21 February 2019

Airline M&A is up in the air

The airline industry has hit some turbulence so far in 2019, what with the European carriers Flybmi and Germania collapsing this month, Flybe coming close to folding before several suitors jetted in with different proposals, Norwegian Air Shuttle launching a discounted emergency cash call, and, over in Asia Pacific, lenders taking over Jet Airways of India for a nominal 1 rupee (less than one US cent) as banks attempt to turn around the operator on the verge of collapse.

What is going on to cause such upheaval? Fierce competition is a given, considering low-cost carriers (LCCs) are still challenging so-called legacy airlines, which then puts pressure on prices, profit margins and financial wiggle-room. Add in fuel and carbon footprint costs, as well as concerns over Brexit and the US-China trade tensions, and the current woes in the aviation sector. Could this merely be the calm before the storm?

The reported struggles by the likes of Flybe, et al, come as International Air Transport Association (IATA) announced at the beginning of the month that global passenger traffic for 2018 shows demand was up 6.5 per cent in 2018, and while this represents a slowdown to 2017 annual growth of 8.0 per cent, it was an above-trend improvement. IATA also announced that the “financial markets continue to be uncertain about the prospects for airline earnings, following the fall in oil prices, with swings of airline share prices both up and down in recent months”.

Zephyr, the M&A database published by Bureau van Dijk, shows announced or completed mergers and acquisitions, including joint ventures and capital increases, targeting the global air transportation sector have been slowing down in recent years, with volume declining for the second consecutive year to 316 deals in 2018 and value slumping to USD 11,575 million, which not only reversed growth that had resulted in USD 20,688 million-worth of deals being announced in 2015 but was also the lowest value recorded since 2004 (USD 9,846 million).

In 2019 to date, a total of 27 deals have been announced that target the sector and together they are worth USD 1,280 million, according to Zephyr. The two largest so far feature Air France-KLM planning to buy a 31 per cent stake in Virgin Atlantic and Norwegian Air Shuttle - recognise the name? – unveiling a heavily discounted USD 352 million cash call to shore up its balance sheet. Next up, and the only other deal currently valued at over USD 100 million, is the completed purchase of a 5 per cent stake in China Southern Airlines by Qatar Airways.

It is not all doom and gloom. After all, Ryanair has announced its intention of moving to a group structure similar to that of International Airlines Group as well as being on the lookout for some small-scale opportunities, as and when they may happen. While some carriers may collapse or stall, there will always be another waiting in the wings to swoop in and claim highly-prized airport slots, assets or businesses in a bid to stay fully grounded within the highly-competitive market.

© Zephyr