The pace is gathering

Victoria
By Victoria December 4, 2012 12:56

The pace is gathering

The talk yesterday was all about Delta and Virgin but lost in all this was the call in Africa for the big airlines to merge. Kenya Airways called for merger between it, Ethiopian and South African Airways with a view of withstanding the influx of competition coming at all sides from the Middle East, APAC, Americas and Europe, the latter being the ever-present competition.
Kenya Airways CEO Titus Naikuni told delegates at the 44th African Airlines Association (AFRAA) Annual General Assembly in Johannesburg last week that his airline should come together with fellow Ethiopian Airlines and SAA to create a large African airline able to take the fight back to foreign carriers, which dominate 80% of intercontinental traffic to and from Africa. While the big three airlines are big in the context of the African market, globally they are small relative to giant competitors such as Emirates, Air France-KLM and British Airways.
African airlines are calling for greater unity among themselves to better compete against much bigger foreign airlines in their own skies and for African governments to liberalise the continent’s air space. Kenya Airways believes a merger between itself, Ethiopian Airlines and South African Airways is necessary to create a single large carrier representing Africa and able to compete globally. And Africa’s numerous regional airlines are looking to these three big carriers to support their growth and improve the industry’s safety performance on the continent.
But first, protective governments need to be persuaded of the benefits of open skies, while smaller carriers fear for their futures if big carriers are given greater freedoms.
“What we need to do is, we need to merge our airlines. There is no way that we are going to survive as small airlines,” Naikuni said. “We are the lambs at the gate.” Bringing the three biggest carriers together would create one large strong airline.”
Ethiopian CEO Tewolde GebreMariam agrees with the merger proposal “in principle”, saying size matters in the aviation industry which relies on economies of scale. The idea of a major pan-African airline group has to be discussed, “because now we are being challenged by not only big carriers but also governments who treat these carriers as a strategic national asset”, he said.
This might sound like a far-fetched plan in a politically-divided and sometimes, more often than not, unstable Africa. We might also argue that this is not something that could happen in the near future, after all, Air Afrique, you might argue, the pan-African airline established by 11 west and central African countries ended up being liquidated. But the logic is totally sound and in this new world we can argue that it is essential. If the will is there and the people at the top can turn talk into action then this idea could and should come to fruition before the end of this decade.
The logic is crystal clear, an African carrier that links the East of the continent north to south would have wonderful opportunities to expand and a firm hold on air freight movements. Even if Kenya Airways, Ethiopian and SAA were to combine, they would account for just 37% of Emirates’ revenue and about half the number of passengers.
Meanwhile: look to Singapore Airlines (SIA) and Etihad to raise their stakes in Virgin Australia to as much as 20% each as speculation about a shuffle of Virgin’s shareholding continues to grow. Air New Zealand is also keen to maintain a strong shareholding of Virgin Australia and thus the stock is going to be somewhat overpriced over the next few weeks. This could lead to Richard Branson selling his 23% holding at a premium and relinquishing the two seats on the board that he has at present.
Etihad has made no secret that it will move for these which should force SIA to do the same. How this will affect Virgin Australia management decisions will be interesting to watch as the competing interests weigh more and more. If any of the three airlines ever get a seat on the board then Virgin Australia might also need a UN negotiator at board meetings when talking about code shares between Australia and Europe. Indeed it would have to be open to all three or none and thus Virgin Australia in any event will now have to look to having a person on board who does little else but talk to the three major competing shareholders.
We have reported for many months that Virgin Atlantic would most likely end the year with a Delta deal, the relatively stable 2012 in airline economic terms has paved the way for a deal to be struck. SIA is finally able to get out of Virgin Atlantic and turn full attention to its fight in the APAC region, the deal would provide the funds for further Virgin Australia investment.
The trans-Atlantic market has consolidated so very much over the past few years and yet ticket prices before tax have hardly increased with inflation during the same period. Will the Delta/Virgin marriage compound this problem or alleviate it? One thing is for sure, American Airlines is getting smaller by the year in comparison with its direct competitors, a merger of some sort seems more needed now than ever.

Victoria
By Victoria December 4, 2012 12:56
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