• Strategy
  • CFO Europe Magazine

Midair Maneuvers

CFOs of Europe's mid-tier flag carriers are leading radical strategy overhauls.

Aer Lingus’s turnaround led to a successful IPO on the London and Dublin stockmarkets last autumn, which raised around Û500m to grow the business. Much of that growth is expected to come from the long-haul division, where it has just announced plans to double its fleet to 14 by 2014. The extra aircraft will allow Aer Lingus to exploit its close ties with the US by opening up new routes to additional American cities under the Open Skies deal.

“Aer Lingus is in a unique position,” says O’Sullivan. “We have great brand recognition in the US but our ability to grow has been constrained up to now because of regulatory restrictions.”

O’Sullivan has already struck an interim deal with the US to fly three new routes — to Washington, DC, Orlando and San Francisco — from September, six months before Open Skies takes effect. Analysts think these routes alone could boost the carrier’s revenues by more than €200m a year. To add to this headstart, Aer Lingus recently linked up with the web-based booking system of US low cost carrier JetBlue, allowing passengers to get flights through Ireland to any of JetBlue’s 51 destinations in the US and Caribbean, and vice versa. But its trump card is that Ireland is the only EU country to have pre-clearance for US customs and immigration — a powerful selling point for stress-free entry into the US.

All this strengthens Aer Lingus’s hand as it fends off a bid from Ryanair, which bought 25% of the company to block other potential buyers. EU competition authorities blocked Ryanair’s bid last month on the grounds that it would harm competition and undermine consumers, but the budget carrier plans to appeal.

Get Eaten

Regional consolidation is in full swing to the east, led by the Russians. In April, Hungary’s government sold a 99.95% stake in flag carrier Malev to Russia’s fourth largest airline, KrasAir, for €800,000, with an additional agreement to repay Malev’s €130m debt and put in €50m of development capital. To meet EU rules, the sale was made to AirBridge, a Hungarian company affiliated to AiRUnion, an alliance of five Russian airlines including KrasAir, its biggest member. Russia’s government holds a 51% stake in KrasAir.

Gaining a foothold in Europe outweighed any worries about the debt load for KrasAir, which has ambitions to be the second largest player in Russia after Aeroflot. “Malev will preserve its route network with around 50 European cities and gain access to 54 destinations in Russia and the CIS,” KrasAir’s CEO, Boris Abramovich, told reporters before winning the deal. “Teaming up will allow both of us to boost traffic and profits before long.” Abramovich plans to make Malev, which posted a net loss of €4.6m in 2006, profitable in the next two years and triple passenger numbers and sales by 2015.

KrasAir rival Aeroflot, Russia’s biggest carrier, is hot on its heels in the region: it has been linked to Serbian flag carrier Jat Airways, although no formal offer has been made. “We would be interested in purchasing a stake in this airline if there is a firm decision to privatise it; but the deal has to be sensible — purchasing foreign airlines at any cost is not our goal,” says Mikhail Poluboyarinov, Aeroflot’s CFO. “But in general, Jat is interesting for us since it can be instrumental in the potential formation of a pan-Balkan hub.”

Alitalia was almost within Aeorflot’s reach but pulled out of a bidding fight last month after it was unable to meet the sale terms. Poluboyarinov admits turning around Alitalia would have been tough but Aeroflot wanted access not only to the affluent Italian market, but also to Alitalia’s lucrative routes to southern Europe, North Africa and Latin America. Poluboyarinov says having turned Aeroflot around through a programme of cost-cutting, fleet renovation and strong people management, more than doubling its market capitalisation to €1.8 billion, the management team was well placed to do the same at Alitalia. Aeroflot’s reform proposals included dropping money-losing destinations and replacing Alitalia’s ailing fleet of MD80s with 20 Sukhoi SuperJet-100s — a more fuel-efficient Russian jet with lower operating costs.

Aeroflot may have lost out to rival AP Holding, owner of Italian carrier Air One, but there are other potential targets: it has been linked to Austrian Airlines and the Czech and Polish governments want to privatise their flag carriers — Czech Airlines and LOT.

Despite all this activity, KrasAir’s purchase of Malev and Lufthansa’s takeover of Swiss are the only completed transactions among the middleweight flag carriers. (View pdf here.) AEA’s Schulte-Strathaus reckons constraints on ownership and control mean struggling airlines will first look for innovative ways of closer co-operation through alliances or partial mergers. Rising above the fray will be carriers that, like Finnair and Aer Lingus, identify their profitable niches and ruthlessly unload excess baggage.

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