On Sunday, May 02, 2010, the boards of United Airlines parent UAL Corp. and Continental Airlines Inc. agreed to a merger in a transaction valued at about $3.2 billion, creating the world’s largest airline.

United-Continental

The merger is based on a stock swap, with no premium. United will swap 1.05 shares for each Continental share, leaving United shareholders with a 55% stake in the new company, and Continental shareholders with a 45% stake.

The highlights:-

- The new airline will be named United, and will be based in Chicago.
- Continental CEO Jeff Smisek will be the new CEO, with United’s Glenn Tilton as the non-executive Chairman until Dec 31, 2012. 
- United replaces Delta Air Lines as the world’s largest airline.
- United will have a footprint of 370 destinations in 59 countries.

Before the merger, UAL ranks third among US carriers in terms of traffic and market capitalization while Continental ranks fourth. In addition to vaulting the new United into the top spot, the merger also creates a whole bunch of issues – for both airlines’ employees, for other airlines, and for consumers.

The merged airline assumes responsibility for 88,000 workers and $29 billion in revenues, based on 2009 figures. The two airlines put together showed a loss of $933 million in 2009. To justify the merger and return to profitability, United will be looking at ways to slash this large workforce and scrap overlapping routes. 

They’re expecting an operating profit of $600 million next year, with $1b to $1.2b in annual cost savings and new revenues by 2013.

With Delta-Northwest, Frontier-Midwest, and United-Continental now off the airline industry merger market, the focus now shifts to the remaining carriers still unconsolidated – specifically, US Airways and AMR Corp’s American Airlines. The merger fever might also spread to the discount airlines, with Southwest already keen for an acquisition after its failed bid for Frontier.

For consumers, the reduced competition will mean higher fares on routes where both airlines were competitors, and possible disruption of service while integration issues are sorted out, including pilot seniority and overlapping routes. Estimates indicate that they’ll be reducing the number of available seats by 8%, despite having a code-share agreement already in place.

The official announcement of the Continental-United merger will be made on Monday, May 03, 2010.

Photo by PhillipC

As the ash settles on the surreal week (April 15-21, 2010) of European airspace shutdown, its time to chalk up the score. A traditional list of winners & losers seems pointless, given the huge amount of suffering caused everyone. But there were a few surprising silver linings – as in entities and sectors which won and lost.

British Airways

British Airways:- On the face of it, BA would seem to be the biggest loser, sitting at the epicenter of the European shutdown with an estimated loss of around £15-20 million pounds per day.

But by the time the planes started taking off from London, British Airways was already flying high. What changed? 

On the morning of April 20, inspite of UK airports still being closed, BA CEO Willie Walsh issued orders for long-haul flights to head for London.

With 26 planes full of British citizens zeroing in on London after a long week stuck abroad, it turned into a high-stakes game of chicken between the government and BA.

If BA had blinked, the planes would have had to be diverted to Continental Europe, and UK airports would have remained closed for at least another day. But BA didn’t blink, and how close the game was can be judged from the fact that BA planes coming in from across the oceans started landing ten minutes after the UK airports opened at 10 pm on Tuesday night.

Willie Walsh and British Airways are now being credited for ending the crisis.

Cisco Tandberg Videoconference

Cisco & Videoconferencing:- The airlines lost $1.7 billion in the shutdown, but the world’s business lost a heck of a lot more. As per the US Travel Assoc., the US economy alone lost $650 million. Some of it was compensated for with videoconferencing.

Cisco, as usual, led the way with a hands-on demonstration. Cisco Systems Inc (NASDAQ: CSCO) was on the verge of closing a $3.3 billion merger with Norway based videoconferencing competitor Tandberg (OSLO: TAA), when Cisco’s Senior VP for emerging technologies Marthin De Beer found his flight to Oslo cancelled.

Instead of postponing the critical final stage of the deal (as any two companies who don’t sell videoconferencing would have done), Cisco and Tandberg plowed ahead via Telepresence, using the Cisco TelePresence System 3200 at the Cisco office in San Jose and the TANDBERG Telepresence T3 at the Oslo end.

Cisco issued a statement to announce the completion of the deal at the height of the crisis on April 18.

Meetings Mean Business

Meetings Industry & Business Travel:- Inspite of losing an entire week of revenue, and notwithstanding the aforementioned demonstration of the power of Telepresence, the one week shutdown also highlighted the importance of face-to-face meetings.

Case in point being the cancelled meeting of EU transport ministers to work out a solution to the European crisis. The fact that they couldn’t meet and finally had to make do with a virtual chat on April 19 ended up resulting in absolute chaos and lack of a unified response.

IATA Director General and CEO Giovanni Bisignani blasted the EU member states for being clueless, saying that “We are far enough into this crisis to express our dissatisfaction on how governments have managed it-with no risk assessment, no consultation, no coordination, and no leadership… In the face of such dire economic consequences, it is incredible that Europe’s transport ministers have taken five days to organize a teleconference.”

End game is that while Cisco and other videoconferencing providers enjoyed a temporary uptick in demand, there’s also now a new-found respect for the value of business travel and face-to-face meetings – Amadeus knows, and so does Armani, and Hillary Clinton and many others.

In the long run, the European shutdown may actually have ended up helping the meetings and business travel sectors by ensuring that executives remember how disruptive it is to their business when they are not able to travel. 

Iceland/Iceland Tourism:- Given their recent misfortune – first the financial ruin of their banking sector and now the volcano, you definitely cannot call Iceland a winner at this point.

