Flying Blue (Air France, KLM, and Other Partners) - AFKL looks to fully buy AZ (Alitalia) in 2013

Interesting article in La Tribune:

http://www.latribune.fr/entreprises-finance/services/transport-logistique/20120306trib000686694/le-plan-d-air-france-klm-pour-croquer-alitalia.html

Couldn't find it posted before; mods please feel free to merge if this is the case.

Main points:
- AFKL is aiming to buy Alitalia (AZ) in 2013 through a share swap.
- The AFKL share price will have to rise if this is to be achieved.
- Possibility that Italian shareholders might turn to Lufthansa (LH), which can pay cash, or might use the German card to raise the price.

Yet another twist in this long-running saga!

I'd have thought AF needed to get its own house in order before embarking on this venture...

From what I've heard, AZ is no more interested by merging with AF/KL, which I could easily understand.

I can't help wondering... does anyone really want to merge with AZ? Why?

AFKL is aiming to buy Alitalia (AZ) in 2013 through a share swap.

Share swap : what a surprise! I wonder with what cash they would have been able to buy AZ.

Share swap : what a surprise! I wonder with what cash they would have been able to buy AZ.

That's the main problem as explained in the article : AF/KL share is so low that it's not possible at the moment. They expect the share to climb up after they announce cost killing measures. But imho they're dreaming...

I can't help wondering... does anyone really want to merge with AZ? Why?

It would make a lot of sense for AF/KL to own not only France and the NL, but Italy too. They could do a lot with pricing that way, as well as slash a lot of costs. And you could say the same thing for LH. Thus there is a strong competitive reason for one of these giants to buy AZ. Buy or die.

That's the main problem as explained in the article : AF/KL share is so low that it's not possible at the moment. They expect the share to climb up after they announce cost killing measures. But imho they're dreaming...
Do I remember correctly that you announced that you bought AF shares last year when the price was around 5? Then your expectations have changed a lot :). I still remember when the share was near 40 a few years back!

One wonders why the "informations" leak was organized by AF at the time when the awful results were announced. Trying to convince Italian AZ shareholders that AFKL was still trying to purchase AZ? Clearly a share swap is a dream. AZ has been progressing steadily in most operational respects, and AFKL would have to pay a significant acquisition premium. Currently, the share swap would give the Italian industrialists near-control over AFKL as mentioned in the article (AFKL bought 25% of AZ shares for 300 millions back in 2009, that would value the remaining 75% shares at 900 million compared to 1.3 billion for AFKL). Why would the existing AZ shareholders be willing to tender their shares to obtain AFKL shares with a lockup period of a couple of years, with great uncertainty about the value of those shares when they can finally sell them? Would the new government be more willing to accept the deal than Berlusconi's government when AFKL does not bring any cash to the table?

Hmm.. I don't know that the shareholders of CAI are interested in selling Alitalia.

The airline has seriously shrunk in size as well- in 2011 Ryanair carried twice as many passengers to/from/in Italy compared to Alitalia and AirOne (a wholly owned subsidiary) together.

AZ is a shell of what it used to be at this point.

Do I remember correctly that you announced that you bought AF shares last year when the price was around 5? Then your expectations have changed a lot :). I still remember when the share was near 40 a few years back!

When I first worked for AF, share was at 37eur, so you can blame me :P
Anyway, I hope for AF to grow again, but it won't be in 2012 or 2013. The transformation will take at least 3 or 4 years before investors/shareholders can see the share climb imho.

Hmm.. I don't know that the shareholders of CAI are interested in selling Alitalia.

The airline has seriously shrunk in size as well- in 2011 Ryanair carried twice as many passengers to/from/in Italy compared to Alitalia and AirOne (a wholly owned subsidiary) together.

AZ is a shell of what it used to be at this point.

28 million vs. 25 million seems hardly twice as much.

28 million vs. 25 million seems hardly twice as much.

You are correct. I was confusing growth year on year with overall pax- thanks for pointing out the error.

AZ 2010 23.4 million passengers
FR 2010 23.3 million passengers

AZ 2011 25 million passengers
FR 2011 28.1 million passengers

Italy is the second market in the world for Ryanair after GB/Ireland.

It would make a lot of sense for AF/KL to own not only France and the NL, but Italy too. They could do a lot with pricing that way, as well as slash a lot of costs. And you could say the same thing for LH. Thus there is a strong competitive reason for one of these giants to buy AZ. Buy or die.

