Posts filed under ‘Aviation’
Iberia and its brides… where’s the value?
Iberia is for sale. After years of flirting with British Airways, now it realises that there’s not enough satisfaction in that relationship. Shareholders want to sell. And B.A. is not ready to take that step. Too many doubts. I’m sure that with a good price for that 10% they have they’d even get out.
The second bride is Lufthansa. Lots of cash and need for expansion. Alhough Iberia is in the wrong alliance. But Iberia would be a big step towards South America for Lufthansa. Conte and Mayhuber, the two bosses, denied yesterday any approach. Sometimes denial is the previous step to marriage. Although German firms have not been very lucky lately buying in Spain.
And then there is Texas Pacific Group. Good news for eficiency, bad news for workers. Iberia needs a deep refurbishing and that would mean a lot of lay offs. Many of Iberia’s workers are only worried about preserving a way of life that is already dying in most of the old flagship carriers. They have managed so far to keep their privileges while receeding to Madrid and their most profitable flights with South America. But, with a private equity firm, that would no longer be possible.
A private equity firm could drive a lot of value from Iberia, something that main shareholders didn’t feel like doing because it was not politically correct. They’d be so pleased to go home with their capital gains…
But, investors be aware, there are two risks hanging over the company.
The first, it’s most profitable route, a nice route from Madrid to Barcelona and back that until now has managed not to be canibalised by competitors, is about to get new and powerful competence: the high speed train. Probably it will cut its passengers in half, and profits with them.
And last but not least, Iberia needs to be Spanish. The routes they operate to South America and give Iberia a specially high strategic value have been built from agreements between the Spanish and South American governments. One by one, brick by brick, unsurprisingly, Madrid’s hub has been constructed from agreements based on Iberia’s spanishness and Madrid’s capitality. There would be not enough reasons to keep that exclusivity for long with skies being more open each day and with an Iberia decreasingly Spanish.
Airbus and Boeing: would a monopoly be more efficient?
Airbus and Boeing are two tough rivals in competition for the world aircraft market. But, would that market benefit from a single player?
Polititians, of course, would say no. That’s why Airbus gets billions in development loans/funds from a few European governments. That’s the first thing that archrival and more experienced Boeing would say about Airbus. But what about NASA contracts and tax deferments on export from the US government? Looks like no one is playing fair.
But does the fairness always benefit efficiency? From a microeconomic point of view it seems clear that without all that covert financing neither company would survive. At least from the figures I have. And that would mean a monopoly in the aircraft market. Probably for Boeing, but that’s not the question. And probably that would also mean a better use of public money: no use at all.
The market of aircraft parts has benefited a lot from this anew competition. New players are entering the providers competition, i.e. chinese providers or eastern Europe providers. They wouldn’t stand a chance, or maybe not? Would that be a bad thing?
The fact that the parts market is increasingly efficient means that less efficiency is on the upper scale, hence the need for public money. Public money that derives into good externalities for third parties. Maybe even for third parties that are not giving away the public money needed. A form of development? Spreading knowledge that will strengthen the market? What about learning by doing?
What about future value? Air transportation market has been growing steadyly (qith one exception, you know). New environmental regulations mean more aircraft need to be renewed. Globalization means more competition, and at the same time, airline specialization means that aircrafts need to be increasingly personalized and adapted to all sort of profiles (i.e. low-cost profiles).
So it could be said that in fact governments are only financing discounting on future growth and positive externalities. That what today, in the name of market efficiency, would be a monopoly, won’t be when growth arrives, and wouldn’t need to be taking externalities into account. Maybe even this duopoly public-driven situation is helping growth by itself, creating a new market, and making it easier for airlines to grow. For the governmens implied, of course it means allocating resources from other areas but, even being those more efficient, could airplane making have more future? The “infant industry” justification.
As long as fuel doesn’t get more expensive, of course. But governments could also help with that. Would that make it different from an economic point of view?
