12.13.2007 « It Is True: Lufthansa to Buy 19% Stake in jetBlue »
jetBlue announced that Lufthansa will purchase up to a 19% stake in the carrier click here. William Greene, the equity analyst at Morgan Stanley, said the deal will bolster liquidity for jetBlue at a time when near term debt obligations exceed expected cash flow from operations and cash on hand.
For Lufthansa, this would seem to be a smart investment in a quality US carrier with a product focus that recognizes that a one size fits all network does not appeal to all customers. Further, this transaction for Lufthansa would appear to be a very shrewd option play for a US carrier when equity values are low and the relationship of the euro to the dollar is high.
In this writer’s opinion, as well as Greene’s, jetBlue’s slot portfolio at JFK has strategic value. Down the road, connectivity to the many Star Alliance partners serving New York could be of value. But the first stage is a pure financial play and no commercial relationship is anticipated. The announcement comes just a day after a talk by Wolfgang Mayrhuber, the chief executive of German airline Lufthansa AG in China where he suggested that global consolidation is a necessary and logical development of the global market click here.
In that Reuter’s article, mention is made of Lufthansa moving away from the possibility of investing in Alitalia. In a previous blog post, we wrote about British Airways’ possibility of reconsidering the use of its capital to consolidate “at home” versus using that capital to invest in other countries, namely the US click here. Well it just happened – or at least the first step was taken. And BA has walked away from its interest in Iberia.
Yes, on the surface this deal may raise questions as to why would Lufthansa make such a deal. Is United, US Airways and/or Air Canada hurt by this transaction? Will this precipitate other similar types of transactions leveraging the current currency relationship to low equity values? WestJet and Air France are considering a closer relationship.
Change is coming. What would Yogi say?
Reader Comments (7)
I definitely see more action like this in the future. Perhaps some foreign carrier will make a grab at a stake in Delta since they also have a large JFK operation? Now what foreign carrier would be interested in Delta and JFK, hmmm.... Maybe KLM-Air France?
flyby
Great to hear from you. Given the aggressive nature of the Air France/KLM combination, your suggestion of a Delta play is most interesting and plausible. While the Lufthansa/jetBlue deal is advertised - on the US side - as a pure financial play, the strategic possibilities are many. Given the past rumors surrounding a Delta interest in jetBlue, this was a most interesting play by a STAR carrier.
And we might even get a sense of wind direction from the US government on how they view such transactions. ?
Suffice it to say, we are about to embark on a very exciting period in US commercial aviation. Thanks for reading and commenting.
My question back to you: if one thinks that consolidation of the US home market is important, won't deals like equity stakes only perpetuate the current unhealthy situation in the US market?
I think Yogi would say that we've now come to the (global consolidation) fork in the road, and we might have no choice but to take it.
I am rather leery of seeing equity stakes in US carriers coming from overseas. It merely further lines the pockets of airline management teams (is it any wonder that Tilton is often heard supporting such deals?)
Overall, these stakes are merely another delaying tactic to the much-needed Darwinian shake-up which is desperately needed in the US domestic sector. Let the weak competitors exit from the market, and then the stronger ones will be able to address the issues you often raise, such as our lagging in global competitiveness due to aging fleets, outmoded workrules, etc... Seeing foreign carriers take stakes in domestic carriers will merely prolong the agony.
Blackbook
We just need to come up with a yogiism. I agree that we are at a fork in the road. I do think that the outdated foundations and interests on which US commercial aviation sits is being structurally challenged.
I am less leary of global partnerships although I do wave the flag of concern regarding US carriers and their ability to lead and compete. With regard to the management issue: yes, certain management's may financially benefit. But isn't the question more of management entrenching themselves to block the evolution of the market that could benefit employees, shareholders, communities and other stakeholders?
Like Richard Anderson said at Delta: what is best for the company will be considered - and I am paraphrasing. And at this point my bet is other management's feel the same.
I am more aligned with your view to let the weak die. That is healthy and then we can challenge management teams to see who can best navigate a more promising competitive landscape. I don't want us to see the agony prolonged for I fear it will be too late.
When you look at how the oneworld alliance is being "cemented", it is being done with no equity stakes. It is cemented by mutual benefit of the alliance partners.
Oneworld carefully choose their partners and then redesigns member processes along common standards. In addition to physically locating themselves in each others terminals for "seamless" service, the Oneworld travel experience has a similar cabin look and feel, similar level of service quality, and similar overall experience...all by design. The objective is to get the business traveler to experience indifference as to who is actually providing the service. As these alliances grow more integrated, a common "brand" emerges. All without equity stakes.
Luftansa is doing no such thing with Jetblue. They basically gave them $300 million bucks and got BOD seat to baby sit their investment.
Jetblue's operation is not throwing off enough cash to cover Capex and they can't risk a higher debt load and its attendant fixed costs with a passenger base that's so price sensitive. Jetblue wants to create the illusion of growing profits and by keeping additional debt service off the income statement.
Recall that debt financing is cheaper than equity financing...
If Jetblue executives had higher aspirations for their stock price, they would've used convertible securities instead of forking over 20% of the company to Luftansa for $7.50 a share. It may be that nobody will give Jetblue a loan.
The Jetblue - Luftansa relationship seems to be an old-fashioned "interline" agreement, IMO. Only 5% of Luftansa passengers have travel plans beyond JFK. That 5% will have to "shlep" themselves over to the Jetblue terminal on their own. Hardly the "seamless" experience business travelers are looking for.
Most likely customers of this service would be Hanz, Franz, and Dieter taking advantage of their cheap dollar. Off they go to South Florida to show off their "pumped-up" physiques. "Oont now vee dahnce at Sprockets!!"
Old SwissAir was a big fan of "equity stakes". Look where that got them. The "Hunter Strategy"....what a joke! SwissAir had had to keep shoveling money down rat holes. Admittedly, the $300 million is chump change for Luftansa due to the strong currency translation. IMO......Jetblue was desperate for some cash. $300 million will probably cover Capex requirements for another year. And if their operations can't cover Capex....they'll be needing more dough.
But this pittance probably gives them some breathing room, I guess they'll probably have close to a billion in cash after this transaction.
Bill-
I do agree that there will be more of these equity stakes taken in the future, and I definitely agree that this is not a real solution to the unhealthy situation for the US Airlines. This band-aid fix will only last so long before it breaks and all stakes are sold off leaving the US carriers short handed.
As one of the other readers said, this cash for Jetblue will probably allow them to wallow for another year without really fixing any problems. We really do need some evolution of the industry in the form of attrition.
The yogi expression is pretty funny to me. The US Airlines have come to a fork in the road, but they just keep going. No going left or right to change direction(or even taking the fork!), just sticking with their antiquated business models from the 1960s.
Flyby
Thanks much for your post yet again. With regard to the fork, my guess is they dropped something on their tie yet again.
I do our paths cross at some point. Thanks for your invaluable contribution here. Always nice to have company in promoting change.
Happy Holidays to you and yours. I guess I had better get writing as this story is getting a bit stale so thanks for keeping it alive.