Airline Weekly - September 24, 2007
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Airline Weekly - September 24, 2007

European Unification: Continental consolidation now imminent, starting with Alitalia

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Cover Story

European Unification: Continental consolidation now imminent, starting with Alitalia

In the U.S., airlines are thinking long and hard about consolidation. In Europe, they’re consolidating.

Last week, it was Germany’s Air Berlin leading the charge again, announcing its fourth airline takeover in little more than a year. The latest target is leisure-oriented Condor, which pursues a similar business model to Air Berlin’s last takeover target, LTU. It also bought small Swiss airline Belair and, before that, Germany’s business-oriented dba (which itself previously merged with Germania).

Air Berlin’s pursuit of smaller, strategically-troubled rivals may reflect an unusually-large appetite, but it isn’t unique. Since the blockbuster merger between Air France and KLM, announced in 2003, Europe’s airlines have been joining forces. Among those consumed by rivals: Swiss International, Portugalia, FlyNordic, Virgin Express, Volare, British Mediterranean, Bulgaria Air, Malev and airline-owning travel conglomerates First Choice and MyTravel.

But this is hardly the end. Europe’s airline industry remains littered with small- and mid-sized carriers without the network scope or low cost structure to succeed on their own. Most have managed to avert disaster during the past three years—and in some cases even post small profits—thanks to downsizing and strong economic and traffic trends. But economic booms don’t last forever. When the tide comes in, as Warren Buffet likes to say, everyone will know who’s swimming naked.

No carrier is more exposed than Alitalia, which is spilling red ink even during the good times. In 1999, just two years after the E.U. completed the deregulation of its airline industry, the hapless Italian airline announced a merger with KLM, only to be disbanded when the Dutch carrier grew frustrated by the Italian government’s failure to fulfill two promises: to privatize Alitalia and to protect the new Malpensa Airport in Milan by shrinking nearby Linate Airport.

Alitalia, jilted at the altar, then joined SkyTeam in 2001 and announced a deep alliance with Air France in 2002, hoping it would eventually lead to a full merger. But in 2003, Air France chose to join with KLM instead, insisting that it wouldn’t touch... (347 of 1385 words)

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In an industry featuring economies of scale with respect to costs and economies of scope with respect to revenues, some consolidation seems to make sense. And sense it makes to Air Berlin, which bought yet another airline this week. This time the target is Condor, which provides another longhaul platform and more potential cost synergies. The deal also—even if Lufthansa spoils things by buying Condor itself—removes another player from Europe’s fractured airline landscape.

Air Berlin’s ambitions may herald a high-profile clash with Lufthansa, but the real heavyweight event of the year could be between Cathay Pacific and Singapore Airlines. Both badly want to build a presence in the flourishing city of Shanghai, with Singapore Airlines sitting on a deal to buy 24% of China Eastern and Cathay angling to torpedo it. Air China, allied closely with Cathay, may also play a big role in the battle.

Speaking of carriers that want to serve Shanghai, all-premium airline MAXjet reported losses last week, as did rival Silverjet. Though competition, though, may be a bigger concern.

And speaking of concern, IATA now predicts airline profits in 2008 will be lower than previously forecast. Economic booms, after all, don’t last forever, regardless of what buttons Ben Bernanke pushes.

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