As the aviation industry struggles to navigate the most extreme economic turbulence in its history, it suddenly looks as if the wave of consolidation that has threatened to rip through some of the world's biggest airlines has finally hit.
In one corner sits Willie Walsh, the plucky Irishman in charge of British Airways, who is attempting to create the world's first "global airline". Walsh has already sought anti-trust immunity for a joint venture with American Airlines. In his sights now is Fernando Conte's Iberia and Alan Joyce's Qantas. The airline has confirmed it is discussing possible merger deals with both Qantas and Iberia. If successful it would create an aviation behemoth with three major hubs on two continents.
As Walsh tries to keep all his negotiations on track, breathing down his neck is Wolfgang Mayrhuber, chief executive of Lufthansa, who next month will have mobilised enough firepower to mount a serious attack on British Airways' lucrative transatlantic routes. Mayrhuber has already announced a potential "transformational" deal with Sir Michael Bishop's Bmi. In January the German group will take an 80% controlling stake in Bmi and with it a much sought-after pile of slots at Heathrow.
Not wanting to be left out of the party, Virgin Atlantic boss Sir Richard Branson has confirmed his airline will discuss a possible cooperation deal with Lufthansa to make his airline "a stronger competitor to British Airways than we are today". Branson also has his eye on Bmi. He believes Virgin's long-haul operations would sit well with Bmi's predominantly short-haul business.
"Talks will take place with Lufthansa, maybe are taking place, to see whether it makes sense for the two companies to work together," said Branson from the sidelines of a nuclear disarmament event in Paris.
Meanwhile, Ryanair has made a fresh bid to buy rival Irish carrier Aer Lingus, while Flybe is rumoured to be in talks to take over Bmi's regional and low-cost subsidiaries. Then there is the small matter of Italy's failed carrier Alitalia, which has attracted the attention of both Air France-KLM and Deutsche Lufthansa. With this amount of activity in the marketplace it is little surprise that analysts are referring to it as "merger mania".
"The magic formula is synergy," says aviation expert and author of The World's Major Airlines, David Wragg. "There is still a lot of capacity that can be taken out of the marketplace. We still have far more airlines than is economically plausible and in many respects they have not experienced the same amount of pressures from globalisation that other industries have experienced."
With the airline industry embroiled in its most transformational period since the creation of the commercial jet airline, analysts are now asking who will survive the shakeout and more importantly what will this mean for the consumer.
Consolidation has arrived as carriers try to seek shelter from sky-high fuel costs and falling passenger numbers. Latest traffic figures show that the number of passengers travelling through BAA's seven UK airports in November has fallen by a million, or 8.9%, on last year.
Worst hit has been European charter traffic, which has dropped 17%, while domestic traffic has fallen 12.7% and European 9.1%. On top of this the airlines have had to deal with high oil prices. Although oil is presently hovering around the $45 a barrel mark it was high in the summer months, the traditional time when airlines build their profits. Fuel accounts for between 30% and 50% of airlines' operational costs and in the past year the price of jet kerosene has more than doubled. British Airways' fuel bill has risen from 10% of its cost base in 2000 to around 40%. It estimates that its fuel bill will rise to £2.5bn by 2009, a 20% hike on the previous year.
"High oil prices are here to stay," says one aviation analyst. "The airline industry is having to deal with that, and consolidation is one way out of it. The other, of course, is to create as fuel-efficient a fleet as possible."
In Europe the market is contracting into three groups. By far the biggest is Air France-KLM, which has its eyes on Alitalia, the bankrupt Italian flag-carrier. It is followed by Lufthansa, which has bought Swiss Air, is in the process of trying to acquire Austrian Airlines, and once the Bmi deal has completed will have access to 11% of the takeoff and landing slots at Heathrow, which is second only to British Airways.
