The financial results for many airlines have peaked and attention has now turned to ‘what’s next?’
Consolidation is not only the result of merger and acquisition activity but also business failure.
Such consolidation has been evident over the last 12 months and it is reasonable to expect that it will continue into 2018 and beyond as the operating conditions become more challenging.
Given the skewed nature of the results, it is what happens at a company level that is important
The price of fuel is now back to levels last seen in 2014 and appears to be rising along with other costs, while yields continue to fall.
It is also important to keep a sense of perspective. Industry profit at record levels is now history and the reality is that this outcome was the result of a relatively small number of airlines doing exceptionally well.
Furthermore, given the skewed nature of the results, it is what happens at a company level that is important. Investors and lenders invest in a company and not the industry.
We have two lists of airlines. The first one has some 40 airlines on and contains those where there will be “corporate action” and investment activity, including merger and acquisition.
Acquisition is often a response to a mature or maturing market and the opening up of new opportunities
The second one is an “at risk” list, which identifies financially weak airlines that have limited or no strategic value to an acquirer.
Acquisition is often a response to a mature or maturing market and the opening up of new opportunities, particularly related to revenue but including cost-related benefits too.
A “horizontal” merger, which is what technically occurs when two airlines get together, should result in “more for less” and the eradication of duplicated activities and offices—something that has not been apparent in the case of cross-border consolidation in Europe.
Merging with or acquiring another business is generally about size. For the acquirer, drivers generally relate to market access and offering a wider network. But it can also be about acquiring aircraft.
Given the lead times between orders and deliveries, there are a number of cases where this could provide part of the rationale.
For the “acquiree”, it provides a route to crystallize a value higher than might be reached by trading alone. It may even be the only option for all or part of the business to continue to operate.
The outstanding issues would appear to be timing and valuation, which almost by definition are interrelated. A common feature is that the seller will inevitably have a higher view of their business worth than the buyer. The price has to be right.
Airlines would do well to remember that if something looks too good to be true, it generally is
There are many examples in history, across all industries, that show that combining two weak businesses will never be a recipe for success.
Given that we are now past the point where the financial results for many airlines have peaked, attention will inevitably turn to ‘what’s next?’.
With an even greater gap between the “haves” and “have nots”, and an operating environment that is becoming more challenging, consolidation resulting from both merger and acquisition and also through failure is inevitable.
As results deteriorate and the vendor’s views of value become more realistic, the only real question, in a number of cases, is when?
Airlines should be asking why, why now, how, and how much? And they would do well to remember that if something looks too good to be true, it generally is.
In such cases, no deal is better than a deal at any price.