JetBlue-Aer Lingus Buyout Plan - Analyst Blog

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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