Lufthansa is expected to use its financial strength to upgrade Bmi's fleet of 54 aircraft and challenge BA on some of its most lucrative routes. A spokesman for the company said all options were being considered, but analysts speculate that Heathrow slots to UK regional airports such as Belfast and Durham Tees Valley may be sacrificed in favour of more lucrative transatlantic routes.
The third group centres around BA. If Walsh can pull off the merger with Qantas and Iberia his next step will be the US.
"It is only a matter of time before there is a transatlantic merger. If BA can do the Qantas and Iberia deals it will clearly establish itself as a credible and serious competitor in the market," said Gert Zonnefeld, an analyst at Panmure Gordon.
Others are more sceptical. "I can't see an international airline being created," says David Wragg. "There are all sorts of problems. Where would the head office be? Who will have safety oversight over the airline? And while it may be good news for the airlines and also for their shareholders it will be very bad news for the customer."
Amid all the brinkmanship, clandestine negotiations, rumour and counter-rumour, Virgin's vociferous opposition to British Airways being allowed to get any bigger at Heathrow remains a constant.
"You can see the world consolidating down to a certain number of carriers and it would be very disappointing if each carrier had their own little turf which they control," said Virgin Atlantic chief operating officer Lyell Strambi. "It would be a very boring world, a very controlled world. I don't think it is remotely desirable. I think it would be very bad for UK aviation.
"There's a golden opportunity here to create two very big carriers. Heathrow's a big enough market to have two home-based carriers and it would be a bit disappointing if that was sacrificed to suit a monopoly."
Analysts say next year will bring even more consolidation as more airlines continue to collapse amid the economic storm. On Friday Colm Barrington, chief executive of Aer Lingus, said he was looking for a friendly investor to take a majority stake in the airline and stave off a £670m bid from Ryanair. Barrington said he had not identified a perfect partner for Aer Lingus, but said from a consumer and a country point of view Air France KLM "would be a better option than Ryanair".
If Ryanair is unsuccessful with Aer Lingus it will look elsewhere, snapping up smaller regional carriers such as bmibaby. As negotiations continue, one thing remains constant: the growing speculation surrounding the industry.
Source: Reuters
In one corner sits Willie Walsh, the plucky Irishman in charge of British Airways, who is attempting to create the world's first "global airline". Walsh has already sought anti-trust immunity for a joint venture with American Airlines. In his sights now is Fernando Conte's Iberia and Alan Joyce's Qantas. The airline has confirmed it is discussing possible merger deals with both Qantas and Iberia. If successful it would create an aviation behemoth with three major hubs on two continents.
As Walsh tries to keep all his negotiations on track, breathing down his neck is Wolfgang Mayrhuber, chief executive of Lufthansa, who next month will have mobilised enough firepower to mount a serious attack on British Airways' lucrative transatlantic routes. Mayrhuber has already announced a potential "transformational" deal with Sir Michael Bishop's Bmi. In January the German group will take an 80% controlling stake in Bmi and with it a much sought-after pile of slots at Heathrow.
Not wanting to be left out of the party, Virgin Atlantic boss Sir Richard Branson has confirmed his airline will discuss a possible cooperation deal with Lufthansa to make his airline "a stronger competitor to British Airways than we are today". Branson also has his eye on Bmi. He believes Virgin's long-haul operations would sit well with Bmi's predominantly short-haul business.
"Talks will take place with Lufthansa, maybe are taking place, to see whether it makes sense for the two companies to work together," said Branson from the sidelines of a nuclear disarmament event in Paris.
Meanwhile, Ryanair has made a fresh bid to buy rival Irish carrier Aer Lingus, while Flybe is rumoured to be in talks to take over Bmi's regional and low-cost subsidiaries. Then there is the small matter of Italy's failed carrier Alitalia, which has attracted the attention of both Air France-KLM and Deutsche Lufthansa. With this amount of activity in the marketplace it is little surprise that analysts are referring to it as "merger mania".