I don’t really have an answer, just some thoughts. But when politics mix with economy, the figures are increasingly blurred and it gets harder to be a liberal. I’ll have to think more about it.
Barcelona’s Airport new terminal: one or two alliances?
Right now there is an ongoing discussion in Barcelona. A new airport terminal is being built that will be able to handle around 30 million extra passengers. But there’s something to be decided: which companies will be located there.
Barcelona’s airport is the eight in Europe considering the passengers that use the installation. That means it’s close to medium cities like Munich or Milan. But, being similar in size, there’s a big difference between Milan, Munich and Barcelona: the number of intercontinental flights.
Of course, in order for the airport to grow it will need more infraestructure. The third runway is already built and the new terminal will give it the capacity it needs to grow and expand.
But the proximity to the recently expanded Madrid Airport is a problem for Barcelona’s aspirations to be a hub. One of the main aviation alliances, One World, has already a hub there, and being at 700km (45 minutes by plane) makes it unlikely for this alliance to have more intercontinental flights in Barcelona. From an economic point of view they’d rather have them in Madrid. To complete the picture, this alliance includes Iberia, the old Spanish flagship company, and has the highest market share in Barcelona: around 40%, and steady, not decreasing but not growing either. In fact this alliance has no plans to have any international flights in Barcelona anytime soon and it’s moving towards a low cost profile.
There is a second alliance: Star Alliance. They are growing at a high pace, and they already have a market share of aproximately 20%. The spanish flagship of this alliance is Spanair, that is also an important Spanish carrier, growing quickly and aiming to overtake Iberia in a not too distant future.
This alliance looks like the only chance for Barcelona’s airport to position itself as an international hub. On the other hand this alliance also has a hub in Frankfurt, which won’t be substituted but complemented by Barcelona’s growth. So there’s an upper limit to Barcelona’s possible expansion with this alliance.
So, should the new terminal be allocated exclusively to Star Alliance?
Many people do believe so. It looks like the only alliance that has the possibility and will to bet for Barcelona. So I can agree partially on that: it’s important to have the best parts of the new terminal allocated to the alliance that has the most interesting prospects.
But why not share the terminal between the two alliances Star Alliance and One World? Many people refuse that thinking that One World just wants to be there to disturb Star Alliance plans for expansion. Or many people just want that based on an irrational approach to the rejection to expand Barcelona’s international connection from One World.
But, from an economic point of view, and beginning of a situation of a new terminal with only one alliance: Star Alliance and with excess capacity. Does a second alliance positioned there leave us better off or worse off?
Maybe the right concept to grasp would be “Pareto efficiency”: we reach the most efficient situation when we are not able to improve any participant’s situation without leaving another worse off.
And without worsening the behavior of Star Alliance, we can improve easily the situation of One World just allocating them the spare capacity of the new terminal (discounting of course future growth), as long as it doesn’t worsen the operation of Star. And we can do that defining the correct precedences and procedures.
Of course Star Alliance would be benefited if we threw out the other alliance to the existing -and worse- installations. That would give them some extra market power… but what for? To have an advantage over competition.
And to give one player advantage over another instead of fair competition always leaves the consumer worse off. And that’s not the objective. Free competition is good for Barcelona’s airport on the long run. That’s the point we should go to.
Why? Because even not having interconental flights, even his leaning to the low cost profile, One World is the market leader in Barcelona, providing the airport with most of its connections. And that gives high value to the airport. And it will drive even more value with the combination of another alliance’s hub in the same location. The two hubs will even be able to interchange passengers, helping build the critical mass of passenger an airport needs to have intercontinental connections.
Because it’s not the politicians who make the intercontinental flights. They can obstruct or help them, but it’s the market, and the consumer’s demand, that will establish new long range connections. And the market works best when all the players are given the most opportunities with a clear set of rules and without discriminations of any kind.
That’s, in my humble opinion, the best way to ensure a healthy growth for Barcelona’s airport.
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