April 5 (Bloomberg) -- Even before sealing a merger of British Airways and Spain’s Iberia, Willie Walsh, the deal’s architect, said he had 12 more targets in his sights. Eighteen months later, he may have more opportunities than he can handle.
Faltering growth and surging fuel prices are pushing TAP of Portugal and Scandinavia’s SAS AB toward a sale, with Ireland’s Aer Lingus Group Plc and eastern European operators including Poland’s LOT and CSA of the Czech Republic also potentially seeking investment. At the same time, Walsh may need to take stakes in ailing American Airlines and Japan Airlines Co. in order to keep the two carriers in the Oneworld alliance.
Walsh, 50, faces the dilemma just as International Consolidated Airlines Group SA, the company formed from the BA-Iberia combination, struggles with cost cuts at its Spanish business and prepares to absorb BMI, a cast-off from Deutsche Lufthansa AG it’s buying for 173 million pounds ($275 million).
“In the near term the priorities would be BMI and TAP,” said Stephen Furlong, an analyst at Davy Stockbrokers in Dublin. “They’ll do what they have to do to ensure their leadership in the trans-Atlantic market is maintained, but if that could be achieved without putting money in they’d probably be happier.”
IAG traded 0.7 percent lower at 178.40 pence as of 9:43 a.m. in London, where it’s based. The stock has added 21 percent this year, valuing Europe’s third-biggest airline at 3.3 billion pounds and outperforming Air France-KLM Group, ranked No. 1 and down 1.7 percent, and Lufthansa, the No. 2, up 10 percent.
Having won approval for a venture between BA, Iberia and American Airlines in 2010, IAG should have been contemplating its opportunities for European expansion from a position of strength in the trans-Atlantic market, the largest in the world for lucrative premium-class business traffic.
Instead American’s parent, AMR Corp., is mired in bankruptcy proceedings, having filed for creditor protection in November. US Airways Group Inc., a member of the Lufthansa-led Star group of carriers, and Delta Air Lines Inc., aligned to Air France-KLM within the SkyTeam affiliation, are mulling bids, people with knowledge of their intentions have said.
IAG, then as British Airways, pursued the right to coordinate prices and schedules with Fort Worth, Texas-based AMR for 13 years. The airline devotes 31 percent of capacity to North American routes and said Feb. 29 that the venture’s revenue grew to more than $8 billion in 2012.
While Walsh said Feb. 29 that IAG is “not looking to invest in American” and saw no “cause for concern,” with AMR’s revamp plans “very credible,” it can’t stand by if a bid comes in, said John Strickland, an analyst at JLS Consulting in London.
“It will be a high priority to keep American Airlines,” Strickland said. “The joint venture was a long time coming and should yield many future advantages.”
At the same time, IAG will “look closely” at investing in Japan Airlines as the Asian carrier plan an initial public offering as early as September after exiting bankruptcy last year, Walsh said March 12 in Tokyo, adding that an investment “represents a great opportunity for us in the future.”
IAG and AMR together fought off a bid from Atlanta-based Delta to pry JAL away from Oneworld after it first filed for bankruptcy in January 2010, and an application has been lodged for a joint venture on routes between Japan and Europe.
Walsh has to juggle the needs of Oneworld against an increasing number of acquisition opportunities in Europe, where a second wave of consolidation is taking place.
IAG is in pole position to make acquisitions in Europe as returning Air France-KLM CEO Jean-Cyril Spinetta focuses on steering 2 billion euros ($2.6 billion) in cost cuts past French unions and Lufthansa’s Christoph Franz retreats from a string of takeovers that added ailing Austrian Airlines and BMI.
Lisbon-based TAP SGPS SA is likely to be the first asset available to Walsh, with Portugal targeting a sale before the end of the year, Secretary of State for Treasury and Finance Maria Luis Albuquerque told journalists in Lisbon on Feb. 28.
“We would certainly be interested in looking,” Walsh said on March 20 at a Oneworld event in Berlin. “The network it has into Brazil is interesting, certainly. It’s got some interesting network into Africa as well, so we will wait and see.”
TAP’s Brazilian routes might make it a must-buy should IAG’s Oneworld partner Lan Airlines SA of Chile choose to exit the alliance following its impending merger with Sao Paulo-based Tam SA, a member of the Star group, leaving IAG without an ally in the BRIC country, Latin America’s largest economy.
“Brazil isn’t quite a power house, but it’s an upcoming economy, so you could see how that would be quite an interesting proposition,” said Gert Zonneveld, an analyst at Panmure Gordon in London. “Iberia is strong in the Spanish-speaking part of Latin America, but not the Portuguese part.”
Among other European carriers, Aer Lingus -- where Irishman Walsh was once CEO -- helps provide vital feed at BA’s Heathrow hub via a code-share deal on its flights from Dublin, Cork and Belfast, where the U.K. airline has no routes of its own. The company has received expressions of interest from a “number of parties,” Ireland’s Transport Ministry said March 12.
Poland, Czech Republic
Turkish Airlines, building a hub in Istanbul, said Jan. 23 it was one of two bidders for a stake in Polskie Linie Lotnicze LOT SA, and talks may be completed within a month, CNBC-e television reported March 15, citing Chairman Hamdi Topcu.
The second bidder is publicly traded, according to Poland’s government, which had offers from four parties last year, BA and Air France among them, newspaper Rzeczpospolita said Oct. 16.
Czech national carrier Ceske Aerolinie AS is in talks with two potential investors, finance ministry spokesman Ondrej Jakob said Jan. 27, while the Swedish and Norwegian governments have parliamentary mandates to sell their stakes in Star member SAS.
London-based Morgan Stanley analyst Penny Butcher said today in a note that IAG will probably find itself “pressed” this year to devote capital to the “strengthening of alliance ties,” and that concern about this and losses at Iberia balance out optimism regarding the strength of trans-Atlantic demand. She resumed coverage of the stock with an “equal-weight” rating.
Still, ownership restrictions mean IAG couldn’t win full control of a carrier in either Japan or the U.S., with foreign holdings limited to 33.3 percent and 25 percent respectively, making investments generally less attractive than in Europe, where Walsh could take charge of any business acquired.
“Minority investments in airlines have rarely made for a successful strategy,” said Gerald Khoo, an analyst Espirito Santo Investment Bank in London. “It would be defensive, spending to keep something that they already have.”
Walsh has attempted an intercontinental deal before, striking an agreement to merge with Oneworld member Qantas Airways Ltd. of Australia before new CEO Alan Joyce walked away.
Rather than pursue more mergers, IAG may be wiser to focus on integrating BMI, which will deliver 42 pairs of takeoff and landing slots at Heathrow, taking IAG’s holding to 51 percent, and stemming losses at Madrid-based Iberia, Furlong reckons.
The Spanish business, based in a contracting economy, had an operating loss of 61 million euros last year, compared with a 592 million-euro operating profit at BA, with its lucrative routes between the financial centers of London and New York.
A new low-cost unit, Iberia Express, was introduced on March 25 in effort to stem losses on domestic and short-haul flights, provoking the ire of the pilots concerned about their job prospects and prompting a series of walkouts.
“Iberia is losing money and they have to sort that out, and BMI also has to be turned around,” Furlong said. “Mergers are the way the world is going, but to be a world leader you have to achieve the synergies that are driving them.”
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