Airline Mergers: European Edition

Those familiar with the U.S. airline industry have witnessed a large number of airline mergers over the past several years. However, some European airlines have been able to merge across international borders prior to this latest wave of U.S. airline mergers. And now reports are surfacing that another European airline merger could be in the works.

Prior mergers
In 2003, Air France joined Dutch airline KLM to create the airline holding company that is Air France-KLM (NASDAQOTH: AFRAF  ) . In a move relatively rare in the airline industry, this merger crossed international borders; an agreement that would have been near impossible in the days of nationalistic airline sentiment.

In 2009, German airline Deutsche Lufthansa (NASDAQOTH: DLAKY  ) merged with Austrian Airlines in another effort at consolidation in the European market. But unlike the Air France-KLM merger and most major U.S. airline mergers, the Lufthansa-Austrian merger was a cash deal signaling a more acquisition-like merger rather than a share exchange-based merger of equals.

In 2011, British Airways and Spanish airline Iberia formed International Consolidated Airlines Group (NASDAQOTH: ICAGY  ) with the goal of seeing major merger synergies by 2015. However the path for this airline has not been entirely smooth. Earlier this year, Iberia reported a loss of nearly 1 billion euros nearly entirely wiping out the profit generated from British Airways. It should be noted that much of this loss was due to one-time items involving things like pension and restructuring costs.

From these two mergers we have seen a European climate fairly friendly to cross-border airline mergers and airlines willing to take advantage of the opportunity.

The next merger?
With the European economy still in recession, airline profits are harder to come by for major carriers. And few carriers are finding it harder to generate consistent profits than Italian airline Alitalia.

Even before the recession, Alitalia required billions in capital injections from the Italian government -- injections that were eventually stopped. In 2008, Alitalia declared bankruptcy only to relaunch in 2009 and burn through nearly another billion euros between then and now.

You may be asking why any company that likes money would touch Alitalia with a 50-foot pole. But Air France-KLM is reported to be considering a takeover of this troubled carrier. For those further interested in Alitalia's past, it is worth noting that Air France-KLM also tried to take over Alitalia in 2008 but the deal fell through after Alitalia's unions opposed the deal.

Quite likely, Air France is looking to get Alitalia on the cheap, especially when factoring in the airline's poor financial record. Alitalia would give Air France-KLM a greater presence in Italy and allow the newly merged airline to integrate routes.

However, the Italian government wants to make Rome an international hub; a goal that could conflict with Air France-KLM's integration strategy. The Franco-Dutch airline is likely to have a goal of adjusting Alitalia's operations so they can be profitable in contrast to the horrendous cash fire that Alitalia has set over the past several years.

In the end, a merger between Air France-KLM and Alitalia is being considered but many hurdles must still be cleared. Namely, Alitalia's nationalist goals versus Air France-KLM's goals of profitability. This matter is far from settled and airline investors should watch for more developments in this potential merger.

European mergers
Like their U.S.-based counterparts, European airlines have been getting in on a merger trend that has allowed for greater economies of scale and management of capacity. While the Air France-KLM and Alitalia merger is making the biggest news in the European airline industry, there could still be plenty of future airline mergers. Investors both in the U.S. and Europe should continue to follow the news surrounding airline mergers and their industry-changing effects.

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