MIAMI – Qatar Airways is looking to buy up to a 10% stake in American Airlines on the open market, according to a report filed with the US Securities and Exchange Commission (SEC).
In an unsolicited notice provided to American, Qatar Airways indicated that it intended to purchase at least $808 million worth of common shares in American on the NASDAQ stock market, a figure which would yield the Middle Eastern giant a stake of approximately 3.3% in the Fort-Worth based legacy carrier.
A 10% stake would cost Qatar Airways ~$2.5 billion at American’s current share price, which is up about 3% in today’s trading.
Qatar Airways already owns 20% of American’s oneworld Alliance and Trans-Atlantic joint venture partner International Airlines Group (IAG), the parent to London-based British Airways.
The stake in IAG began at 9.99% in January 2015 and grew in three successive incremental investments to 20.01% by August 2016, making Qatar Airways the largest minority shareholder in IAG.
In contrast, the largest individual shareholder in American is Warren Buffet’s famed Berkshire Hathaway investment company, which owns about 10% of American as well, and Qatar Airways would more or less match his share with this proposed investment.
Any purchase of more than 4.75% will have to be approved by American’s Board of Directors, to which Qatar Airways must send a direct request. Qatar Airways has not made a formal request yet to American’s board, which indicates that they are likely trying to assess the response to their offer at American Airlines HQ before proceeding.
According to US airline foreign ownership laws, the maximum ownership of voting shares that Qatar Airways could acquire in American if it wanted to expand past the 10% stake is 24.9%.
A spokesperson for Qatar Airways shared the following comments on the move.
“Qatar Airways sees a strong investment opportunity in American Airlines. Qatar Airways believes in American Airlines’ fundamentals and intends to build a passive position in the company with no involvement in management, operations or governance.
Qatar Airways has long considered American Airlines to be a good Oneworld Alliance partner and looks forward to continuing this relationship. Qatar Airways plans to make an initial investment of up to 4.75%. Qatar Airways will not exceed 4.75% without prior consent of the American Airlines board. Qatar Airways will make all necessary regulatory filings at the appropriate time.”
Qatar Airways deepens its global entanglement with the Oneworld alliance
Qatar’s potential investment in American is notable for several reasons, most notably in that it eschews the traditional Middle Eastern airline power approach of keeping uncontrolled alliances at arm’s length.
Its Middle Eastern rivals include fiercely independent Emirates and investment in struggling airline enthusiast Etihad Airways, both of whom do not typically engage with partner airlines unless they are the stronger player. Even Turkish Airlines, which is nominally a member of Star Alliance has an uneven participation in the world’s largest airline alliance.
In contrast, Qatar Airways appears to have embraced its Oneworld Alliance membership more whole-heartedly, opting for much deeper ties with its alliance partners on a variety of metrics ranging from frequent flyer program integration to code share agreements.
Now it plans to further tie itself to Oneworld with an investment in yet another of the alliance’s anchor member airlines, which points to Qatar Airways political savvy.
An investment in American is smart for a variety of reasons
First and foremost, the economics of the deal makes a ton of sense. American Airlines is one of the world’s most profitable airlines, operating in a consolidated, regulated market that is itself the most profitable in the world while growing at a decent pace.
American made $2.7 billion in net profit last year despite a series of one-time adverse events, and we expect the carrier to eventually settle in the ~$3.5 billion annual net profit range once it fully realizes synergies from the merger with US Airways.
That amounts to a $350 million annual return to Qatar Airways, or an annual return of 14.2% which is spectacular in the current market environment. Even if profits are halved, Qatar Airways would have an annual return of ~7% which is still excellent.
It’s no accident that former airline industry skeptic Warren Buffet, widely considered one of the world’s savviest long-term investors, is heavily invested in American.
Beyond the economics, there is also immense strategic political value. Unlike Emirates and Etihad, who have positioned themselves as disruptors that are shaking up the airline industry status quo in the West, Qatar Airways has opted for a much more diplomatic approach to airline relations via these investments and other integrations with alliance partners.
