Lufthansa clears hurdle in bid for Austria Airlines

By Caroline Brothers

Published: December 5, 2008

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PARIS: A week of frenetic aviation merger activity across Europe culminated Friday when the Austrian government accepted an offer for its flag carrier from Lufthansa, which would allow it to become the biggest airline in Europe.

Just days after British Airways announced that it was in merger talks with Qantas of Australia and Ryanair renewed a bid for Aer Lingus, Vienna agreed Friday to sell its 41.6 percent stake in Austrian Airlines to the German flag carrier for €336,000. Lufthansa could pay a further €162 million due in three years, depending on its profitability.

Airlines reeling from high oil prices and plummeting demand are forging partnerships at an unprecedented pace to seek shelter from the financial stress that has downed 30 airlines this year.

"It is not easy to privatize a myth," Peter Michaelis, chief executive of the Austrian privatization agency, OIAG, said at a broadcast news conference in Vienna to announce the deal. "We have had heavy turbulence during the flight and very bad weather; the important point being that together we will able to land safely and touch ground."

A €500 million rescue loan, repayable once the deal has closed, will be made available to Austrian Airlines from the Austrian government to inject immediate liquidity into the company, Michaelis said. He added that the deal met all of Vienna's conditions.

Lufthansa hopes to buy out all of Austrian Airlines' remaining shareholders with an offer of €4.44 per share in a second phase of the takeover, early next year, which would give it full control. On Friday the shares closed up 4.3 percent at €3.86.

A five-member trust with veto rights will oversee the interests of Austrian Airlines over the next five years.

The deal requires approval from European Union competition authorities. Wolfgang Mayrhuber, chairman and chief executive of Lufthansa, said he did not envision "crossfire" from that quarter.

The two airlines already cooperate in the Star Alliance airline grouping that also includes Swiss International Air Lines, with which Lufthansa has already successfully merged, and BMI of Britain, in which Lufthansa has just increased its stake.

"Lufthansa may be a strong company, but when we see how economic forces change, it is extremely important that we find possibilities for strengthening our home base, which is Europe," Mayrhuber said. "This is not possible in a stand-alone solution, it is only possible as part of an integrated group."

A combination of Austrian and Lufthansa would operate a fleet of 513 aircraft, putting it just ahead of Air France-KLM, which has 411. Air-France-KLM and Lufthansa had similar revenue levels last year; Lufthansa's will move ahead once Austrian is on board.

The airlines' agreement guarantees that Austrian Airlines would retain its separate identity, branding, headquarters, code-sharing agreements with airlines in Eastern Europe, and its specific services as an independent carrier. Vienna would remain the hub, despite its proximity to Munich, where Lufthansa has a major base, and Mayrhuber said he foresaw €40 million in cost savings that did not include plans for job cuts.

But he said that if passengers did not show up at the ticket gates, the work force would be reduced. The companies had an economic plan under which Austrian would reach break-even point in three years' time, he added.

Alfred Ötsch, chief executive of Austrian Airlines, said its financial situation had not proven robust enough to support its recent expansion, leaving it vulnerable to competitors.

While experts saw the value of the deal for Austrian, they were more skeptical over the benefits for Lufthansa. One saw it more as a defensive measure for the German airline, so that it would not lose its Star Alliance partner to a competitor. Lufthansa, alongside Air France-KLM, is also considering an alliance with Alitalia, the money-losing Italian flag carrier that is being restructured via a merger with domestic carrier Air One and that is seeking an international partner.

But Mayrhuber said that uncertainty still shrouded the business plans of the Italian carrier, which is a member of the Skyteam alliance, which also includes Air France. "No one knows whether it will switch alliances - it is very complex," he said.

Mayrhuber said that neither Lufthansa nor Austrian had envisaged the financial crisis when they began negotiating and that Lufthansa considered the deal an investment that would substitute for the growth that the crisis has wiped out for 2009.