Spanair Collapse Puts Europe's State-Owned Airlines on Alert for Investors
By Manuel Baigorri, Steve Rothwell and Alex Webb – Jan 30, 2012 10:23 AM ET
Spanair SA’s collapse after the withdrawal of state funding suggests Europe’s debt crisis may spur airlines from the Mediterranean to the Baltic to consider mergers or risk failure.
The first collapse of a scheduled European airline since the last recession comes as cash-strapped governments mull disposing of at least half a dozen other carriers in auctions pitting Qatar Airways Ltd., which had been in talks with Spanair, and other emerging-market bidders against Air France- KLM Group (AF), Deutsche Lufthansa AG (LHA) and British Airways parent IAG.
Governments are becoming reluctant to save ailing airlines as the debt crisis forces austerity programs in other parts of the economy. State investors in Stockholm-based SAS AB (SAS), Aer Lingus Group Plc (AERL) of Ireland, Portugal’s TAP and the flag carriers of Poland, Hungary and the Czech Republic have all signaled plans to reduce direct support and seek new investors.
“Governments don’t have the financial wherewithal to support airlines in the same way as in the past,” said John Strickland, an aviation analyst at JLS Consulting in London. “Regulations requiring a level playing field have also made it tougher. It could put other carriers in a similar position.”
SAS, which had an 11 percent stake in Spanair, fell as much a 9.5 percent today and was trading 4.7 percent lower at 9.05 kronor as of 4:01 p.m. in Stockholm after saying it would take a 1.7 billion kronor ($251 million) writedown over the collapse.
Vueling Airlines SA (VLG), Spain’s second-biggest airline, surged 27 percent to 5.20 euros, the sharpest gain since Oct. 22, 2008, while IAG, owner of Iberia, the No. 1 operator, fell 1.2 percent. Iberia said that Spanair’s loss, while “painful,” showed the need for its own Express unit, which debuts in March.
Ireland’s Ryanair Holdings Plc (RYA), which carries more people on routes to Spain than any airline based there, said it could target some of Spanair’s more attractive routes, and the shares rose as much as 2.7 percent before trading little changed.
Europe’s second-tier airlines are pondering their futures after being left behind following the formation of the three big groupings. Air France purchased KLM in 2004 to form the region’s biggest airline, Lufthansa (LHA), the No. 2, expanded through bolt-on deals in neighboring Austria, Belgium and Switzerland, and IAG, or International Consolidated Airlines Group SA (IAG), was formed a year ago via a $9 billion merger of BA and Iberia.
Heinrich Grossbongardt, a marketing consultant in Hamburg who has advised the airline industry for two decades, reckons a European slump will spark a new “overdue” consolidation bout.
“It’s amazing how all these zombie airlines manage to survive despite making losses year after year,” he said. “Air travel today is a commodity business, which means economies of scale are key. A traditional airline needs 50-plus million passengers a year to bring costs down to an acceptable level.”
Spanair, which employs 2,000 people, said Jan. 28 it folded after Qatar Air (105701QD) halted bid talks and the Catalonia government indicated it would no longer supply funds. The last plane landed at 10 p.m. on Jan. 27, and the company is seeking protection from creditors, spokeswoman Aina Rodriguez said today by phone.
Spain is cutting spending as it grapples with the euro area’s third-largest budget deficit, with Catalonia the second- most indebted region. Barcelona-based Spanair was founded in 1986 and was Spain’s fourth-biggest airline by passenger numbers, carrying almost 13 million in 2011 from 15 Spanish airports using a fleet dominated by Airbus SAS A320 series jets.
The carrier would have been the third from Europe in less than a year to sell stock to a Middle Eastern bidder. Qatar Air bought a 35 percent stake in Luxembourg’s Cargolux International SA, the region’s largest specialist freight airline, last June and Abu Dhabi-based Etihad Airways said Dec. 19 it would spend $350 million to lift a stake in Air Berlin Plc to 29.2 percent.
Qatar Air Chief Executive Officer Akbar Al Baker said in an interview at London’s Heathrow airport on Jan. 26 that he would remain on the lookout for opportunities.
“We will be interested in an airline with potential, but restricted in growth due to financial constraints,” he said, adding that he’ll “keep very quiet” about specific ambitions after previous comments helped push up the share price of SAS, owner of Scandinavian Airlines, the No. 1 Nordic carrier, in which the Danish, Norwegian and Swedish governments hold stakes.
The Norwegian government won parliamentary approval to sell its SAS shares last June, a spokesman said Jan. 27, while declining to comment on its intentions. Sweden’s government has a similar mandate, spokeswoman Victoria Ericsson said, and will wait for the “right time” before acting. Denmark’s Socialist Party, a minority member of the ruling coalition, wants to preserve Copenhagen’s hub status and is reluctant to sell, according to Anne Baastrup, its transport spokeswoman.
The Irish government has said that it’s interested in selling its 25 percent holding in Aer Lingus as part of a drive to raise 2 billion euros ($2.6 billion) from asset disposals, in line with commitments to the International Monetary Fund. Talks are underway on restructuring a pension plan that’s been seen as an obstacle to a sale, the airline said in a statement today.
