Airline Fanatic

The NYTimes blog DealBook is reporting that Lufthansa is in talks to buy a 20% stake in JetBlue Airways.  I for one never expected JetBlue to be open to a sale, even for a portion of the company, to any airline, but it looks as if I’ve been proven wrong.  An official announcement on the deal could be made as soon as the market closes on Thursday in New York.

JetBlue’s stock, which has been in the dumps as of late, was up as much as 35% on the news of the potential deal to almost $8.50.  Why make this bid now?  DealBook indicated it was because of the relative strength of the Euro against the Dollar, making the deal cheaper than ever before for Lufthansa.  All of this still remains a rumor until an official announcement, but it seems quite possibly real to me.

Because Lufthansa is only taking a 20% stake in the company, they stay way below the foreign-ownership requirements for US airlines, something Virgin America has to battle when they started operations earlier this year.  According to people familiar with the matter the investment would only be a passive one, but would not rule out some kind of partnership (read:code sharing agreement) in the future. 

 Via [DealBook]

UPDATE: The AP has confirmed this story.  Lufthansa actually purchased a 19% stake in JetBlue for $300 million.  This is based on a share price of $7.27 per share, or a 16% premium of JetBlue’s closing price Wednesday.  Even more important, the two airlines said they would seek “an operation cooperation.”  What this means was not elaborated upon, but more details will be forthcoming.

Maxjet Airways, one of the all-business transatlantic carriers trying to carve out their niche, requested that their shares stop trading on the London Stock Exchange today, pending the “clarification of its financial position.”  Yikes!  I’m no financial wizard, but when you ask for your stock to be suspended, it probably mean you are in a little bit of a financial pickle.

The numbers back this up, with Maxjet reporting major losses of $31.9 million during the first six months of this year.  For the full year 2006 Maxjet threw an amazing $79 million down the tubes, it was their first year of operation.  Most new airlines expect to make losses while they get their operations going and achieve some scale, but I doubt they expected to lose that much.

So what is their explanation for being so deep in the red?  From the Financial Times:

It has faced mounting losses in the face of surging fuel prices and lower than expected fare yields. Higher maintenance costs for its ageing fleet of Boeing 767 aircraft have also depressed financial performance.

Guess what guys, the rest of the world has had record fuel prices and aging fleets to deal with too.  It seems Maxjet may have overestimated the demand for discount business class service over the Atlantic, and are in big trouble because of it now.  If this were truly the case, you would think the rest of this category of airlines would be in trouble too.  Quite the contrary though, as Silverjet has just announced it will expand its current current fleet of 767s.

For the time being operations and reservations go on as normal while executives scramble to secure fresh financing.  I haven’t has the pleasure of trying Maxjet out myself yet, but here’s to hoping the airline will still be around when I do get that opportunity!

It’s been a long road for Singapore Airlines in their bid to take a combined 24% stake in China Eastern Airlines, but today they are one step closer to the final sale.  A date has been set for China Eastern’s many shareholders to take a vote on the sale to Singapore, on January 8th.  The ownership structure of China Eastern seems to be quite complex, with several state and private interests making up the biggest chunk of outstanding shares.  The way the vote is organized however (shareholders in Hong Kong and Shanghai will vote simultaneously, and state owned players are not allowed to vote) indicated the sale will proceed once the vote finally takes place.

The New York Times is running a piece today about merger talk between the number 2 and number 3 airlines: United and Delta.  The latest news was spawned by Pardus Capital Management, which owns about a 2.6 percent stake in Delta.  According to Pardus, the combined airline would create about $585 million in savings, not to mention creating the world’s biggest airline.

The stimulus for this letter to Delta management seems to be the record rapid rise in fuel prices.  Any money the majors may have been making over the past few years will be completely wiped out it seems by these huge price increases.  Pardus obviously assumes that such a massive combined airline would then be able to reduce capacity to a degree that prices would rise considerably, and revenue along with them.  This is a pretty good assumption, as one less major carrier would reduce the competition on many routes over night, and it would take low cost carriers a while to adapt.

The letter also analyzes potential other merger prospects, but still identifies a Delta-United union (which would be a pure stock transaction) as the best fit.  A combination with Northwest would provide the best cost savings at over $1.5 billion annually, but would not result in a significantly larger network.  I wrote a post a while ago on a Northwest-Delta merger and came to the same conclusion: don’t do it.  Pardus also took a look at Continental and found that costs would actually rise $171 million a year.

We’ve known that Delta has been looking for acquisitions for some time now, but a letter from a larger shareholder such as Pardus may push them a little harder.  That combined with the current price environment may mean we could see movement sometime soon on this.  As always, the politics of labor unions and the airline industry will play a factor here, so we will have to wait and see.

After my post on JetBlue’s impressive quarterly results, the Wall Street Journal talks with Ray Neidl about United and JetBlue, as well as some general discussion about the airline sector going forward.  Its a worthwhile three minutes.