February 17, 2007 / 12:04 AM / 11 years ago

Private equity eyes U.S. airlines

<p>American Airlines planes sit on the tarmac at Chicago's O'Hare International Airport in this January 9, 2006 file photo. The resurgent U.S. airline industry may attract interest from cash-flush buyout firms, but rising valuations and entrenched unions could reduce the appeal.John Gress</p>

NEW YORK (Reuters) - The resurgent U.S. airline industry may attract interest from cash-flush buyout firms, but rising valuations and entrenched unions could reduce the appeal.

The U.S. airline industry is in its best shape since 2000, posting profits last year amid soaring demand and leaner costs after racking up $35 billion in losses over the previous five years. The improved finances and stable outlook for the industry make companies like American Airlines' parent AMR Corp. AMR.N a potential target for private equity firms.

"They've significantly picked up their interest from, say, five years ago," said John Luth, Chief Executive of transport-focused investment bank Seabury Group. "They're really open for business both here in the U.S. and elsewhere."

OPEN FOR BUSINESS

Financial investors have indeed shown a growing appetite for airlines, despite their rocky recent history.

A group led by Macquarie Bank Ltd. MBL.AX and including U.S. private equity firm Texas Pacific Group TPG.UL is closing in on an $8.7 billion acquisition of Australia's Qantas Airways Ltd. (QAN.AX).

BusinessWeek reported late Thursday that U.S. investment bank Goldman Sachs (GS.N) and British Airways BAY.L may bid up to $11.1 billion for AMR, citing people familiar with the situation. But sources familiar with the matter told Reuters on Friday that there were no current plans to make a bid for the world's largest carrier.

"There are more than a dozen private equity firms that have expressed to us an interest in being called when those opportunities are found," said Seabury's Luth, whose firm is one of the firms advising bankrupt Northwest Airlines Corp.

NWACQ.PK.

Texas Pacific, which helped fund Continental Airlines' (CAL.N) emergence from bankruptcy in 1993 and is currently involved in the bidding for Italian carrier Alitalia AZPIa.MI, has the most experience in the airline industry among private equity firms.

PAR Capital Management, which has a seat on US Airways Group Inc.'s board, has also been involved in the airline industry.

"If you can be a player during the upswing, the potential upside is substantial," said Stuart Klaskin with KKC Aviation Consulting.

'HIGH PRICES'

But valuations, boosted by US Airways' aborted effort to acquire bankrupt rival Delta Air Lines Inc. DALRQ.PK, may have already gotten too rich for private equity firms.

"I would be surprised if there was private equity interest in airlines now because the price people are being asked to pay is already high," said one airline banker who did not wish to be named.

The Amex airline index .XAL has risen 25 percent over the last six months.

Labor unions, which wield significant influence at airlines, may also spook financial investors.

"Every time the industry gets profitable again the labor unions...drain a lot of the profitability out of a carrier," the airline banker said.

"Inherently your time frame when investing in airlines needs to be relatively short and some degree is controlled by the expiration of your labor costs," the banker added.

Unions have already shown an interest in clawing back some of the concessions they made during the industry's long downturn.

Ground workers at American Airlines said last month that they plan to start contract negotiations about six months early. The carrier's largest work group aims to be rewarded for generating $95 million in revenue for the airline last year by performing maintenance for other carriers.

Also, despite recent financial improvements, most U.S. airlines remain heavily in debt, complicating the debt-financed buyouts often undertaken by private equity firms.

AMR, for instance, ended 2006 with net debt of $16.3 billion, compared to a market capitalization of about $9.6 billion.

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