Ireland has no plan to sell the stake to Etihad, government spokesman John Carroll said Jan. 6 after transport minister Leo Varadkar arranged to meet James Hogan, the Gulf carrier’s CEO. Talks were limited to “tourism matters,” Carroll said. Concern about the state exiting Aer Lingus has centered on the loss of control over slots at London Heathrow, something a tie-up in the Gulf might ease by offering alternative connections with Asia.
Aer Lingus spokesman Declan Kearney said yesterday from Dublin that the issue is “a matter for government.” The carrier recently decided not to join a global alliance because of cost and connectivity issues, he said. An Etihad spokesman declined to comment and said that Hogan was unavailable.
Gulf carriers, themselves backed by governments often enriched by oil receipts, are targeting Europe’s stragglers to help provide feed to long-haul hubs that they’re building at their home airports in a challenge to Air France, Lufthansa and BA, whose Heathrow base in the biggest transfer airport.
Turkish Airlines (THYAO), or Turk Hava Yollari AO, seeking to build a Gulf-style hub in Istanbul, said Jan. 23 it was one of two bidders in talks to buy a stake in Polskie Linie Lotnicze LOT SA from the Polish government. Treasury Ministry spokeswoman Magdalena Kobos said the second party is publicly traded.
Poland has been seeking to sell shares of LOT since 2009 after buying back a 25 percent stake from Swissair’s bankruptcy receiver following an earlier abortive disposal. The government got four offers last year, with Air France-KLM and BA among the bidders, as well as THY, 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. That’s after Prime Minister Petr Necas said Dec. 18 that a disposal is the only way of saving the business, known as CSA, which merged with Prague airport operator Letiste Praha AS after a failed auction in 2009. Bidders may include Britain’s Flybe Group Plc and an Asian carrier, broadcaster CT1 has said.
In Hungary, the government today granted unprofitable Malev Zrt. (MALEV) the status of “strategically extraordinarily important company,” the official gazette said, a move that can be used to shield bankrupt businesses from creditors. With finances set to become “untenable” by month’s end, a “liquidity plan” is being drawn up, news service MTI said, citing CEO Lorant Limburger. ILFC Holdings Inc. will carry on providing planes, it said.
A buyer is being sought for Malev after the state took a 95 percent stake to replace Russian bank Vnesheconombank as controlling shareholder when a previous privatization failed. Hungary is in “advanced” talks with possible investors after China’s Hainan Airlines quit talks, the government said Dec. 5.
The European Commission on Jan. 9 ordered Hungary to reclaim “unlawful aid” paid to the airline from 2007 to 2010.
With their own outlooks crimped by a slowing economy, Europe’s biggest carriers may be reluctant to enter a bidding contest for unprofitable companies with rivals from emerging markets, and inter-continental deals could offer better value.
IAG is working to identify takeover targets including long- haul operators, according to Chairman Antonio Vazquez, who said of European takeover prospects in an interview on Jan. 23 that “everything is really taken, so it’s difficult to do anything.”
CEO Willie Walsh has identified TAP SGPS SA as the European carrier he’d most like to buy after sealing a deal for BMI, Lufthansa’s U.K. unit, which owns slots at crowded Heathrow. Buying the Lisbon-based airline would add routes from Europe to South America, something which might become a priority should Oneworld alliance partner Lan Airlines SA (LAN) of Chile switch global groupings after a merger with Brazil’s Tam SA (TAMM4), a Star member.
On the Block
Portugal will begin the process of selling TAP “in a few weeks” and aims to complete it in 2012 after privatizations in sectors such as energy, airline spokesman Antonio Monteiro said.
Air France-KLM’s airline purchases have been limited to investment in Alitalia SpA of Italy and the acquisition of U.K. turboprop operator VLM, with interest in Iberia, Austrian Airlines, CSA and SAS failing to lead to deals. Spokeswoman Eloise de Parscau wouldn’t comment on its plans yesterday.
At Cologne-based Lufthansa, CEO Christoph Franz hasn’t extended the sequence of takeovers racked up by predecessor Wolfgang Mayrhuber since taking over last year. The German carrier wouldn’t comment on further merger prospects and said Franz was focused on making the existing business profitable.
Keith McMullan, managing director of Aviation Economics in London, said takeover interest in the likes of SAS and Malev will be minimal and that state-connected carriers will enter a process of “managed decline,” without disappearing completely.
“I don’t think the bigger carriers are the least bit interested in them,” McMullen said. “That’s unless they have a very particular niche, which is very rare really.”
Ryanair, Europe’s biggest low-cost airline, has sent staff to Spain to lure former Spanair clients with “emergency fares,” Chief Financial Officer Howard Millar said in an interview after the company lifted its profit outlook on improved fares, while adding that there’s no prospect of a bid for its assets.
Ryanair CEO Michael O’Leary said Jan. 26 in Budapest that carriers reliant on state support aren’t worth saving, and that there are signs Europe’s economic crisis may be undermining a tendency for them to be kept on “life support” by governments.
“Everywhere we look we’re suddenly talking to airports who are worried,” he said in an interview, adding that “imploding” carriers such as Spanair will spur growth at discount airlines. “There is a realization they may have an Armageddon event.”