The name of the game in the airlines industry is now mergers. The latest to join the bandwagon is British Airways (BA) and Australia's Qantas Airways Ltd. Apart from Qantas, BA is also talking to American Airlines and Spain's Iberia Airlines. Delta Airlines has taken over Northwest Airlines while RyanAir is making a second attempt for Aer Lingus.
Mergers in the airline industry were rare some four years ago because such exercises were plagued with failures. Early mergers such as Ozark Airlines with Trans World Airlines Inc in the 1980s and Continental Airlines with United Airlines lately, failed because a bigger entity did not translate to a better bottom line.
That's because the merging entities had to overcome mine-fields ranging from unions and pilots to regulators and politicians. Governments, in particular, are sensitive over ownership issues, particularly if it involved foreign airlines. This is why mergers amongst airlines normally happen when the entities are within the same continent.
Even mergers of airlines within the same continent are plagued with cost issues because cutting capacity and manpower layoffs are tough decisions to make.
But the merger between KLM Royal Dutch Airlines and Air France that was completed in 2004 proved that a merger may not necessarily be bad. The merger was structured in such a way that both airlines kept their identity and listing status. In terms of shareholders, Air France has the upper hand but KLM has veto rights.
The Air France-KLM merger proved to be an eye-opener to the sceptics. Its profitability increased and the merged entity increased its workforce instead of shedding staff and it has also expanded its network.
That has been the strongest point which Qantas has put forward in its bid to drive mergers between airlines in the region. It's understandable as the unions in Australia are among the strongest.
But the biggest problem for mergers between airlines in this part of the world is governments, especially if it involves national airlines. Governments erect a fence of protectionism when the mere mention of merger or takeover crops up. Ownership is a sensitive issue, which is why national carriers such as Singapore Airlines have failed in their attempt to take over the likes of Ansett Australia and China Eastern.
Even developed nations such as Australia have regulations whereby Qantas has to be majority-owned by Australians.
The get out of this obstacle, the head honchos of airlines and merchant bankers are piecing together a structure that involves an arrangement that is close to a merger but not a full-fledged merger.
A full-fledged merger would mean amalgamation of shareholders and operations. Also, a single listed entity and new a new identity. But that is not what the Air France-KLM model was about. The identities of the two airlines and their listing status were maintained.
What is being looked at in the Qantas-BA merger - termed as a merger of equals - are share swaps and overlapping boards of directors. Both entities are also to keep their listing status. By having overlapping boards, it means some directors of BA will be on the Qantas board and vice versa.
What Malaysia Airlines System Bhd (MAS) and Qantas are talking about is a collaboration that is almost close to a merger but does not involve equity. They are talking about overlapping boards that would enable the operations of both entities to head in the same direction. They are talking about juggling with a bigger seat inventory, cross-selling tickets and enlarging networks and reach. The identity and social obligations of both airlines remain distinct. There is no threat of either losing its identity or rights to fulfil the aspirations set by the respective airlines. It's hard to believe that such a model can be worked out but work is underway to make it work. Many would be surprised by an arrangement that falls short of merger between MAS and Qantas. After all, Qantas is a much bigger entity and is in talks with big boys such as BA.
But the reason Qantas wants to do a deal with an Asian carrier is to increase market share and profitablity. And this is not at the expense if its partner, which is MAS in this case.
What's telling in this collaboration is that there are no causes pushing both parties to the table. Both Qantas and MAS are profitable even in this intense period for the airline industry. They are both talking not about their survival today but for tomorrow and the future. Don't forget-competitors are also out there to pounce on the opportunity.
The least the shareholders and regulators could and should do is to assist in whatever way they can.
In the case of MAS, Khazanah Nasional Bhd and the Ministry of Finance should do all they can to facilitate the collaboration. There should not be any feet dragging over the matter. A decision should be made quickly. The last thing we want is a repeat of the fiasco involving the Proton-Volkswagen deal. Delays and delays finally landed Proton nowhere.
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