Merger and Acquisition Trends in the Global Airline Industry
Merger and Acquisition Trends in the GlobalAirline IndustryNC3A-F1April 2013A Shift in Focus from Market Share to Profitability
NC3A-F1 2Executive SummaryThe average value of transactions (excluding transactions of values greater than $1.00 billion)has declined by 23.2 percent from $142.1 million in 2007 to $50.1 million in 2012.Soaring fuel prices, declining passenger demand, and the economic crisis have led to excesscapacity for airline carriers.Instead of engaging in competition and turf wars, companies in the industry are currently focusingon improving profitability, especially in markets where they already have strong presence.Mergers, joint ventures, and other strategic alliances are slowly becoming the norm for airlineindustry participants, who are focusing on cost cutting and excess capacity reduction in order tocombat rising fuel prices and recession.Following the slowdown in the global economy, primarily caused by the Eurozone crisis, strategicand financial investors have become cautious and risk-averse about portfolio investments. Thishas negatively impacted merger and acquisition (M&A) activity in terms of deal value. Deal valuesdeclined in 2011 to $1.61 billion from $20.48 billion in 2010, a sharp 92.1 percent.Source: Frost & Sullivan analysis.
NC3A-F1 3Research Objective and ScopeGeographic Scope: Global StudyThis research service analyzes the M&A transactions (announced, closed, or effective) in the global airlineindustry from January 2007 to December 11, 2012. Deals are analyzed by segments and geographies.Cross-border deals are also analyzed. The outlook for M&A is also provided.Source: Frost & Sullivan analysis.Research ObjectiveGlobalAnalysis Includes• Across segments• Across geographies• Valuation multiples• Stock price variations• Percentage of stake acquired• Type of buyers
NC3A-F1 4Research Objective and Scope (continued)Source: Frost & Sullivan analysis.Study PeriodJanuary 2007 to December 11, 2012Transactions Analyzed446 transactionsWho Will Benefit?• Companies operating in the global airlineindustry• Private equity• Venture capital investors• Fund managers• Retail investors• Sovereign wealth funds• Hedge funds• Insurance funds and other members in theinvesting communitySources• Frost & Sullivan in-house research expertise• Established business and financial databases,such as Capital IQ• Company annual reports• Reports of associations such as IATA**• Published news• Press releasesNote: Financial data used for analysis are as ofDecember 11, 2012**IATA: International Air Transport Association
NC3A-F1 5Sectors Covered in the StudyAirline Industry: Sectors Covered in the Study, Global, 2007–2012Source: Capital IQ and Frost & Sullivan analysis.Commercial AirlinesEstablishments primarily engaged in operating airplanes for commercialuse, such as Boeing.Private or Business AircraftServicesEstablishments primarily engaged in providing aircrafts/charters to flyfrom place to place on customers’ own time schedules for personal orbusiness use.Helicopter TransportationServicesEstablishments primarily engaged in providing non-scheduled helicoptertransportation services.Rescue and Safety AircraftServicesEstablishments primarily engaged in providing aircraft for rescue oremergency purposes.
NC3A-F1 6Airline Industry—Need for ConsolidationThe airline industry is currently characterized by slack passengerdemand, soaring fuel prices, and a slowdown in the global economy.The industry is cyclical and its performance is closely linked to the grossdomestic product (GDP). Given this scenario, M&A activity is expectedto gain momentum in the airline industry. Industry participantshistorically have expanded capacities and network unprofitably as wellas engaged in price wars in an effort to gain market share.ConsolidationInstead of engaging in competition and turf wars, companies in theindustry are currently focusing on improving their profitability,especially in markets where they already have strong presence.Mergers, joint ventures, and other strategic alliances are slowlybecoming the norm for airline industry participants who are focusingon cost cutting and excess capacity reduction in order to combat risingfuel prices and recession.The United States witnessed several key mergers in the past fiveyears. The most significant impact of this consolidation wave is theincrease in load factor. Historically, the load factor for carriers in theregion ranged between 65.0 and 75.0 percent. After the consolidation,the average load factor was over 80.0 percent. The direct implicationof this increase has been more passengers per flight.Cost cutting andexcess capacityreduction—keys toimproving profitability!Source: Frost & Sullivan analysis.
NC3A-F1 7Global M&A Activity across SectorsSource: Frost & Sullivan analysis.Airline Industry: Key M&A Statistics*, Global, 2007–2012Used for analysis ofM&A trends216 deals$47.30 billionMost ActiveRegion by DealVolumeEuropeMost ActiveSector by DealVolume andTotal DealValueCommercialairlinesKey Stats446 deals$54.20 billion4 sub-sectorsGlobalMost ActiveRegion by DealValueNorth America233 deals $24.38 billion*The total deal value is based only on the deals that have disclosed deal value. All figures above refer to the target and not the buyer.