These entanglements create a dynamic that makes it harder for governments in the West to give in to protectionist lobbying as two of the key interest groups (American Airlines and IAG) will not have the same anger and verve towards a shareholder.
In the United States, this could be the final blow against the partnership between United Airlines, American Airlines, and Delta Air Lines asking for a renegotiation of OpenSkies agreements with Middle Eastern carriers.
American was already the weakest link in that arrangement, and it now will have even less incentive to fight said battle actively. If anything, American might even opt to set up a joint venture partnership with Qatar Airways to take advantage of said OpenSkies agreement and profit financially from the arrangement.
That being said, the relationship between American and Qatar Airways wasn’t amazing before this deal, so that will need to be worked out first.
Qatar Airways fights back
Politically this move is also a part of a larger series of moves from Qatar Airways in the wake of a still-unresolved diplomatic crisis that has seen Qatar Airways cut off from Egyptian, Bahraini, Emirati, and Saudi markets and airspace, ostensibly over concerns due to Qatari support of terrorism.
Regardless of the political realities of the situation (which are more complicated than a simple Qatar supports terrorism story), this represents a substantial threat to Qatar Airways’ business model and even existence if things escalate in the wrong way.
By anchoring itself to a major US corporation, Qatar is also creating a better position for itself politically in the United States behind the scenes. It won’t necessarily end the crisis, but it will hopefully help reduce implicit US support for the actions of the Saudis.
It is also part of a larger flurry of moves from Qatar Airways trying to signal business as usual including revealing its new QSuites business class product at the 2017 Paris Air Show, winning Airline of the Year for the fourth time from Skytrax, and the release of a bold new advertising campaign centered on the theme of OpenSkies.
These moves are almost a signal of defiance in the face of the diplomatic threats, and it will be interesting to see how things play out for Qatar Airways over the next couple of weeks.
American isn’t thrilled with Qatar Airways’ interest
In a letter sent out earlier today, American CEO, Doug Parker, sent strong signals that his carrier and management team wasn’t happy with the interest from Qatar Airways. You can find the letter reproduced below:
Dear Fellow Team Members,
As you likely know by now, American recently received notice as part of the Hart-Scott-Rodino Act (a federal process governing large purchases of stock of publicly traded companies) that Qatar Airways has indicated its desire to make an investment in American Airlines.
American Airlines is a publicly traded company, which means our stock is available for anyone to purchase on the Nasdaq Stock Market. We don’t own those shares – they belong to the shareholders who own this company – and we cannot control who sells or purchases them. But this is an important development for American and one I wanted you to hear about from me directly.
While anyone can purchase our shares in the open market, we aren’t particularly excited about Qatar’s outreach, and we find it puzzling given our extremely public stance on the illegal subsidies that Qatar, Emirates and Etihad have all received over the years from their governments. We remain committed to that effort, and we will remain so even with this potential investment.
While today’s news for some of our team may be puzzling, at best, and concerning, at worst, here’s what we know for sure: We will not be discouraged or dissuaded from our full court press in Washington, D.C., to stand up to companies that are illegally subsidized by their governments. We stand for American Airlines, and we stand for all of you and the amazing work you do every day, around the globe, to take care of our customers.
If anything, this development strengthens our resolve to ensure the U.S. government enforces its trade agreements regarding fair competition with Gulf carriers, because we must make it crystal clear that no minority investment in American will ever dissuade us from doing what is right for our team members, our customers and all of our shareholders. And do not worry, per U.S. law, no foreign entity can own more than 25% of a U.S. airline, so there is no possibility that Qatar will be able to purchase enough of American to control or influence our Board, management or our strategy.
Of course, it may just be that Qatar Airways views American Airlines as a solid financial investment, because of the great work you all are doing every day. In that case, we would agree with them. Your results are earning the confidence of our customers and our shareholders every day, and it’s a privilege to work with and for all of you. Thank you for making American all it is and will be in the future.