Airline M&A, Again

In my prior posting concerning US Airways’ bold merger bid for Delta Air Lines, I was going to cite the conspicuous absence of private-equity activity in the US airlines industry as being a good sign that the industry offers very little for investors. And then this morning, The New York Times reported that Macquarie and Texas Pacific Group are looking to buy out Australian carrier Qantas.

Of course, the competitive picture for Qantas is wholly different from US carriers like Delta and US Airways. For starters, Qantas is healthy and is well-positioned to capitalize on one of the few growth areas left in commercial aviation in that it has a strong pan-Pacific presence.

But there are some bits of the commercial aviation business that affect all carriers, regardless of business model or geography. Foremost among these is the high cost of fuel. NYT reported that Qantas’ profits had fallen 30% in the first half of 2006, presumably because of fuel costs. Like most businesses that rely on jet fuel—commercial airlines and parcel services, particularly—Qantas probably buys a percentage of its fuel in bulk at a fixed cost and then purchases the rest according to market price in order to hedge against market volatility, so it’s difficult for me to see, at least at some little effort, how much of that 30% decrease in profits can be chalked up to fuel costs.

None the less, that Qantas has attracted the attention of private equity leads me to think that there are some smart folks out there who believe things will not get worse for the airlines, at least, not vis-à-vis fuel costs or the costs associated with greater security. Does Macquarie’s and TPG’s move signal a belief that international carriers may be turning the corner?

Of course, back in the US, where several airlines are still struggling with burdensome legacy costs and overcapacity, ‘turning the corner’ must be taken with a pillar of salt.