NC3A-F1 8RegionPercentage of revenue oftop three companies inthe region to total regionrevenuePercentage of revenue oftop five companies in theregion to total regionrevenuePercentage of revenue oftop ten companies in theregion to total regionrevenueWorld 8.5 13.8 23.6North America 37.0 53.9 80.7Europe 24.7 37.4 56.4Asia-Pacific 10.7 16.6 31.5Latin America 41.2 58.1 85.8Middle East 73.6 82.7 92.9Regional ConcentrationThe table above presents the ratio of revenue of top companies (top 3, 5 and 10) in a region as apercentage of revenue of all the companies the region. In regions such as North America, Latin America andMiddle East the top ten companies by revenue occupy over 80 percent of the market, indicating lowerpossibilities for M&A activity in these regions. Asia-Pacific and Europe have scope for industry consolidationas indicated by their lower percentages.*Revenue (latest annual) included as part of analysis includes those of public companies only. Source: Capital IQ and Frost & Sullivan analysis.Airline Industry: Ratio of Revenue of Top Companies to Total Region Revenue*, Global, 2007–2012
NC3A-F1 99458837163770204060801002007 2008 2009 2010 2011 2012NumberofTransactionsYearM&A Transactions—Value and Volume AnalysisDataYearTotal2007 2008 2009 2010 2011 2012Count of All Transactions 94 58 83 71 63 77 446Value of All Transactions ($ Million) 6,680.7 12,238.4 11,039.8 20,480.1 1,614.3 2,145.5 54,198.8Average Value of All Transactions($ Million)180.6 611.9 380.7 660.6 62.1 126.2 338.7Average Value of All Transactionsexcluding deals with value greaterthan $1 billion ($ Million)142.1 94.5 92.5 80.0 62.1 50.1 92.5Source: Capital IQ and Frost & Sullivan analysis.Airline Industry: Number of M&A Transactions,Global, 2007–2012Airline Industry: Value of M&A Transactions,Global, 2007–2012Airline Industry: M&A Transaction Details, Global, 2007–20126,680.712,238.411,039.820,480.11,614.3 2,145.50.05,000.010,000.015,000.020,000.025,000.02007 2008 2009 2010 2011 2012TransactionValue($Million)YearNote: Excludes transactions for which details are undisclosed
NC3A-F1 10Airline Industry: Percentage of Transaction ValueTrend by Region from the Target’s Perspective,Global, 2007–2012Transaction Value Trends by Region from the Target’sPerspective (continued)Source: Capital IQ and Frost & Sullivan analysis.Note: Analysis includes only transactions for which details are disclosed.*Excludes transactions with value greater than $1.00 billion0%20%40%60%80%100%2007 2008 2009 2010 2011 2012Region E 16.7 87.5 5.6 57.5 3.0 4.4Region D 34.7 0.0 3.0 36.1 8.2 2.0Region C 40.6 9.9 53.8 2.9 51.8 80.7Region B 6.9 0.0 37.6 2.2 37.0 12.9Region A 1.1 2.6 0.0 1.3 0.0 0.0TransactionValue(%)Year0%20%40%60%80%100%2007 2008 2009 2010 2011 2012Region E 21.8 14.9 25.9 12.3 3.0 12.0Region D 14.7 0.3 13.7 29.5 8.2 5.2Region C 53.0 67.4 15.2 26.6 51.8 48.3Region B 9.1 0.0 45.0 20.2 37.0 34.5Region A 1.4 17.4 0.2 11.4 0.0 0.0TransactionValue(%)YearAirline Industry: Percentage of Transaction Value*Trend by Region from the Target’s Perspective,Global, 2007–2012Region A: Africa and the Middle East; Region B: Asia-Pacific; Region C: Europe; Region D: Latin America and Caribbean; RegionE: United States and CanadaEurope and North America dominate the preferred regions as targets. Their combined share of total value of transactions from 2007until December 11, 2012 has consistently remained over 50.0 percent. However, upon excluding deals with values of over $1.00billion, we observe that, after 2008, the dominance of Europe and North America have come down and regions such as Asia-Pacificand Latin America have gained momentum in M&A activity in terms of deal value.
NC3A-F1 11M&A Activity—Key SegmentsAirline Industry: Deal Volume by Industry Classification, Global, 2007–2012Source: Capital IQ and Frost & Sullivan analysis.*Conglomerates refers to companies that operate in more than one segment.UD: UndisclosedIndustry Classifications [Target/Issuer] 2007 2008 2009 2010 2011 2012 TotalCommercial Airlines 46 29 40 35 30 36 216Helicopter Transportation Services 5 1 5 6 0 5 22Private or Business Aircraft Services 23 11 14 13 9 12 82Rescue and Safety Aircraft Services 1 2 3 0 1 0 7Conglomerates* 19 15 21 17 23 24 119Airlines Total 94 58 83 71 63 77 446Industry Classifications [Target/Issuer] 2007 2008 2009 2010 2011 2012 AverageCommercial Airlines 272.3 1,101.2 642.7 1,089.8 71.2 243.2 576.8Helicopter Transportation Services 19.7 UD UD 113.6 0.0 18.9 38.2Private or Business Aircraft Services 17.1 154.1 15.4 1.8 2.6 1.0 28.8Rescue and Safety Aircraft Services UD UD UD 0.0 UD 0.0 UDConglomerates* 178.1 109.1 196.5 105.8 60.0 57.7 122.8Average 180.6 611.9 380.7 660.6 62.1 126.2 338.7Airline Industry: Average Deal Value by Industry Classification, Global, 2007–2012Commercial airlines, the largest segment in the airline industry, has dominated the M&A activity in the industry,both by deal volume and deal value. The segment’s total deal value was around $47.30 billion, 87.3 percent ofthe total deal value. The average deal value of this segment is greater than that of the industry over the studyperiod.Note: Values are in $ Million.
