Forum Topics A reminder acquisitions are hard
Magneto
Added 2 months ago

Came across an interesting YouTube video on Pan Am and thought it was worth sharing.

https://youtu.be/PfPPMGmBqH4?si=q9dbgo1qRhHJzIX-

Pan Am was once the international airline, but it had a structural problem. It had almost no domestic routes. Its competitors could funnel passengers from across the US into their international flights, while Pan Am relied largely on point to point demand.

After deregulation in the late 1970s, Pan Am tried to fix this by buying its way into the domestic market, acquiring National Airlines in a deal worth well over a billion dollars in today’s money. On paper it made sense. More routes, more passengers, better revenue and profits.

In reality, it turned into a mess. The domestic network did not feed Pan Am’s international routes particularly well. Costs blew out, fleets and cultures clashed, and profitability suffered. Instead of strengthening the business, the acquisition added complexity and financial strain at exactly the wrong time.

Pan Am did not fail only because of this deal, but it is a good example of how hard acquisitions can be, especially when they are used to patch over a structural weakness rather than build on an existing strength.

Anyway, thought the video was an interesting watch and a good reminder that strategic acquisitions often look a lot better in spreadsheets than in the real world.

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tomsmithidg
Added 2 months ago

One of the first ever investment seminars I went to was run by a group heavily comprised of Ansett pilots. They were spruiking an investment system, mostly in blue chips including a large portion in Ansett. I often wonder how that group got on when Ansett went broke and was subsequently very glad that I didn't have the money at that time to buy into their investment syndicate.

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Magneto
Added 2 months ago

Airlines are a brutal business. Almost everything is expensive and largely outside the airline’s control. Fuel, maintenance, labour and aircraft purchases are all huge costs, and one bad cycle can wipe out years of profit.

Ironically, flying passengers from A to B is often not where the money is made. The real profits tend to sit in side businesses like loyalty programs, airport retail and cafés, catering, ground handling, software, financing and credit cards.

That’s why both Ansett and Pan Am are such good case studies. When the core airline economics are weak, management often turns to acquisitions as a shortcut to scale, relevance or competitive advantage. In both cases, the acquisitions didn’t fix the underlying economics. They added debt, complexity and timing risk to businesses that already had very little margin for error.

By the end, Ansett had accumulated a fleet with far too many different aircraft types, driving up training, maintenance and operational complexity. Tellingly, one of the few valuable assets to survive was the simulator centre at Tullamarine, which is still operating today.

As Buffett famously said, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down. Airlines have destroyed more capital than almost any other industry.

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