Qatar Airways surprised many with the disclosure that it plans to make an unsolicited investment of up to 10% in American Airlines.
The move, while not necessarily a departure from the Doha-based carrier's past strategy, comes as American continues to push for limits on open skies with Qatar and the United Arab Emirates, and Qatar faces increasing isolation from its neighbours under a blockade launched by Saudi Arabia earlier in June.
"We’d guess Qatar [Airways] fears further isolation from the US following punitive measures taken by its Gulf neighbours," says Hunter Keay, an analyst at Wolfe Research, in a report on 22 June. "Buying Boeing airplanes and owning a minority stake of [American] intertwines Qatar with US interests a bit more."
The carrier firmed an order for 20 Boeing 737 Max 8 aircraft, as well as 40 options and purchase rights, at the Paris air show earlier this week.
Fort Worth-based American disclosed the proposed investment in a stock exchange filing on 22 June, calling it an "unsolicited notice" from Qatar under US disclosure requirements for investments over $81 million.
Qatar chief executive Akbar Al Baker informed American CEO Doug Parker of the plan to acquire a 10% stake through the open market in a recent conversation, the filing states.
A 10% stake in the US carrier is worth roughly $2.38 billion, based on the $48.33 per share price for American stock at opening on 22 June and the 493 million shares outstanding as of 21 April.
"The proposed investment by Qatar Airways was not solicited by American Airlines and would in no way change the company’s board composition, governance, management or strategic direction," says American in the filing.
Parker, in a letter to employees, says: "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."
Qatar can buy up to a 4.74% stake in American – something it says it intends to do – without board approval. However, the Department of Justice would have to approve any investment of more than $81 million, something Wall Street analysts see as likely based on past precedent.
"Qatar Airways sees a strong investment opportunity in American Airlines," the Gulf carrier says in a statement. "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."
POLITICAL BACKDROP
A strong investment opportunity or not, the timing of Qatar's move on a stake in American is questionable. The US carrier is more than two years into its push to limit open skies with the Gulf and has expressed optimism that the effort will move forward under the new Trump administration.
The crux of the complaint by American, Delta Air Lines and United Airlines is the more than $40 billion in subsidies they allege Emirates Airline, Etihad Airways and Qatar have received from their respective governments. These funds have allowed the carriers to essentially dump capacity in the US market under open skies, say the US airlines.
"We will not be discouraged or dissuaded from our full court press in Washington DC to stand up to companies that are illegally subsidised by their governments," says Parker.
US airline executives met with president Trump in February, with Delta chief executive Ed Bastian calling it a "positive discussion". However, the Gulf open-skies issue was not discussed at the meeting.
"American Airlines continues to believe that the President and his administration will stand up to foreign governments to end massive carrier subsidies that threaten the US aviation industry and that threaten American jobs," American says in the filing.
At the same time, Qatar faces regional isolation under a blockade by Bahrain, Egypt, Saudi Arabia and the United Arab Emirates, and tacit support by president Trump. The countries claim Qatar's support for terrorist groups for the move, though other motives are suspected.
Qatar Airways has suspended service to the four countries involved in the blockade and has had to reroute aircraft around their air space.
"The four countries account for just 3% of Qatar’s flying, and the deeper relationship with AAL could be viewed as a self-help step to strengthen a relationship and source of revenue that now becomes more important," says Daniel McKenzie, an analyst at Buckingham Research, in a report on 22 June. "The US is Qatar’s #1 destination and accounts for 8% of Qatar’s overall flying."
Qatar serves 10 destinations in the USA, six of which are American hubs: Chicago O'Hare, Dallas/Fort Worth, Los Angeles, Miami, New York John F Kennedy and Philadelphia, FlightGlobal schedules show.
The airline plans to begin service to Las Vegas and San Francisco in 2018.
Qatar mentions neither American's open-skies complaint nor the blockade in its statement.
LOPSIDED BENEFIT?
Analysts question the value of Qatar's proposed investment. Some see it as an extension of the carrier's existing equity investment strategy while others view it as influence seeking.
"While curious on the surface, Qatar’s investment likely has more to do a continuation of its Oneworld equity strategy than any effort intended to disrupt/deflect from ongoing US efforts to curb ME3 violations of open skies," says Jamie Baker, an analyst at JP Morgan, in a report on 22 June.
However, Baker notes that Qatar chief Al Baker is known to be vengeful and has been quoted saying that the airline selects routes to “rub salt in the wounds” of competitors.
"Given the US airline industry's allegations of unfair trade practices against Middle East carriers, Qatar's investment could be a soft attempt at diluting some of the harsh rhetoric," says McKenzie.
Qatar may hope that having a seat at the table with American as a shareholder, though not actually on the board, could give it some influence – if not much – in the US carrier's actions.
Parker firmly rejects the notion.
"[The proposed investment] strengthens our resolve to ensure the US government enforces its trade agreements regarding fair competition with Gulf carriers," he says. "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."
However, American, unlike Delta and United, has maintained codeshares with Etihad and Qatar since the open-skies spat began.
"The reason we’re partners is because we have customers who want to get to certain parts of the world we don’t cover," said Parker on the airline's codeshare with Qatar in June 2015, adding that the dispute is over government policy and not with the individual carriers.
Qatar may be after a deeper relationship with American. It launched a joint venture with British Airways, whose parent International Airlines Group (IAG) it owns a 20% stake in, in October 2016, and has hinted at a possible similar tie-up following its investment in a 10% stake in LATAM Airlines Group.
"We view an investment by Qatar Airways as more of a passive agreement with Qatar looking for value in the market," says Helane Becker, an analyst at Cowen, in a report on 22 June. "Long-term Qatar might view this investment as a stepping stone to more access to the US (via a stronger relationship or JV)."
A joint venture would expand Qatar's access to the US market, where American is the largest carrier. The benefit to American is less clear, since it does not serve Doha and has access to many of Qatar's destinations via its other partnerships, including those with British Airways, Japan Airlines (JAL) and Qantas Airways.
Regardless of Qatar's motives, Parker's letter and the filing indicate that American's board is unlikely to approve an investment by the carrier.
Keay outlines a few reasons why the board may reject the deal, beyond the obvious anti-Gulf sentiment in the airline's statements, in his report. These include the lack of network benefits, jeopardisation of American's $10.5 billion in net operating loss (NOL) tax credits that it plans to use through 2022, and possible labour discord.
"Labour would be upset by this due to the threat of lower paying, non-union jobs and we think CEO Parker’s single biggest thing right now is driving buy-in and trust from his employees," says Keay.
The Allied Pilots Association (APA) and the Association of Professional Flight Attendants (APFA), which represent American's pilots and flight attendants respectively, are opposed to Qatar's proposed investment.
It is only the early innings of Qatar's proposed investment in American and much could change. American opposed a merger with US Airways when Parker, then chief executive of the smaller US Airways, proposed the idea in 2012, only to come around to the deal that was announced in February 2013.
Source: Cirium Dashboard