But one thing they do have now is the world’s most famous volcano – Eyjafjallajokull (even if it is unpronounceable). With their hot springs and 130 volcanoes, Iceland now has a new and credible income source in volcano tourism.

BA photo by bribriTO

There’s a popular Beltway saying that the most dangerous place in Washington is between Sen. Chuck Schumer and a television camera. That’s usually true, but in the case of his crusade against carry on baggage fees, Sen. Schumer has gone above and beyond posing for the media, and he’s actually doing a lot of good work.

Sen. Chuck Schumer

It all began on April 6, 2010, when Spirit Airlines announced that they would be charging $45 for carry-on bags.

Spirit Air CEO Ben Baldanza, in an interview with Chris Elliott, explained that excessive carry-on baggage was the number-one controllable reason that Spirit’s planes were being delayed at the gate, and the carry-on bag fee was part of a plan to make the boarding process quicker and easier.

By April 11, it was a big enough story that Sen. Schumer stepped in and labeled the move a ‘slap in the face of travelers’ and that passengers should have the ‘right to bring a carry-on bag without having to worry about getting nickel and dimed.’

He also write to Treasury Secretary Tim Geithner urging Treasury to block the fees.

This is where normally Sen. Schumer would lose interest and move on to more interesting matters. But with no response from the Treasury, Sen. Schumer upped the ante by promising to introduce legislation to block airline carry-on baggage fees.

True to his word, the bill – aptly named the Block Airlines’ Gratuitous (BAG) Fees Act (S.3205, H. R. 5021), was introduced  in the US Senate on April 14, with Sen. Schumer as the Sponsor.

Airlines currently pay a 7.5-cent tax to the federal government for every dollar they collect in fares, but no tax is imposed on fees collected for non-essential services. Last January, the Treasury issued a ruling that deemed carry-on bags as non-essential for air travel. As a result, airlines can impose fees on carryon bags without paying any tax.

The BAG Fees Act would designate carry-on baggage as a necessity for air travelers, thus forcing airlines to pay a tax on the fee. Again, with the legislation introduced and other Senators willing to guide it through Congress, this is another point where the media-savvy Senator Schumer would normally lose interest.

But then, Sen. Schumer goes one step further, and has now corralled support from five other airlines – American Airlines, Delta Air Lines, JetBlue Airways, United Airlines and US Airways – who have pledged not to charge carryon baggage fees.

With Sen. Schumer actively pushing the remaining airlines to also pledge not to add carryon bag fees, there’s a chance that Spirit Airlines could find itself isolated and possibly reverse its decision to charge the $45 carryon bag fee. A voluntary reversal by Spirit Air would be a huge victory for Sen. Schumer – and probably what is keeping him interested.

Amadeus IT Holding S.A. starts trading on the Spanish stock exchanges on April 29, 2010 in a blockbuster $1.24 billion IPO. Let’s take a quick peek under the hood and kick the tires.

Amadeus

The Amadeus IPO’s price range is from €9.2 to €12.2 per share, and they hope to raise €910 million to repay company debt with the sale of just over 85 million shares. The IPO pricing values Amadeus at between €4.3 billion and €5.4 billion.

Amadeus was taken private in 2005 by Cinven and BC Partners in a $6bn deal, with the two private equity firms holding a 52.8% stake, and the rest owned by Air France (23.1%), and Lufthansa and Iberia each holding 11.6%.

Iberia is planning to hold on to its entire stake – for now.  The remaining four stakeholders are making a combined secondary offering of 35 million shares via Amadelux Investments. Current and former Amadeus management put together are offering another 1.68 million shares.

Amadeus reported 2009 revenues of €2.46 billion – a slight drop from the €2.5 billion in 2008. The lower revenues from the global drop in airline passenger traffic last year was partially offset by Amadeus’ growing share of the airline IT solutions market (28% in 2009). Amadeus is also expanding its IT offerings to include railway and hotel management systems.

Their share of the Global Distributions Systems (GDS) market is now 39%. Via Opodo, Amadeus also has a presence in the online travel agency business. But its not a significant factor – as yet, since their Distribution and IT Solutions accounted for 96% of all revenue in 2009.

If you need more facts and figures about the past, present and future of the GDS business, read the PhoCusWright report on The Role and Value of the Global Distribution Systems in Travel Distribution (free download, registration required).

A question that must be on the minds of many investors – Is it possible that Amadeus might end up like Blackstone’s botched bid to take Travelport public?  

 At this stage, the biggest worry for Amadeus managers and their bankers is the volcanic ash cloud induced airline shutdown and its impact on the European markets, airline stocks and Amadeus’ bottomline.

Stocks of European airlines have taken a beating in the last few days, and apart from that, the IATA estimates a global loss of $200 million per day for the airline industry.

By the 25th of April, if European airspace is still under lockdown, investors will find it hard to disassociate Amadeus from the airline chaos. But if the skies clear up by the 20th or 21st of April and a whole week goes by with planes in the air as usual, Amadeus has no reason not to expect a successful IPO.  

Update 1: April 28, 2010 - Amadeus Sets IPO final price at EUR11 a share, which values Amadeus at EUR 4.93 billion. Shares start trading on Thursday. Expect the price to jump to above EUR 15 by early next week, and rise to just below EUR 20 within a month.  

Update 2: April 29, 2010 - Shares of Amadeus IT Holding SA (AMS.MC) opened high and as of now, AMS is up 8.18% to EUR 11.90.

Stay tuned for more updates leading upto and immediately after April 29.