Opportunity Abounds As Non-European Carriers Move Into European Skies

Delta Air Lines and Etihad Airways are finding ways to enter European airline markets despite ownership and control regulations.

May 5, 2014 at 7:36PM

Having a strong network is key to an airline's success, and European routes are becoming highly sought after by non-European airlines. Actions taken by Delta Air Lines (NYSE:DAL) and Etihad Airways are shaking up who competes for the money spent by European travelers.

Airline regulation
Through the latter half of the 20th century, most nations moved to deregulate their airline industries, thus allowing carriers to pick new routes, new times, charge different prices, and compete with one another.

However, compared to most other industries, airlines still remain highly regulated when it comes to international routes and ownership. Most nations have restrictions on the ownership and control of airlines that operate within their aerospace, and the European Union is no exception. According to Reuters, to obtain an operating license in the E.U., carriers must be at least 50% owned and "effectively controlled" by an E.U. member state or citizens.

International airline management
With similar restrictions existing in the U.S. and Canada, airlines have used alliances of partner airlines to form strong international networks. Sometimes, to create a special partnership deal, airlines will purchase minority stakes in other airlines.

In Delta's case, the airline wanted to increase its presence at London Heathrow Airport, which is particularly popular with high-revenue business travelers. But with Heathrow being a highly popular, slot-restricted airport, Delta pursued a joint venture with Virgin Atlantic to increase its presence. By purchasing a 49% stake in Virgin Atlantic from Singapore Airlines, Delta and Virgin Atlantic established a joint venture to boost Delta's presence at London Heathrow.

Etihad Airways, a state-owned Middle Eastern carrier, has also been looking to compete in Europe but is subject to the same ownership laws as other non-European carriers. To get around this, Etihad has been establishing partnerships and buying stakes in European airlines, including Air Berlin and Aer Lingus.

Now, Etihad is eying Italian flag carrier Alitalia. Alitalia has had a long and mostly unprofitable history, with its most recent cash call resulting in the dilution of Air France-KLM's (NASDAQOTH:AFRAF) 25% stake down to 7% as the Franco-Dutch carrier declined to inject more money into the unprofitable airline.

As Alitalia is still looking for cash, Etihad is considering the airline as a way to expand its reach in Europe. Air France-KLM left talks concerning additional funding for Alitalia after Alitalia refused to more aggressively restructure debt and cut unprofitable operations. In February, Air France-KLM noted it was still interested in Alitalia if its conditions were met. This raises the possibility that if Etihad can extract better terms from Alitalia, both Air France-KLM and Etihad could move in to partner with and recapitalize the Italian flag carrier.

Investing in European skies
Etihad Airways is not open to outside investment because of its state ownership by Delta Air Lines and Air France-KLM are both publicly traded. Delta offers exposure to the U.S. airline market, parts of international markets, and a specialized joint venture between North America and London Heathrow.

Air France-KLM offers more direct European exposure along with the potential upside of a deal with Alitalia if an agreement can be reached. For U.S. airline investors, gaining some exposure to European airline operations can help round out an airline portfolio, making these carriers worth a look.

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Alexander MacLennan owns shares of Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, and long January 2015 $30 calls on Delta Air Lines. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days.

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