airline that is left. They have become the alliance for airlines that would not get into Groucho Marx’s club.
However, even I was shocked by the news today that Garuda will join the alliance in 2012. This airline has had the doubtful reputation of having one of the worst safety records in the world and has only just been allowed to re-start flights to Europe. The combined safety record of Air France, Aeroflot, Korean Airlines, Tarom and new members China Airlines and now Garuda is not something the alliance would wish to boast about.
SkyTeam is the least developed of the alliances in terms of offering passengers “joined-up travel”. In its desire to catch up with the two big alliances it has become a resting place for some airlines with doubtful reputations for safety, customer comfort or both. Any regular traveller would want to be a member of the frequent flyer programme of both a Star Alliance carrier and a One World carrier so they can “earn and burn” throughout the network of these alliances. Unfortunately, I cannot see much point in having a SkyTeam card at all because so many of their airlines are second, or third best in their own markets.
On Tuesday I was listening to an Argentinian friend moaning about the slow progress Aerolineas Argentinas was making in improving its standards. Chile has LAN, Brazil has TAM (the two of them are about to merge) and whilst these two airlines have done a great deal to change the dreadful reputation of South American airlines, Aerolineas Argentinas just goes on in the same old way, making fairly minor improvements. Like a lot of Argentinians, my friend is actually very annoyed about this. It is a matter of national pride. Argentina has come up in the world since the dark days of hyper-inflation, and it should be able to match or better anything Chile or Brazil do in aviation, but they are stuck with a lumbering giant.
Somehow, it was not a surprise to read the next morning that Aerolineas Argentinas is about to join SkyTeam – it has become the alliance for airlines that can’ t join OneWorld or Star Allaince.
This is actually getting out of hand. I pointed out a while ago that they now have a near-monopoly on large airlines with bad safety records (only Turkish Airlines is missing – they are in Star Alliance). Now that Garuda is improving its finances and even considering an IPO, it is surely a shoe-in for SkyTeam.
The head of a Chinese airline with a chequered financial past was quoted as saying that he would consider joining an alliances but One World is for rich airlines, Star Alliance already has a lot of members so he will look to SkyTeam.
The alliance is at serious risk of making itself look distinctly third-rate and their new recruit does not do anything to improve the image.