DEALTALK-European airlines top IAG's shopping list

Mon Feb 21, 2011 3:29am EST

* Regulatory issues could make for easier deals in Europe

* Upcoming EU airline privatisations could offer opportunity

* Portugal's TAP offers access to Brazil, Africa routes

By Rhys Jones and Tracy Rucinski

LONDON/MADRID, Feb 21 (Reuters) - International Airlines Group (ICAG.L)(ICAG.MC), formed by the merger of British Airways and Iberia, will look to buy out smaller European carriers before pursuing major deals further afield.

IAG boss Willie Walsh said BA and Iberia had drawn up a shortlist of 12 targets to pursue after their $9 billion merger was completed late last year. [ID:LDE685112] [ID:TOE687051]

The group wants to lead global consolidation of the airline industry by folding Asian and Latin American carriers into its network, but Europe is likely to be its first port of call.

"The first airline to join IAG will most likely be European, simply for regulatory reasons," a source with knowledge of the matter told Reuters.

Aviation is one of the most regulated sectors in terms of limitations on foreign ownership; U.S., EU and Australian laws discourage mergers between domestic and overseas airlines, meaning a deal within Europe could be easier to execute.

The governments of Hungary, Poland, Czech Republic, Scandinavia and Portugal have all publically expressed interest in selling their flag carriers, and analysts see Air Portugal (TAP) as IAG's best bet, given its attractive long-haul network.

"Air Portugal has the leading capacity share from Europe to Brazil, which is a high-growth market," said RBS analyst Andrew Lobbenberg. "It also has a portfolio of African routes into former Portuguese colonies, which are now attractive premium travel resources markets -- notably Angola."

A merger of Brazil's largest airline TAM Linhas Aereas TAMM4.SA(TAM.N) with Chile's LAN LAN.SN(LFL.N) -- a deal that would create Latin America's biggest carrier if cleared by regulators -- would hasten the need for IAG to grab a slice of the growing Latin American air travel market.

"In either of these circumstances, TAP's Brazilian network would be useful to IAG's network portfolio," said Lobbenberg.

Portugal, which is taking steps to avoid an Irish-style bailout, hopes to raise 1.9 billion euros from privatisations this year but may want to delay a sale until TAP returns to profit. It posted a net loss of 3.5 million euros in 2009.

TAP, currently a member of Star -- a rival to IAG's own oneworld alliance -- would have to pay a switching cost to transfer alliances. There could also be political sensitivity between the Spanish and Portuguese governments, rivals to capture the lion's share of growth in traffic to Brazil.

If IAG has to wait to get its hands on lucrative Brazilian routes, it might turn first to a fellow oneworld member, such as Finish airline Finnair (FIA1S.HE), analysts said.

IAG has a bilateral partnership with Finnair, which offers a strong position on routes between Europe and Asia, they said.

IAG is the fifth carrier on Europe-Asia routes, with a market share of around 5 percent, and would be attracted by Finnair's significant long-haul network to Asia, from which it generates almost two-third of its revenues.

"The region that stands out is IAG's underweight position on routes between Europe and Asia, which we believe will soon overtake the North Atlantic as the biggest route in terms of available seat kilometres," said Nomura analyst Andrew Evans.

"Within Europe, oneworld partner Finnair has a natural geographical advantage for serving the northern Asian market, given flight paths, but lacks a deep point-to-point market."

Finnair has a market value of around $800 million, according to Thomson Reuters data.

Analysts believe Finnair and TAP, which have comparable fleets and networks, have a similar market value, though the potential of TAP's South American network could make it pricier.

IAG, which has 419 aircraft flying to 205 destinations, aims to shave 400 million euros off annual costs within five years.

"The new company's first priority is to get the house in order, but it has to be ready to pounce if an opportunity arises," added the source with knowledge of IAG's plans.

Shares in IAG have fallen 14 percent since they listed in London on Jan. 24, valuing the group at 4.5 billion pounds.

"After Finnair, I'd bet on a oneworld member like Hungary's Malev [MALV.UL]," said BPI analyst Joaquin Garcia-Romanillos.

After falling behind in European consolidation following Air France's (AIRF.PA) merger with Holland's KLM in 2004 and Lufthansa's (LHAG.DE) recent tie-ups with Swiss, Austrian Airlines and the UK's bmi, IAG will be keen to lead the next wave of global M&A activity and, in the long-term, will look at Asian carriers.

In the Asia-Pacific region, analysts see India's Kingfisher Airlines (KING.BO) and Australia's Qantas (QAN.AX) as IAG's prime targets, along with Chinese carriers Air China (601111.SS), China Southern (600029.SS) and China Eastern (600115.SS).

IAG could face a battle for scale in Europe first. Air France and U.S. peer Delta (DAL.N) have appointed Goldman Sachs to advise them on an approach for Britain's Virgin Atlantic [VA.UL], according to the UK's Sunday Times. [ID:N20185853] (Editing by Will Waterman)

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