One of the leading low-cost airlines
JetBlue Airways Corporation
(
JBLU
) is now contemplating the acquisition of a stake in one of its
interline partners,
Aer Lingus Group plc
(
AERL
).
The Irish Flag carrier, Aer Lingus, which is partly owned by
peer
Ryanair Holdings plc
(
RYAAY
) and the government of Ireland is planning to sell approximately a
25% stake to JetBlue. According to market reports, Aer Lingus'
current market capitalization is approximately €461 million, and
the stake owned by the government (approximately 25.4%) is valued
at €116 million. If the stake sold is entirely government owned, it
is estimated that JetBlue will have to shell out approximately €134
million (the balance being the premium to be paid to the
government).
The deal appears to be a government move, given that the
European sovereign debt crisis that has forced it toward
privatization, in an attempt to cover deficits. But possibilities
of Ryanair Holdings (the principal owner with a 29.8% stake)
selling its share cannot be ruled out.
JetBlue is considered a preferred choice of investors owing to
its strong financial position with unrestricted cash and short-term
investments of $1.2 billion plus a strong foothold in the U.S.
market.
However, considering the current scenario in the global airline
industry in which carriers are struggling to run operations
profitability, the financial viability of the proposed deal still
remains in question. If JetBlue moves ahead with the deal, the
agreement would mark an important step in shaping its international
market presence, diversifying its business strategy from being
primarily a domestic carrier. But we believe any financial synergy
arising out of this deal will be difficult to estimate in the near
term.
The airline industry was hit hard by the unrelenting market
turmoil and rising fuel costs in 2011 after a strong rebound in
2010. Unfortunately, we don't expect a marked improvement in 2012.
Conditions could in fact worsen, given Europe's weak outlook and
its financial problems, which have effectively halved global
airline profits the 2010 peak.
Going by the recent reports of the International Air Transport
Association (IATA), airlines saw their profits plunging more than
85%, from where they are expected to fall further in the current
year due to the Euro-zone crisis. In such a situation, JetBlue's
new deal may further stress, its healthy liquidity position
notwithstanding.
The carrier already remains pressured by high operating costs.
Besides fuel cost, the carrier will also remain impacted by heavy
maintenance expenses throughout this year due to the gradual aging
of the fleet. A big fleet of A320s, the company acquired in
mid-2000s is due for restoration works this year.
As a result, JetBlue estimates capital expenditures of $645
million for the year, mostly (approximately $430 million) dedicated
to aircraft expenses. In addition, the company is also obligated
toward debt maturities and capital lease payments of over $200
million.
In terms of Aer Lingus financials, the company reported a 6.4%
decline in adjusted operating profits in 2011. The carrier's debt
position increased at a rate of 7.8% year over year to €577.2
million versus gross cash that inched up 1.1% year over year to
€894.8 million in 2011. Passenger growth of 1.8% in 2011 has also
been less than impressive and the carrier has already projected
that it foresees lower additions given difficult market
conditions.
Considering all the pros and cons of buying the stake, JetBlue's
next step toward the deal will be something to look forward to.
We maintain our long-term Neutral recommendation on JetBlue. For
the short-term (1-3 months) the stock holds a Zacks #2 Rank
(Buy rating).
ASIA ENTMNT&RES (
AERL
): Free Stock Analysis Report
JETBLUE AIRWAYS (
JBLU
): Free Stock Analysis Report
RYANAIR HLDGS (
RYAAY
): Free Stock Analysis Report
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