NC3A-F1 12Airline Industry: Transaction Volume Trend by DealVolume Range, Global, 2007–2012Airline Industry: Percentage of Transaction Volume Trend byDeal Volume Range, Global, 2007–20120.0%20.0%40.0%60.0%80.0%100.0%200720082009201020112012Greater than $1 billion 2.7 5.0 10.3 9.7 0.0 5.9$100–$1,000 million 37.8 30.0 13.8 22.6 30.8 23.5$10–$100 million 37.8 40.0 41.4 35.5 26.9 29.4Less than $10 million 21.7 25.0 34.5 32.2 42.3 41.2TransactionVolume(%)YearAs observed, after 2008, the percentageof deals with values less than $10 millionis increasing. In the next 12–18 months,deal values are expected to remain low asinvestors are skeptical when it comes tocommitting to higher amounts, especiallyin an industry that is highly correlated withthe world GDP. However, we could expecta few major deals involving large carriersas well.Source: Capital IQ and Frost & Sullivan analysis.Deal ValueRange2007 2008 2009 2010 2011 2012Less than$10 million8 5 10 10 11 7$10–$100million14 8 12 11 7 5$100–$1,000million14 6 4 7 8 4Greater than$1 billion1 1 3 3 — 1*Note: Analysis includes only transactions for which details are disclosed.Investment Trends Analysis by Deal Value RangesDeal Value Range 2007 2008 2009 2010 2011 2012Less than $10 million 3.3 5.3 2.9 2.1 3.7 4.8$10–$100 million 44.9 28.9 42.9 37.7 31.5 47.1$100–$1,000 million 318.7 256.3 465.1 257.8 169.1 133.0Greater than $1 billion 1,564.0 10,443.1 2,878.7 6,080.1 — 1,344.5Airline Industry: Average Transaction Value* Trend by DealValue Range, Global, 2007–2012Note: Values are in $ Million.
NC3A-F1 1302468100.0100.0200.0300.0400.0500.0600.0700.02007 2008 2009 2010 2011 2012Transaction Value (LHS) 574.3 176.8 239.8 653.0 230.1 111.5Average Transaction Value (LHS) 287.1 44.2 119.9 108.8 76.7 111.5Transaction Volume (RHS) 5 8 6 9 5 7NumberofTransactionsTransactionValue($Million)YearAirline Industry: Volume and Value of Cross-border Deals, Global, 2007–2012Investment Trends Analysis by Cross-border Deals(continued)Source: Capital IQ and Frost & Sullivan analysis.0.03.06.09.012.015.02007 2008 2009 2010 2011 2012Cross-Border Value as a percent of Total DealValue8.6 1.4 2.2 3.2 14.3 5.2Cross-Border Volume as a percent of Total DealVolume5.3 13.8 7.2 12.7 7.9 9.1TransactionValueandVolume(%)YearAirline Industry: Cross-border Deals as a Percentage of Volume and Value of Total Deals, Global, 2007–2012
NC3A-F1 14Companies Seeking Acquisitions/Investments*AirAsia Berhad (KLSE:AIRASIA)All NipponAirways Co. Ltd.(TSE:9202)Hangar 8 plc (AIM:HGR8)Flybe Group PLC (LSE:FLYB)HNA Group LimitedEtihad Airways P.J.S.C.HNZ Group Inc. (TSX:HNZ.A)Exchange Income Corporation (TSX:EIF)American Airlines Inc.Türk Hava YollariA.O. (IBSE:THYAO)Source: Capital IQ and Frost & Sullivan analysis.* 07/01/2012 to 01/23/2013
NC3A-F1 15Companies Seeking to Sell/Divest*Vietnam AirlinesAgni Air Pvt. Ltd.China Eastern Airlines Corp. Ltd.Guna Airlines Pvt. Ltd.UTair AviationBankia, SA. (CATS:BKIASpiceJet Limited (BSE:500285)Grupo AeromexicoSAB de CV(BMV:AEROMEX*)Deutsche LufthansaAktiengesellschaft(DB:LHA)B&H Airlines d.o.o.SAS AB (OM:SAS)Qantas AirwaysLOT Polish Airlines S.A. (PLL LOT)Kingfisher Airlines Limited (BSE:532747)Source: Capital IQ and Frost & Sullivan analysis.* 07/01/2012 to 01/23/2013The companies listedabove have expressedinterests to sell or divestparts of their businesses.This includes divestingparts of their businesses,selling their stakes inother companies, sellingassets, and selling non-core businesses.
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