I can understand someone looking to forge a strategic partnership through such a merger. DL and NW had a lot of complimentary routes so DL+NW made sense from that perspective. (Oh, how I miss NW!) NW had a huge share the US Midwestern market, DL had a lot of the South; NW had a huge presence in Asia, DL had more presence in Europe and South America. But it's not like AZ brings anything new to the table in this respect. Yes, some consolidation (e.g. reservation systems, ticketing agencies, airport staff, etc) can yield some savings, but I don't think it would be spectacular in this case. That, combined with the sleuth of problems that AZ has, makes me wonder if this merger would in the end be more of a headache.

I suppose it won't be long before Europe will have 2 giants (the AF and LH groups), some very small carriers all somehow allied with the giants (OK, LO, RO,...) and the LCCs. But even in that scenario, thanks to the ubiquitous presence of the LCCs I don't see the giants being able to commend higher prices. Which brings me back to my original question... WHY bother with AZ?

...
I suppose it won't be long before Europe will have 2 giants (the AF and LH groups)... WHY bother with AZ?

I think you've answered your own question: because neither "giant" wants to let the other one have it. Don't forget that Italy is a big market, airports and slots in Europe are getting costrained and also don't forget about the limits set by bilateral agreements in increasing long-haul traffic through existing hubs. If, for example, AFKL have reached their allowed frequencies to China from both AMS and CDG, but they still see demand in that market, they could channel that demand through e.g. FCO. This is what LH Group is doing, e.g. through LX.

I suppose it won't be long before Europe will have 2 giants (the AF and LH groups)

I think you are forgetting the quite large IAG group. Which will get larger very soon.

And nomad1974 gets my point about the value of acquiring AZ.

I can't help wondering... does anyone really want to merge with AZ? Why?

The business model of AF, like other European majors, is to feed profitable long-haul flights with (today non profitable) medium-haul flights.

To do so, you need a hub with many connections. The more connections you have, the more chances you get to have your long-haul flights full.

The Northern Italian market, less than 1 hour and half from CDG, is very interesting for AF in that respect (AZ has only a few intercontinental destinations, and FCO is now the long-haul hub for AZ and cannot compete with CDG for most destinations).

Furthermore operating costs at AZ are rather low, which is another advantage for AF.

The business model of AF, like other European majors, is to feed profitable long-haul flights with (today non profitable) medium-haul flights.

To do so, you need a hub with many connections. The more connections you have, the more chances you get to have your long-haul flights full.

The Northern Italian market, less than 1 hour and half from CDG, is very interesting for AF in that respect (AZ has only a few intercontinental destinations, and FCO is now the long-haul hub for AZ and cannot compete with CDG for most destinations).

Furthermore operating costs at AZ are rather low, which is another advantage for AF.

I understand that the Northern Italian market is attractive but AF can tap that market by increasing its frequency to the local airports.

I understand that AZ costs are below those of AF, but that makes AZ potentially profitable and therefore expensive to buy.

What would worry me is their "fuite en avant tous azimuths", meaning their catch-all objectives trying to transform into a top-quality premium airline (better than SQ), while at the same time becoming a LCC in Europe to compete with the other LCCs, while at the same time merging with other more-efficient airlines.
Cooperation with AZ and even merger has some economic sense, but can highly-indebted AF chase so many rabbits?

I understand that the Northern Italian market is attractive but AF can tap that market by increasing its frequency to the local airports.But that is on an altogether different scale. Increasing frequency will give you a relatively marginal increase in traffic. Acquiring the dominant carrier on that particular market will give you a quantum leap in terms of market share. While this may or may not be a wise move, this really cannot be compared to merely increasing feeder frequencies.

In a medium term expectation of a European airline industry dominated by 3 majors (AF, BA and LH) and a handful of LCCs (first and foremost FR and U2), it does make sense for airlines to position themselves in this way as long as they do not do a Swissair and compromise their survival in the process.

In a medium term expectation of a European airline industry dominated by 3 majors (AF, BA and LH) and a handful of LCCs (first and foremost FR and U2), it does make sense for airlines to position themselves in this way as long as they do not do a Swissair and compromise their survival in the process.

I agree. Another way of phrasing it is that there would be a potentially large cost to NOT seeking to buy AZ if AZ wants to be bought by someone. The most populated European countries remain Germany, France, the UK, Italy, Spain, and Poland. The first three have their own majors, IAG means Spain is off the charts for its dominant airline, so Italy (which is also a major destination for tourists and business people alike) is the largest market to conquer. A few years ago, AZ was in such a poor state that nobody wanted to buy them, but now they have made immense progress both financially and in terms of service. I have little doubt that if AF proved too lukewarm about buying, LH would reenter the picture now that LH Italy has failed. As mentioned, AZ's operating costs are now much lower than they used to be (and indeed much lower than AF's) so I think it could prove a great opportunity for the AF-KL group to reinforce its position on the Middle Eastern, African, and possibly a number of other Asian markets.