CAPA: Route to growth: Organic vs acquisition

Reports that Sharjah’s Air Arabia, fresh from raising $700 million in an IPO in Mar-07, has allocated up to half that amount to buy another airline in the region, stirs the debate on organic growth vs acquisition.If the opportunity presents, Air Arabia could be ready to pounce on another Middle East carrier, even a full service airline that it would convert to an LCC model.

But AirAsia CEO, Tony Fernandes, this week stated “you sometimes buy a lot of trouble by acquisitions. If you buy another airline using your equity, you’re inheriting all their culture and all their issues - I’m very much an organic growth sort of person”. Tiger Airways is also growing organically across borders, and is tipped to set up a third base next year, most likely in the Philippines.

The debate really comes down to market access. AirAsia is located within the (supposedly) liberalising ASEAN region and has used cross-border JVs with majority local partners to grow within the region. The Middle East is much further behind in terms of intra-regional (as opposed to long-haul) liberalisation and its evolution will be different and influenced strongly (as in other regions) by its growing LCC sector.

Other carriers on the low cost acquisition trail include Qantas/Jetstar seeking more of the action in Asia, while Singapore Airlines is focused on the full service segment, with a potential acquisition in China.