Qantas bowed to a buy-out and takeover rumours have swirled around BA and, most recently, American Airlines. So what does it mean when private equity starts sniffing around the notoriously unstable airline industry, asks Lex? One obvious interpretation is that the private equity cycle is peaking. Flush with cash, funds are delving into ever-riskier areas. The Qantas deal is not as extreme a signal as the buy-out of a US carrier might be. In the US, with limited barriers to entry, new capacity has typically flooded in during good times. For investors, the industry should remain a cyclical trading play. That is how Texas Pacific hit its two home runs. It bought both Continental and America West during bankruptcy, turned them round and sold at the right time. Unions are willing to make concessions when they are looking into the abyss during a downturn, but during better times, understandably, they try to claw benefits back. At this point in the upturn, straight buy-outs look tough. Private equity would need to deploy capital while simultaneously restructuring companies’ costs and engineering a rationalisation of industry capacity. And it is hard to see the creditors of bankrupt Delta or Northwest giving up control of the airlines at a bargain price to a financial buyer, particularly with potential merger partners already circling.

This entry was posted by Helen Thomas on Wednesday, February 21st, 2007 at 4:32 and is filed under Private equity. Tagged with american airlines, ba, qantas, tpg. Edit this entry.