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Merger Talks between Lufthansa and Turkish Airlines

Analysis of current situation, potential benefits and possible outcome

Hausarbeit 2013 33 Seiten

BWL - Investition und Finanzierung

Leseprobe

Table of Contents

1. Introduction

2. Present Situation
2.1. Lufthansa Company Profile
2.2. Turkish Airlines Company Profile
2.3. Does a Merger Make Sense?.

3. Motives for the Lufthansa and Turkish Airlines Merger
3.1. Strategic Reasons
3.2. Economies of Scale
3.3. Economies of Network Density
3.4. Efficiencies
3.5. Improved Capacity Management
3.6. Increased Market Share and Revenue
3.7. Challenges to be Overcome for a Successful Merger
3.7.1. Anti-Trust Concerns and Regulatory Barriers
3.7.2. Customer Perceived Monopoly Behaviour
3.7.3. Cultural Fit between the Airlines

4. Possible Forms of Cooperation between Lufthansa and Turkish Airlines

5. Future Cooperation Process and Outlook on External Impact
5.1. M&A Process
5.1.1. Pre-Merger Phase
5.1.2. Merger-Phase
5.1.3. Post-merger Phase
5.2. Outlook and possible Impact on Airline Industry

6. Conclusion

Bibliography

1. Introduction

During the last visit of the Turkish Prime minister Recep Tayyip Erdogan in Germany in November 2012 the German chancellor Angela Merkel told him that she would like the two countries to work on a joint management and operations of the two airline giants, Lufthansa (LH) and Turkish Airlines (TK). Erdogan seemed quite flattered about the offer responding later in an interview with the Turkish media (translated quote):”During my visit to Germany, Chancellor Merkel offered to establish joint management for LH and TK. And I have responded positively to Merkel’s offer. We have already had plans for joint projects and I hope to take such a joint step together.”[1]

Since then there have been numerous rumours in the news about a possible merger between LH and TK.

The intent of this paper is to discuss what is behind these rumours and analyse the possibility of such a merger. For this purpose we have split the paper in four parts. In the first part we will talk about the present situation of the European aviation business, specifically in the case of LH and TK. We are also going to introduce the two companies and analyse several aspects of them i.e. past development, performance of the last years, current financial situation and company strategy. Additionally we will present the strengths and weaknesses of each company and the challenges they are facing at the moment.

In the second part we will analyse what possible benefits could arise from a merger of the two companies and briefly outline some of the challenges the airlines will have to overcome to make a merger successful. In the third part the possible forms of cooperation will be discussed.

Finally in the fourth and last part, we will assess the future perspective and the external impact of such a merger. Throughout the paper we try to focus on corporate finance aspects of mergers and acquisitions.

2. Present Situation

Currently Airlines in Europe are facing numerous challenges. Stiff competition and rising fuel prices make it difficult for airlines to post profits at the end of the year. Additionally the airlines have to face the aggressive expansion strategies of the major gulf carriers like Emirates, Etihad and Qatar. The big European flag carriers compete against the gulf carriers on long haul routes, particularly between Europe and Asia[2]. (Andrew Parker, Daniel Dombey, Financial Times, 19.11.2012) These airlines are offering more and more seats to Europe and continue to take stakes in other carriers. For instance, Qatar Airways, the state owned carrier vying with Etihad as the second biggest carrier in middle-East said in October 2012 it would join the One World Alliance, one of the world’s three largest global airline alliances, which includes British Airways. On the other hand Air France – KLM, Etihad and Lufthansa’s German rival Air Berlin agreed on flight code sharing. As a result, Lufthansa remains the only major European network carrier not participating in some sort of tie up with an expanding Middle East hub carrier. Lufthansa criticizes the inroads of the Gulf carriers in Europe and the European hub system, arguing they are unfairly subsidized by their governments and thus should not be granted further bilateral access. Lufthansa manifested its position regarding the gulf carriers when they were courted by Etihad in 2010, but resisted, preferring to rely on its strength in its home market and the power of its Star Alliance grouping which it heads.[3]

The position chosen by LH is not an easy one. The thriving traffic flow between Europe and Asia has launched a race for the long-haul routes to the east, where LH is having difficulties keeping up with the Middle Eastern carriers. These carriers are purported to benefit from competitive advantages like public subsidies and preferential fuel prices, which enables them to offer lower prices and better in flight services.[4]

In this race, a strategic partner like Turkish Airlines might be exactly what Lufthansa needs.

