Thursday, June 22, 2017

American Airlines CEO ‘Not Happy’ About Qatar Airways Plan to Buy 10% Stake: Gulf airline intends to buy shares on the open market—an approach American Airlines CEO calls ‘puzzling and strange’

The Wall Street Journal
By Robert Wall and  Susan Carey
Updated June 22, 2017 1:30 p.m. ET

Government-owned Qatar Airways said it aims to buy as much as 10% of American Airlines Group Inc.  —a brash attempt by the fast-growing Middle East carrier to push its way into the U.S. amid political upheaval back home.

American said Qatar Airways informed it of an intention to buy at least $808 million of its stock on the open market, or roughly 16.7 million shares at Wednesday’s closing price. American, the world’s largest airline by traffic and revenue, has a market value of roughly $24 billion.

American Chief Executive Doug Parker, in an interview Thursday, said Qatar Airways approached the airline in early June about the investment. He said he was “not happy” about the prospect and found the approach “puzzling and strange.”

In early afternoon trading, American Airlines shares were trading up 54 cents, or 1.1%, at $48.97.

In a filing early Thursday, American said Qatar Airways Chief Executive Akbar Al Baker told it of the plan to acquire up to a 10% stake. In a separate statement, Qatar Airways said it would seek to build a 4.75% stake initially, then add to that after approval from American’s board and U.S. regulators. It said it sees American as a “strong investment opportunity” and intends its investment to be a “passive position.”

Foreign ownership stakes in U.S. airlines are relatively rare but not unprecedented. U.S. law allows foreigners to hold up to 25% of voting shares and 49% economic interest in a U.S airline. British Airways once held a 25% stake in US Airways. British entrepreneur Richard Branson owned a large minority stake in Virgin America.

Qatar’s proposed investment in American would be more unusual: The two have been on opposite sides of a bitter air-industry fight. U.S. and European carriers have accused Qatar Airways and two other Gulf airlines, Emirates Airlines and Etihad Airways, of benefiting from government ownership and subsidies. The fast-growing Gulf carriers have denied that.

The deal could potentially face review by the Committee on Foreign Investment in the U.S., according to a former government official that had responsibilities with it. CFIUS is a secretive, multi-agency body led by the Treasury Department that can recommend the president block foreign deals on national security grounds.

If the shareholder agreement backs up Qatar Airways’ statement that it intends to be a passive investor, then the deal probably wouldn’t come under CFIUS review, the former official said. But if the 10% stake is tied to more shareholder rights than a passive agreement, then CFIUS would probably look at it, the person said. A spokesman for the Treasury declined to comment.

American, based in Fort Worth, Texas, said it hadn’t sought the investment and that the proposed move wouldn’t affect its management or strategic direction. American said it also wouldn’t stop the airline from pursuing its subsidy claim against the Persian Gulf carriers.

American’s incorporation rules prohibit anyone from acquiring 4.75% or higher in the airline without board approval. American said Qatar has filed for separate antitrust approval with the U.S. Federal Trade Commission and the Department of Justice.

On the surface, the move echoes Qatar Airways’ investment in British Airways parent International Consolidated Airlines Group SA. Qatar Airways initially acquired 9.9% in IAG in 2015, before raising its stake to about 20% in several share purchases. While it hasn’t interfered with running the airline or taken a board seat, cooperation between Qatar Airways and British Airways has blossomed.

At 20 years old, Qatar Airways is one of the world’s fastest-growing air carriers. Mr. Al Baker has raised Qatar Airways’ profile with sponsorship deals, including with soccer club FC Barcelona and the 2018 and 2022 soccer World Cups. It prides itself on lavishing amenities on passengers, and for its position in the elite club of 5-star-rated airlines, the top level in the Skytrax ranking system.

Qatar Airways has taken stakes in other airlines including South America’s LATAM Airlines Group. It also is taking a stake in Italy’s Meridiana and has said it wanted to set up a carrier in India.

“It’s a strategic investment” in the U.S. market, said Daniel McKenzie, an analyst at Buckingham Research Group. The U.S. is Qatar’s top destination and accounts for 8% of its total flying, he said.

The disclosure comes as the nation of Qatar, a crucial U.S. ally in the Middle East and host to a major overseas military base, is coping with an economic blockade levied earlier this month by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt.

Those countries cut diplomatic and transport links to Qatar, accusing it of supporting Islamist groups and extremists in the region. Doha denies that it supports extremists. President Donald Trump seemed to support the blockade on Twitter, though the State Department has since asked Saudi Arabia and the U.A.E. to provide evidence of its charges. Mr. Al Baker criticized Mr. Trump for seeming to take sides in the dispute.

The blockade has hit Qatar Airways hard. It relies heavily on Persian Gulf passengers traveling through its hub in Doha, Qatar. After the imposition of the blockade, Mr. Al Baker said traffic would suffer but he saw it as an opportunity to push growth in other markets.

The move on American Airlines could have broader strategic benefits for the tiny Persian Gulf emirate amid the standoff. It has long aligned itself against its much bigger neighbor, Saudi Arabia, in many of the region’s economic, political and military conflicts. But it has balanced that with an outsize global diplomacy role, advertising itself to the U.S. and others as an honest broker in some regional crises. It also hosts the U.S. military at the sprawling Al Udeid Air Base, outside Doha, home to the biggest U.S. military presence in the region.

Amid Qatar’s worsening tensions with Saudi Arabia, a big U.S. investment could help solidify its alliance with the U.S., said Hunter Keay, an analyst at Wolfe Research. Shortly after the blockade went into effect, Qatar agreed to buy about $12 billion of combat planes from Boeing Co.

A minority stake in American “intertwines Qatar with U.S. interests a bit more,” Mr. Keay said.

American’s Mr. Parker said Mr. Al Baker approached him at an airline industry meeting in Cancun, Mexico, earlier this month. That meeting was held between June 4 and June 6. Saudi Arabia and its allies unveiled its blockade on Qatar on June 5. Mr. Parker called the meeting a “short, private conversation.”

The investment could drive a wedge between Qatar and its other big Persian Gulf antagonist, the U.A.E. So far, Qatar Airways has moved in lockstep with two big carriers based in the U.A.E., Emirates Airline and Etihad Airways, in the tussle over subsidies.

American Airlines, as of April filings, had five shareholders above the 4.75% threshold, including Warren Buffett’s Berkshire Hathaway Inc., which has a 10% stake. American has had a run of strong profits in recent years and successfully managed its 2013 merger with US Airways Group Inc. Mr. Buffett recently rewarded the U.S. industry’s improving fortunes, also taking stakes in Delta, United and Southwest Airlines Co.

American’s Mr. Parker said he is “always excited to hear that people believe American is a great investment.” American continues to be dead set on convincing the U.S. government that state support for Qatar Airways and the two other large Gulf airlines is hurting the U.S. industry and American jobs, he said.

The proposed investment “is confusing to our team and we don’t like that,” Mr. Parker said.

—Doug Cameron, Imani Moise and Nico Parasie contributed to this article.

Original article can be found here:

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