"The magic formula is synergy," says aviation expert and author of The World's Major Airlines, David Wragg. "There is still a lot of capacity that can be taken out of the marketplace. We still have far more airlines than is economically plausible and in many respects they have not experienced the same amount of pressures from globalisation that other industries have experienced."
With the airline industry embroiled in its most transformational period since the creation of the commercial jet airline, analysts are now asking who will survive the shakeout and more importantly what will this mean for the consumer.
Consolidation has arrived as carriers try to seek shelter from sky-high fuel costs and falling passenger numbers. Latest traffic figures show that the number of passengers travelling through BAA's seven UK airports in November has fallen by a million, or 8.9%, on last year.
Worst hit has been European charter traffic, which has dropped 17%, while domestic traffic has fallen 12.7% and European 9.1%. On top of this the airlines have had to deal with high oil prices. Although oil is presently hovering around the $45 a barrel mark it was high in the summer months, the traditional time when airlines build their profits. Fuel accounts for between 30% and 50% of airlines' operational costs and in the past year the price of jet kerosene has more than doubled. British Airways' fuel bill has risen from 10% of its cost base in 2000 to around 40%. It estimates that its fuel bill will rise to £2.5bn by 2009, a 20% hike on the previous year.
"High oil prices are here to stay," says one aviation analyst. "The airline industry is having to deal with that, and consolidation is one way out of it. The other, of course, is to create as fuel-efficient a fleet as possible."
In Europe the market is contracting into three groups. By far the biggest is Air France-KLM, which has its eyes on Alitalia, the bankrupt Italian flag-carrier. It is followed by Lufthansa, which has bought Swiss Air, is in the process of trying to acquire Austrian Airlines, and once the Bmi deal has completed will have access to 11% of the takeoff and landing slots at Heathrow, which is second only to British Airways.
Lufthansa is expected to use its financial strength to upgrade Bmi's fleet of 54 aircraft and challenge BA on some of its most lucrative routes. A spokesman for the company said all options were being considered, but analysts speculate that Heathrow slots to UK regional airports such as Belfast and Durham Tees Valley may be sacrificed in favour of more lucrative transatlantic routes.
The third group centres around BA. If Walsh can pull off the merger with Qantas and Iberia his next step will be the US.
"It is only a matter of time before there is a transatlantic merger. If BA can do the Qantas and Iberia deals it will clearly establish itself as a credible and serious competitor in the market," said Gert Zonnefeld, an analyst at Panmure Gordon.
Others are more sceptical. "I can't see an international airline being created," says David Wragg. "There are all sorts of problems. Where would the head office be? Who will have safety oversight over the airline? And while it may be good news for the airlines and also for their shareholders it will be very bad news for the customer."
Amid all the brinkmanship, clandestine negotiations, rumour and counter-rumour, Virgin's vociferous opposition to British Airways being allowed to get any bigger at Heathrow remains a constant.
"You can see the world consolidating down to a certain number of carriers and it would be very disappointing if each carrier had their own little turf which they control," said Virgin Atlantic chief operating officer Lyell Strambi. "It would be a very boring world, a very controlled world. I don't think it is remotely desirable. I think it would be very bad for UK aviation.
"There's a golden opportunity here to create two very big carriers. Heathrow's a big enough market to have two home-based carriers and it would be a bit disappointing if that was sacrificed to suit a monopoly."
Analysts say next year will bring even more consolidation as more airlines continue to collapse amid the economic storm. On Friday Colm Barrington, chief executive of Aer Lingus, said he was looking for a friendly investor to take a majority stake in the airline and stave off a £670m bid from Ryanair. Barrington said he had not identified a perfect partner for Aer Lingus, but said from a consumer and a country point of view Air France KLM "would be a better option than Ryanair".
If Ryanair is unsuccessful with Aer Lingus it will look elsewhere, snapping up smaller regional carriers such as bmibaby. As negotiations continue, one thing remains constant: the growing speculation surrounding the industry.
Source: Reuters
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