Over the course of the past two years, the world has adapted to new realities or at least attempted to do so. As logistics have been disrupted for much of the past two years, companies have been looking into making their business more robust and we see that return into the merger and acquisition space in the airline industry. The most recent development is the possibility of a buyout of Atlas Air (NASDAQ:AAWW), which I will treat in this report.
Over the course of the pandemic, many airlines took on significant debt to remain in business. As demand for air travel is recovering, we see that some airlines are looking into consolidating businesses to unlock synergies and become more competitive. That kind of competition is not only required to win over the hearts of travelers but also to get enough flight deck crews to fly the aircraft. Coupled with possible synergies, that makes for an attractive case for airlines to merge, and this is further amplified by low acquisition values for airlines compared to their full potential. So, you could say that the time is right for consolidation. There is a reason to consolidate, namely debt levels and to a lesser extent hiring challenges, and there is a clear financial benefit to do it now.
In earlier stages, we saw Frontier Airlines (ULCC) attempting to acquire Spirit Airlines (SAVE), but eventually it has been JetBlue (JBLU) that had the more tempting offer for the airline. Also Avianca and Gol Linhas Aéreas Inteligentes S.A (GOL) are seeking a combination of their operations, creating a major player on the South American air travel market. So there has been increased appetite to combine operations. Some airlines also looked into diversifying by setting up a stronger cargo division.
We are not only seeing that increased appetite for integration among airlines. During the pandemic, it also became clear that logistics including marine traffic was significantly disrupted. So companies that normally are best known for their sea shipping solutions started to expand to air shipping solutions. One such example is CMA CGM which introduced a fleet of Airbus A330 aircraft and also opted for the Boeing 777F and Airbus A350F while taking a stake in Air France-KLM (OTCPK:AFRAF). Another example is Maersk which ordered Boeing 777Fs. These global shipping companies started putting more emphasis on air freight solutions, recognizing the high value of goods shipped through air and the key link that aircraft play in express shipping. So, for various reasons there is a lot of momentum in the merger and acquisition space for the airline industry, but they mostly can be traced back to the pandemic and the shifts the pandemic caused.
With the role that aircraft play in express shipping which is driven by e-commerce growth, investing in freighter airlines or even acquiring them is also interesting to e-commerce companies that want to vertically integrate to strengthen their services and control costs. With that in mind, I am currently looking at the news that a group led by Apollo Global Management is looking to acquire Atlas Air.
Atlas Air is mostly known for its air freight transport services, but also provides passenger charger services. Given that air freight transport services have shown value over the course of the past two years, it is not odd that big companies such as Apollo Global Management would be looking to acquire the air freight transport company. Previously, Apollo Global Management also acquired PK AirFinance, a GECAS company that engages in providing financing solutions for aircraft, engines and parts. So, for Apollo Global Management, acquiring Atlas Air would increase its presence in the aviation industry and the company would own a part of a desired link in the transportation chain for e-commerce.
It is also not surprising that Atlas Air is targeted for acquisition as the airline provides cargo services for Amazon (AMZN) with a fleet of Boeing 737-800s and Boeing 767s which makes Atlas Air a desired company. Amazon holds right to purchase up to 20% of Atlas Air at a predefined value significantly lower than today's prices and so it becomes extremely interesting to see what the response of Amazon will be. I don't necessarily see a bidding war between Apollo and Amazon happen, but we could see increased interest in freighter airlines and more importantly in the ones that Amazon does business with as the e-commerce giant could be looking to solidify its position with those companies.
The pandemic most definitely has shifted focus and drove diversification of business models. Many companies, not just in the airline industry, have been seeing the value of air freight as a tool in their toolbox. In the airline industry, we have been seeing some movements as passenger airlines are looking to merge and global shipping companies are looking to gain market share on the air freight market. This move in combination with a bump in e-commerce market penetration and marine freight solution make freighter airlines a desired element in the chain. As a result, it is not surprising that a company such as Apollo Global Management would be looking to acquire a company such as Atlas Air but the price offered has to be right.
We saw with Frontier Airlines that the company offered a mediocre price and eventually lost out to the superior bid from JetBlue which paid a 38% over the closing price of Spirit Airlines during the previous day and nearly 55% premium compared to the trading levels of Spirit Airlines before any merger news was shared. With that in mind, I would think that investors know what value is being offered for airlines at this point and the value Atlas Air has in the e-commerce shipping solution space and would not accept a premium any lower than 50%.
This article was written by
His reports have been cited by CNBC, the Puget Sound Business Journal, the Wichita Business Journal and National Public Radio. His expertise is also leveraged in Luchtvaartnieuws Magazine, the biggest aviation magazine in the Benelux.
Disclosure: I/we have a beneficial long position in the shares of BA, EADSF, AER either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.