Did you ever wonder why a phone company became a major shareholder in an airline?
This one's intentionally cryptic because 1) it's far from certain that it will happen (although if it does, it will be in the next 2-3 weeks) and 2) I like playing around.
Because Emirates Air figured out that you can piggyback on Inmarsat satellites and avoid interference with ground cell phones. And this might lead to the FCC lifting inflight cell phone use restrictions in the U.S.?
Just a guess
it relates to another potentially big piece of news regarding the investment banks.
Is the "big" news that McDonalds has taken over GS, MS, ML and Citi!!?
I, for one, foresaw this o_O
I often wonder why anyone would want to become a shareholder in an airline, particularly in a traditional carrier.
Massive capital intensity, enormous fixed costs, secular trends driving higher fuel costs combined with a glut of excess supply-side capacity don't exactly make for the most compelling investment thesis.
But at some point they would have to become undervalued. I think one thing that is a big complication is the fact that so many drivers of profitability are unrelated to the actual customer experience.... efficiently maintaining and leasing airlines, buying and selling of slots, negotiating pilot and service union contracts, etc. etc. can deliver significant shareholder value and can be done relatively quickly as opposed to a large-scale culture change or other traditional "overhauls". Not to mention the immediate impact on the bottom line...
Agreed though, a long-term investment in the industry is not the best place to put your money.
As Warren Buffett pointed out in this year's letter, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
So the question is why did a phone company became a major shareholder in an airline?
Hard to say if and when an airline becomes undervalued.
I think any profitable airline investment would be purely timing-driven. Since inception, airlines have never managed to produce returns sufficient to cover their own cost of capital.
Given the current state of industry over-capacity, I wouldn't even be willing to pay book value for a debt-free carrier, as I believe that airline assets (e.g., the materials used to build planes) could be put to better use in other industries (i.e., the sum of the parts, so to speak, is actually worth less than the parts themselves).
There's a pretty good HBS case study about the airlines industry. Is truly is a terrible industry with abysmal rates of return. Never put your money in airlines.
I wonder how that relates to the investment banks.. damn now I'm gonna be thinking about this all day.
so we've established that airlines is a pretty crummy industry for primary investment. On top of this, there are almost no synergies to be gained from a telco owning an airline.
So, why did a phone company became a major shareholder in an airline? It may help if you work out who as well.
No more clues. All will be revealed in the next month (possibly).
the only thing I could think of where an investment bank came into this would be as a seller of the airline to the phone company. sort of reminds me of the recent Lazard/Bear fairness opinion stuff. Possibly a repeal of the fairness op requirement? haha
Yeah, that is what I was getting at- any gains in the industry are best taken in the short term. Maybe faith in a new and unproven management team, whatever...
As far as John's q... some ideas:
-maybe the airline is holding some sort of financial instrument that is extremely valuable to a telco? Could be either directly impacting the telco (e.g. naturally hedges the rest of the telco's portfolio) or just a general good (counter cyclical to MBS and the like) -maybe it is being forced to by central economy planners (foreign telcos and airlines may be gov't owned) to save face (the airline's that is)
Something along the lines of why would a bank be invested in the Fed?
so planes have on-board wifi for internet and cell phone calls 35,000 feet up.
Not that I couldn't envision it happening, but I highly doubt there would be a true "strategic" rationale behind any such transaction.
No deal struck between airlines and telecoms (e.g., offering phone or internet services in flight) necessitates an equity exchange, and even broader rationales - e.g., creating some sort of natural hedge for either business - do not make much sense, as the shareholders of each business could create a lower-cost, more efficient hedge by simply buying up individual shares on their own.
The two businesses are fundamentally different, with very little overlap in terms of shared customers, and almost no overlap in terms of shared costs.
Google punches back against Microsoft and makes a bid for Merrill Lynch to create a finance division. No wonder both company's share price are so underpriced.
Yeah... my suggestions don't stand up on their own very well but I am hoping it part of the final solution.
Partial credit baby!
Come on Mack, throw us a bone over here..
ideating was pretty close with one of his two suggestions.
This is not hypothetical - it actually happened. You guys actually working in advisory may be able to tap up people in your team that remember this (or were even involved).
If it's really an airline, Air Italia of course... Berlusconi is moving behind the screens forming an Italian consortium to save Italy's airline pride. Don't know about any mobile phone operator involved tho.
Actually, Virgin both has an airline and a mobile phone division. That Richard Branson was way ahead of his time...
Are you referring to the investment by Temasek Holdings, Singapore's state-owned investment vehicle and a primary shareholder in Singapore Telecom, which bought up a 49% share of Virgin Atlantic, by chance?
This is all that comes to mind for me, although technically I believe the purchase was made directly through Singapore Airlines, which was majority-owned by Temasek.
It just occurred to me that a profitable phone company could theoretically benefit from acquiring the net operating losses of an airline and using them as a tax shelter.
Seems like you'd be much better off just levering up the phone business and sheltering taxes payable that way, however.
sprint?
all of the ones listed so far. I don't believe in any of those cases the phone company itself took a stake in the airline (and if so, its not the situation I'm thinking of).
because major airlines are about to permit the use of cell phones at 33000 feet :)
Sorry - the scenario that I thought was a possibility did not come to pass.
Anyway, the answer to the question "why did a phone company became a major shareholder in an airline?"
It was Swisscom and they (along with other leading Swiss companies) became (indirectly) shareholders of Swissair in 2001 (see the 2001 20f page 54).
Why? Because the Swiss government told them to.
Ok come on- pretty close? You have to give me more credit than that.
you got partial credit. Pray I don't alter the deal further.
Seriously though, the reason you didn't get full credit is that your solution suggested central economy planners controlling all of the pieces - not the case in Switzerland (although the Swiss Confederation does own the majority of Swisscom, it did not in all of the other investing companies).
What can I say? I'm hard to please. You are free to take this up with the board of Morgan Stanley but they are already in my pocket.
Ok I'll admit I got caught up in the communist terminology but I really meant government. Also why would the other investing companies follow the government directive?
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