Analysts: Nicolas Bojenko (University of Sussex), Max Rosmuller (University of St. Gallen)
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A Difficult End to 2020
Amidst the complications brought by the continuing Covid-19 pandemic in the last 6 months of 2020, one can notice that some industries were clearly more affected than others. Amongst the most affected sectors lies the Airline industry, one that thrives and survives on passenger movements across the globe. When airline revenue dropped, and serious restructuring manoeuvres took place, so did the overall M&A activity. In Europe, commercial airlines passenger traffic was down -70% in 2020, a number as dangerous as it is scary. Additionally, the number of M&A deals in Q3 and Q4 2020 in the EMEA region was at 14, a 60% drop in comparison to the same period last year as reported in Bloomberg Terminal. Total M&A deal values fell from a staggeringly high $3.2 billion in the last 6 months of 2018, to a comparatively much lower $505.2m in that same period in 2020. These visible changes in the airline industry have a wider impact on some specific countries in the EMEA region as a whole. For example, 13.3% of the UAE’s total GDP is supported by air transportation and foreign tourists' arrival. In that same region, a major airline industry player, Turkey, a million jobs are supported by the airline industry, with a contribution of $44.8 billion to the country’s GDP. In Western Europe, the impact is particularly felt in countries like the UK where the airline industry accounts for approximately 4.5% of the country’s GDP, where 1.6 jobs million are typically supported by the air transport sector. Will the airline industry in the EMEA region survive in 2021? Nobody knows for sure. It has been very challenging so far but hopes of a better tackling of the virus and the incoming mass vaccinations undertaken in European countries appears as a glimpse of hope into the future.
Constant Restructuring and its Consequences
In the last quarter of 2020, the airline industry was still confronted with its restructuring needs that arose in the first half of 2020. This said different airlines were affected at different scales. Restructuring generally occurs at companies in 3 different situations, either the firm is going towards bankruptcy, in the middle of bankruptcy or actively attempting to exit out of a financially distressing situation. This said, the European market appeared to be in that first category. Carriers like Air France-KLM who furthered laid off 7,500+ employees in July 2020, or the German Lufthansa which cut an additional 22,000 jobs in that same period. Whilst it looks like these firms’ restructuring needs look worrying, a lot of these airlines have gotten government support for short-term liquidity issues. It is however important to notice that the most struggling European carriers also tend to be those with relatively small surface areas. France, Germany and Lithuania are perfect examples of that, their small geographical areas limit the possible emergence of a domestic touristic airline market. On the other side of the spectrum, the Russian carrier Aeroflot managed to mitigate the impact that is noticeable by other European countries. Whilst the firm received state-guaranteed loans, it did not cut any jobs at all because it managed to cover its immediate liquidity issues, thanks to a reemergence of intra-domestic travel. Aeroflot’s CEO, Vitaliy Saveliev stated that the airline had “no plans to cut jobs” in the short-term future.
But for most companies, restructuring and massively cutting down costs is not sufficient to cover up for the reduced flights to never-seen low levels. For some airlines, putting an emphasis on cargo operations helped save the missing customers and bring in some operational revenue in. The largest commercial airline of Africa, Ethiopian airlines decided to act quickly and converted more than 45 of its passenger jets to build a new fleet of cargo repurposed aircrafts. Facing a 90% drop in international passenger traffic, Ethiopian Airlines’ CEO TewoldeGebremariam stated that “those actions have saved the airline”. A similar manoeuvre was performed by Emirates, the largest UAE based airline, with 85 aircraft repurposed to transport goods to London, Hong Kong or Amsterdam. Emirates essentially uplifted 65% of its cargo operations from the same period last year, where “revenue was mainly supported by strong cargo business” stated by the company in November 2020.
M&A Activity Overview
Overall M&A activity in the airline industry appeared to have been falling since 2018 when combining the total volume of Q3 and Q4 of previous years. At its highest since 2015 with 42 deals, during the same period in 2020, that number was at 14 in the EMEA, a -66.6% drop from 2018.
It is particularly interesting to note that although the volume decreased significantly, some noticeable M&A transactions did occur when it comes to long-established airlines like Lufthansa in Germany or TAP Airlines of Portugal. For the later airline, the Portuguese government raised its ownership stake in its largest national airline to 72.5%, thus granting the Portuguese government an injection of 1.2 billion euros into TAP. Quite frankly the airline is small, it employs around 10,000 employees and has a fleet of about 100 aircrafts, but both private shareholders and the government hang on to that aeroplane tight as it brings “about half of the tourists that arrive by air”. Travel & Tourism has always played a crucial role in Portugal’s GDP growth, in 2018 this sole sector amounted to 35.2% of Portugal’s total GDP. Lufthansa on its end, sold its European catering operations units to Swiss’s “Gategroup”. This move brings in some funds to address the liquidity issues experienced by the company, but primarily it was done as part of “Lufthansa’s new strategy to focus on its airline business”. These Q3 & Q4 deals highlight the fragility of the airline industry in general. Although Covid was a hard tool on the development of these firms, their sole over-reliance on passenger traffic cost them a fortune in 2020. This is one of the main disadvantages that undiversified businesses can suffer from becoming overly dependent upon one unique source of revenue.
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