Thursday, September 15, 2005

Consolidation of the airline industry 0 comments



(P.S: Sorry for any disturbances the advertisements above may have caused you)
The latest US airlines to be haunted by bankruptcy fears are Delta Airlines and Northwest Airlines, the No. 3 and No. 4 US carriers respectively. If they do indeed file for Chapter 11, it would mean four of the seven major airlines would be operating under court protection (the other two being US Airways and United Airlines).

Ok so US bankruptcy laws are much more forgiving compared to Asia's, but this is nevertheless a quite startling situation given the importance of aviation to the modern economy. No wonder Warren Buffett singled it out as an industry where long-term net profit to investors has been zero or negative.

We have seen a consolidation of the major airlines going on worldwide over the past few years and this trend looks likely to continue given the financial difficulties epitomised by the US major carriers as described above. We have had the mergers of KLM-Air France and Lufthansa-Swissair in Europe, Qantas-Air New Zealand in Australia, America West-US Airways in the US; even in Singapore we have recently had the merger of the presumably loss-making budget carriers Valuair and Jetstar Asia.

In this sector, one interesting difference between the West and Asia is the type of airline which generally outperforms the industry. In the West, budget carriers such as Southwest in the US and Easyjet and Ryanair in Europe have done excellently compared to the national carriers, while in Asia it is the reverse: national carriers like Qantas and Singapore Airlines have maintained strong performance while budget carriers have generally struggled. This difference is probably accounted for by the large size and high affluence of the domestic markets in the Western countries (European Community, US domestic routes) which makes the high-frequency short-haul flights business model of the budget carriers in these regions viable. In Asia the lucrative market is in long-haul flights where national carriers have existing agreements in landing rights and generally have advantages in securing new ones (hence enabling them to subsidise short-hauls to counter the threat of the budget carriers).

What is clear is that the high oil prices is taking its toll on all carriers big and small. Fuel costs account for a large proportion of airlines' raw material costs and the doubling of oil prices over this two years must be a page out of their worst nightmares. It is thus natural that further consolidation of the airline industry is likely to continue, given the advantages of doing so: (1) combination of air routes/landing rights and hence more comprehensive coverage making the business model more viable; (2) combination of financial resources thus improving financial stability and enabling options like fuel hedging (not efficient if done on a small scale); (3) greater negotiation power especially if the merger partner has strong governmental links.

Another thing is clear: I wouldn't be in a hurry to buy any transport stocks, airline or otherwise, in the near future!

 

 

0 Comments:

Post a Comment

<< Home