Deutsche Lufthansa AG said its supervisory board approved a plan to buy ailing Austrian Airlines AG. At the end of September reporting period, Lufthansa had cash and reserves of about €3.8 billion, with a nine-month net profit of €551 million.
As the global economic turmoils squeeze the airline industry, the proposed merger highlights how the relative strong airlines are gaining by consolidation. Global giants including Lufthansa, Air France-KLM, British Airways, Qantas, Delta Air Lines, Northwest Airlines, even regional heavyweights Jet Airways and Kingfisher Airlines, have been pursuing mergers, acquisitions or commercial partnerships to boost operational efficiencies and increase size.
Lufthansa, has a long reputation of being one of the most risk averse airlines in the world. However, of late, the airline has been on one of the most ambitious buying sprees anyone has seen in the world.
In 2005, it acquired Swiss International Airlines. In January this year it bought a 19% stake U.S. budget carrier JetBlue, with which it is now establishing a close marketing relationship. In August, Lufthansa agreed to buy 45% of the parent of Brussels Airlines, with whom Jet Airways has a strategic relationship. Lufthansa has said it will increase its 30% stake in British Midland Airways Ltd. to 80%. Last week, Lufthansa announced the creation of Italian subsidiary, Lufthansa Italia that will operate from Milan.
Opportunism, and fear of rivals, are the seen as the main drivers of this buying spree.
The new investments give Lufthansa footholds in diverse and far flung markets. The JetBlue deal, gives Lufthansa a strong partner in the huge New York market, while the BMI takeover, makes Lufthansa the second-largest holder of ultra-precious takeoff and landing slots at London Heathrow airport. Brussels Airlines, brings access to lucrative West African markets and a partnership with Jet Airways from India, which uses Brussels airport as its European hub.
The acquisitions also raise traffic and revenues for Lufthansa, in it’s bid to close the gap with the giant Air France-KLM combine, and to have the size to compete against British Airways who is in merger talks with Spain’s Iberia, Australia’s Qantas, and in anti-trust requests along with U.S. giant and OneWorld partner American.
The Austrian government could approve the deal by Friday, which values the national carrier at as much as €377.4 million ($479.5 million) and save it from collapse under mounting financial woes.
Austria’s privatization agency last month selected Lufthansa for exclusive negotiations to buy the state’s 41.56% stake in Austrian Air. Lufthansa is now proposing to pay only €366,000 for the stake because of Austrian’s financial troubles, but could pay up to €162 million more in the future, depending on the company’s financial performance. Lufthansa also plans to launch a tender to buy out private shareholders for a further €215 million.
A deal would require regulatory approval, partly because the Austrian government plans to spend €500 million helping to restructure the airline. This prospective Government help, could prompt challenges from other carriers.
Industry watchers, and analysts worry that Lufthansa may be overreaching, as Swissair did back in the late 1990’s, but Lufthansa has experience managing diverse companies like Lufthansa Technik, an aircraft-maintenance company, and LSG SkyChefs, one of the biggest in-flight caterers. Also, Lufthansa management is known to keep an eagle eye, both on its balance sheet and profitability. This buying spree is being conducted with the typical methodical German caution, and a focus on profits and immediate benefits.
With inputs from Deutsche Lufthansa, Bloomberg, Flightglobal, and Wall Street Journal