2.1. Lufthansa Company Profile

Lufthansa is the German flag carrier based in Frankfurt and using Munich as its secondary hub. It was newly founded in 1953 under the name Deutsche Lufthansa A.G. and began operations in 1954 using Convair and Lockheed Super Constellation aircraft. In 1987 Lufthansa was one of the founders of Amadeus, one of today’s most successful Global Distribution Systems (GDS). In 1988 Lufthansa adopted a new corporate identity changing its livery, the design of its cabins, city offices, and airport lounges. In 1997 Lufthansa was one of the founding members of the Star Alliance, the world’s first multilateral Airline Alliance. In the 90’s and 2000’s LH was able to continue its expansion and profitable operation. Today the Star Alliance has become the largest global airlines alliance.

Lufthansa on the other hand has become a global aviation group, which operates in five business segments: Passenger Airline Business, Logistics, MRO, Catering and IT services. The Passenger Airlines Group consists of Lufthansa Passenger Airline, Swiss, Austrian Airlines, Germanwings, Brussels Airlines and Sun Express. The Lufthansa group consists of a total of more than 400 subsidiaries and associated companies, offering direct flights from Frankfurt to over 220 destinations worldwide[5].

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Lufthansa Network, 229 destinations (Non-stop from FRA, codeshares included) (Source: Lufthansa)

Besides Star Alliance, Lufthansa has created the Lufthansa regional brand, under which carriers of the likes of Air Dolomiti, Augsburg Airways, Lufthansa Cityline and Eurowings operate point-to-point flights across Europe as well as connecting flights on Lufthansa’s behalf. Additionally Lufthansa has partner airlines, which have entered bilateral cooperation accords; these include Jet Airways, Air India, Luxair and Air Malta.

Lufthansa’s corporate strategy is geared to sustainable value creation and commitment to shareholder value. They attach priority to profitability over size.

In the last ten years the company has performed well and was able to make black numbers except in 2003 (-984€m) and 2009 (-34€m). In 2011 the company posted a net loss of 13 €m. Some of the reasons which caused this loss were events in Japan and the Arab region, the European debt crisis, high fuel prices, the air traffic tax, the night flight ban in Frankfurt and a slowing global economy.[6]

In 2012 things have not been getting easier for the Lufthansa group. Strong low-cost airlines on the one hand and state airlines from the Middle East on the other hand, still constitute an enormous competitive challenge. The situation is further aggravated by high fuel prices, a weak euro and the growing burden of taxes, fees and charges. Nevertheless Lufthansa expects to increase revenue and achieve an operating profit in the mid three-digit million-euro range at the end of 2012. To achieve this Lufthansa has launched a cost-cutting program called SCORE. The aim of the SCORE program, launched in early 2012 is to achieve sustainable and structural improvements in the Lufthansa groups earnings of at least 1,5 €bn Euros over the operating result for 2011 of 820 €m. As part of this program Lufthansa envisages to slash 3500 jobs worldwide. Additionally Lufthansa sold the biggest loss-maker of the group, British Midlands International, in an effort to get back to profitability.

Despite these strong headwinds, Lufthansa managed to achieve a respectable profit in the first three quarters of 2012 (Jan. – Sep. 2012). In the reporting period, the Lufthansa group was able to increase its revenue overall, but because of influences mentioned earlier the operating result was down on last years.

The traffic figures for the Lufthansa group improved overall in comparison with the same period last year.

