A MAGAZINE FOR AIRLINE EXECUTIVES 2007 Issue No. 2

T a k i n g y o u r a i r l i n e t o n e w h e i g h t s TThehe PowerPower ofof PartnePartnerriinngg A CoConversationversation wiwitth AbduAbdull Wahahabb Tefefffahaaha, Secrecretataryry Generaeral Arab Air Carriers Organization.

Special Section I NSID E Airline Mergers and Consolidation Carriers can quickly recover 21 from irregular operations

Singapore Airlines makes 46 aviation history

High-speed trains impact 74 Europe’s airlines

© 2009 Sabre Inc. All rights reserved. [email protected] special report

Boom and Bust A number of private-equity companies are taking an interest in airline ownership to help make the sometimes-struggling carriers better as well as boost the value of what they own.

By Phil Johnson | Ascend Staff

onsidering the preponderance of buzz shutterstock.com by Photos — including multiple rumors as well Cas actual offers of various companies bidding to acquire all or portions of different airlines around the world — it’s not surpris- ing that some of the speculation centers on private-equity firms. More specifically, certain private-equity firms such as TPG Capital, which, along with Silver Lake Partners, recently took Sabre Holdings® private, appear to be very interested in moving deeper into airline ownership. And while it may seem farfetched for some traditionally “non-airline” companies to move their airline holdings up to majority stakes or even outright ownership, in TPG’s case, the airline con- nection is fairly obvious. David Bonderman, who co-founded Pacific Group (now TPG Capital) in the early ‘90s, has a history of being involved in airlines stretching back to his association with , shepherding the once-distressed carrier out of bankruptcy to become one of today’s strongest international players. More recently, TPG Capital also moved to acquire the catering arm of the former Swissair, and Bonderman himself has served for a number of years as chairman of the board of Ireland-based discount carrier Ryanair. “Not every private-equity firm is willing to touch the airline industry,” said Stan Block, Ph.D., a finance professor at Texas Christian University’s Neeley School of Business. Among Block’s spe- Texas Pacific Group, which was co-founded by David Bonderman, former Continental Airlines cialties is the study of corporate mergers and chief executive, has explored the possibilities of acquiring several airlines including Qantas acquisitions. Airways and was recently backed by British Airways to bid on Alitalia, for which it later with- “In many ways, airlines operate in a ‘boom- drew. and-bust’ industry,” Block said. “And in terms of coming into the airline industry, it really does require a very special talent — it takes somebody like Bonderman, who has had the experience stands the airline industry well enough to want to Really, it depends on how any particular and knows how to turn an airline around. It’s participate.” company’s moves are interpreted by analysts who interesting because Bonderman is not one who So what exactly is involved when assess- may or may not have all of the facts at their dis- gets hubris or thinks because he’s done some- ing TPG or any other “non-airline” company posal. Earlier this year, TPG explored agreements thing well previously, he can do something else. looking to get further involved with airlines? Is it to aquire Australia’s Qantas Airways and Alitalia, He’s a hardnosed business guy, and he under- a trend? although both efforts were unsuccessful.

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And it was recently reported that TPG is Block said. “That’s their objective — because they referring to Airlines, a once-highflying carrier being backed by British Airways in a bid to acquire want to maximize the value of the company.” that went bust in the 1980s. “Braniff was heavily Iberia. British Airways itself, in fact, has been Buying aircraft and leasing them to various into the hotel industry, and it got them in trouble. I rumored as a potential takeover target upon the airlines as highly valuable commodities is another think what you see in the airline industry is: It’s an occasion of a significant increase in BA shares major way a number of private-equity interests are industry that tends to go to extremes. We know owned by investment brokerage Goldman Sachs, becoming more heavily involved in the airline busi- that at certain points in time, an airline is highly already a major BA stockholder. ness as a whole. prosperous; at other points in time, it operates What might be the motivation of private- And there’s even been some speculation almost out of desperation. equity firms to be so involved among airlines? that the major delivery-service companies — FedEx “And what happens, just going back to “These private-equity interests are not and UPS, for example — might consider moves to the classic Braniff case, when they’re making tre- ‘nice guys,’ per se,” Block said. “They’re ‘good’ acquire airlines. It does not, however, necessarily mendous profits and have more money than they guys — they’re efficient guys who make compa- require as much imagination to detect the logic in seem to know what to do with — and this is also nies better, but they’re not trying to do anybody that type of prospective combination, since FedEx true of the oil industry and other industries as well a favor. They want to increase the value of what and UPS are already major global airlines in and of — they tend to give themselves too much credit. they own. In any company, there’s a tendency for themselves, albeit not on a passenger basis. They may say, ‘We’re doing so well, we could take activities to be continued because of personalities Airlines — in times of major cost cutting on other industries and spread our brilliance into and tradition and so forth. But once a firm like and emerging efficiencies — also tend to divest those industries.’ So what will happen is that when TPG comes in, they’re starting from a clean board. themselves of any “non-core” properties that are they’re at the peak of profitability, they will enter They’re looking to see what works and what extraneous to the primary business of safely flying other activities — just spreading their good will and, doesn’t work. and connecting people among their chosen global supposedly, their superior management. “So they’re going to reallocate for things destinations. “Then when things change, those are the that are unnecessary, that are not cutting costs, “I think this goes all the way back to Braniff, very things they need to jettison. They can’t be that are not making the operation more efficient,” and maybe even further than that,” Block said, tying up capital there — they can’t be taking those huge losses, particularly if they’re not diversified

Photos by punchstock.com by Photos away from the travel industry. And the problem with things like hotels is that when the airline indus- try is going poorly, chances are other components in the travel industry are going poorly as well. So there is a strong desire to jettison things like hotels and other extraneous business. And just take the example of when an airline that’s had to declare bankruptcy goes into the bankruptcy court, about the last thing a trustee or judge wants to talk about — in trying to keep the airline flying — is to keep its other activities going.” Indeed, not all airlines struggle as much as others during lean times. But the extent to which an airline’s economics become distressed can be a key measure of the type of bargain a potential buyer might accrue through an acquisition. And once a private-equity firm or another non-airline company acquires an airline, its longer- term objectives may be very clear. “They’re only likely to move in where they see two things: potential and inefficiencies,” said Block. “What I mean is the potential to be much better, and inefficiencies that can be eliminated to maximize the value of the company and maximize its profitability.” And therein lies the true potential value of the interest non-airlines have shown in get- ting into the airline industry in a very big way: improvement in efficiency and profitability, which in the long run can only help the entire industry grow stronger. a

In addition to private-equity firms that are taking an interest in the air transport industry, delivery-service companies such as FedEx and UPS may consider moves to acquire airlines. Phil Johnson can be contacted at [email protected].

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