Europe on fire

By Victoria February 7, 2012 16:44

Europe on fire

Czech finance ministry seeks bidder confirmation by June

The Czech Finance Ministry has confirmed that all bids for Czech Airlines (CSA) must be in within the first half of 2012. This public announcement may well confirm what we have said before that there are few bidders and the government is desperate to drum up interest so there are enough potential bidders for a privatization tender to go ahead.

A tender sounding out further interested bidders could be staged mid-way through the first half of 2012, with a privatisation attempt following soon after. Talks have already started with Air France and Korean Air- both are Sky Team alliance members with CSA. We have been here before when in the early 1990s Air France tried to purchase a stake, but it ended in a fiasco with the French company eventually withdrawing from the deal.

Make no mistake the airline with the greatest wish to purchase CSA is Aeroflot and it has Kremlin backing. It has stated that it wants to buy in and of course it is also a Sky Team member and was also involved in the failed 2009 bidding process. Aeroflot, as stated by us a few years back, is highly interested in the airline so that it can buy into the EU market.

CSA and the Czech government seem to be holding out for the same thing that never came in 2009 – Middle East money and route connections – although overtures are now also being made to potential Chinese investors. Beware: CSA is right up there with Air Malta at risk of collapse and we understand that financial figures due out soon are expected to be very poor indeed.


Following on from the problems at CSA – it is not just them you realise

In the interests of balance we need to mention the fact once again that Europe’s flag-carriers are suffering. They are seeing business travel slow and passengers jump to low costs on inter-Europe and North Africa transits. Now on top of this the Middle East carriers are starting to drop their fares on all routes – at a rate of just three days at a time – but it will still make an impact when it is system wide.


Amid the European Union’s worsening sovereign debt crisis (held up only by the ECB becoming the cashflow system in effect), consumers and business people are saving money when travelling inside the European Union by flying with budget airlines rather than flag-carriers. This will get far more pronounced as austerity measures begin to filter through and woe be tide the flag carriers if there is a partial collapse for the Euro or indeed if highly leveraged population groups such as the UK should suffer interest rate rises.


Ryanair, Europe’s largest low-cost airline by revenue, last week raised its profit forecast for 2011-12 from €440m ($577m) to €480m. By contrast, Lufthansa, Europe’s largest flag-carrier by revenue, issued a profit warning last September. Air France-KLM, the second-largest flag-carrier, said in November it expected to report an operating loss in 2011.


Furthermore, the low-cost carriers are well-placed to exploit the collapse of some of Europe’s state-backed airlines. Wizz marked out below is a prime example as is of course the Ryanair decision on Friday to open an operating base in Budapest – just hours after Malev Hungarian Airlines, collapsed. Ryanair, learning from US airline tactics, has so many aircraft grounded that it can pounce at will as airlines collapse.


It is this train of thought that is driving Norwegian Air Shuttle, which last month placed an order for 222 aircraft in order to expand now during a recession like Southwest did in the 1970s. It is a calculated risk. There will most likely be a combination of airline collapses and industry consolidation with 21 of Europe’s top 40 airlines with a market share of less than 1% in 2011 it is not hard to see why.  In fact the top five airlines: Lufthansa, Ryanair, Air France-KLM, EasyJet and IAG between them control just 45% of intra-EU seat capacity. This is a mirror of the US market post 9/11 – the top five there now control some 86% of seat capacity. IAG will help consolidation along soon as it goes all out for a TAP Portugal purchase and seeks control of the South American Atlantic travel market.


So for an investor taking a short-term punt on airlines (brave people) there are some very good options… But they are all in the USA where airline shares are on fire (see Americas section).  In Europe Ryanair is undervalued at the moment and will rise.  IAG, of all the legacy airlines in Europe, is the one that will fall even if the TAP purchase goes through as Willie Walsh and his team hope, as the airline group has already had its good run during 2011 and is now on the way down as profits are taken. That pension deficit has not gone away and will only get larger if TAP is purchased. It is already back to mammoth proportions since the start of the credit crisis, wiping out all the gains made in the 2000 to 2007 years. European businesses and therefore European airlines remain on the edge of a blackhole and Greece could yet further pull them in, even if another fudge is reached for a bailout this month, it is unlikely that austerity measures will be implemented at all and we will be back here again soon enough. Remember the underlying systemic problem we now have though – the ECB has become the system, if the Euro suffers partial default in any way the ECB could find itself under pressure which will lead to it either stripping Germany of cash or grinding the banking system to a complete stop,. The figures involved are now beyond the powers of the ECB or IMF, funded as they are, to prevent system breakdown.


Please also see the lead regulatory feature in the Americas section for the very good news on the FAA.

By Victoria February 7, 2012 16:44
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