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Lufthansa key figures (Source: Lufthansa Website)

2.2. Turkish Airlines Company Profile

Turkish Airlines is the Turkish flag carrier based in Istanbul. Turkish Airlines was formed in 1933. Their first international services took place in 1947 with a route from Ankara international airport to Athens. In 1956 the Turkish government reorganized the airline. In 1983, a new government began the airline’s make over into a modern operation. After the deregulation of the domestic market in 1996 Turkish Airlines (IATA code: THY) entered marketing agreements with other international airlines to increase its competitiveness. THY continued to extend its international reach through marketing agreements with various airlines including American Airlines. In 1989 Sunexpress was founded as a joint venture between Lufthansa and Turkish Airlines. Today the airline is still owned 50% by each of the two. In the 00’s THY managed to recover fairly quickly from the 11th September attacks and consequent Iraq war, kicking off another fleet expansion program in 2004. In 2008 THY joined Star Alliance, becoming the 7th European airline and the 20th in total to join the global Airline Alliance.

It has been awarded the Skytrax “Europe’s Best Airline” award twice in the last two consecutive years. It has declared its mission to “become the preferred leading European air carrier with a global network of coverage thanks to its strict compliance with flight safety, reliability, product line, service quality and competitiveness, whilst maintaining its identity as the flag carrier of the Republic of Turkey in the civil air transportation industry.”[7]

Today THY has established itself in Europe as one of the leading airlines offering direct flights to more countries than any other airline in the world. Figure 2 shows Turkish Airlines destinations, highlighting in the blue circle that the majority of its destinations are within narrow body range. This indicates the advantage of the geographically favourable location of the Istanbul hub.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Turkish Airlines destinations: 155 destinations out of 181 within narrow body range. (Source: Turkish Airlines website)

Turkish Airlines is currently considered the fastest growing airline in the world. Total Revenue in the first three quarters of 2012 went up by over 30 %, when compared to the previous year’s numbers of the same period. Total passengers carried also increased by a remarkable amount of 20 % with a fleet increase of around 12%.

Turkish Airlines has numerous competitive advantages, which will nourish its further growth in the future.

Istanbul, THY’s primary base of operations, is unique in terms of geographical location. A natural bridge between east and west, Istanbul allows transfers to be made in either direction in less time and at less cost than is possible anywhere else. The fact that one may reach 55 countries within three and a half hours aboard a flight leaving Istanbul is a clear indication of its importance as an aviation hub.

Additionally Turkish Airlines operating costs are very much lower than those of its competitors. The contributors to this cost advantage are a relatively youthful fleet, the ability to conduct narrow body operations, Istanbul’s location, high levels of personnel productivity and efficiencies in aircraft utilization.

Other strengths of the company include Subsidiaries, which support its primary operation, a strong and balanced flight network and superior service quality.

In the years ahead, Turkish Airlines will, within the framework of its well-defined strategies, further strengthen its market position and provide maximum benefit to all of its stakeholders.[8]

Abbildung in dieser Leseprobe nicht enthalten

Table 2: Turkish Airlines Key figures (Source: Turkish Airlines Financial Reports)

[...]


[1] Skift (2012)

[2] Financial Times (2012)

[3] Reuters (2012)

[4] CAPA (2012)

[5] Star Alliance (2013)

[6] Lufthansa Annual Report (2011)

[7] Turkish Airlines (2013)

[8] Turkish Airlines Annual Report (2011)

Details

Seiten
33
Jahr
2013
ISBN (eBook)
9783656649144
ISBN (Buch)
9783656649175
Dateigröße
835 KB
Sprache
Englisch
Katalognummer
v272720
Institution / Hochschule
Technische Hochschule Wildau, ehem. Technische Fachhochschule Wildau – Institute of Technology
Note
1,0
Schlagworte
merger talks lufthansa turkish airlines analysis

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Titel: Merger Talks between Lufthansa and Turkish Airlines