Lufthansa under pressure to make bmi purchase pay

 

Deutsche Lufthansa is likely to break up loss-making British unit bmi to sweeten investors turned off by its purchase of the bottom-line sapping carrier.

The German airline led European M&A in the downturn, spending over 1 billion euros (910 million pounds) on smaller rivals Brussels Airlines, Austrian Airlines and bmi - but the latter's lucrative Heathrow landing slots did little to cheer investors and Lufthansa's stock has lagged peers.

Lufthansa shares have fallen around 4 percent so far this year while rival British Airways has gained about 18 percent and Air France-KLM has jumped almost 25 percent.

While Lufthansa has yet to reveal its strategic plan for bmi, whose 144.7 million pounds 2008 net loss compared with a profit of 599 million euros at Lufthansa, analysts see at least a partial sale as the most likely outcome.

"Lufthansa have a new management team in place who are keen to restructure and will want to sell bmi from a position of strength but in its present form this isn't the best time to sell bmi" said Stephen Furlong, an aviation analyst at Davy Stockbrokers.

The global airline has been hit by the toxic mixture of reduced spending on travel, a drop in global trade and rising oil prices. Industry body IATA has said it expects the world's airlines to lose $11 billion (7 billion pounds) this year.

THE MOTHERSHIP

When Lufthansa bought half of bmi from Sir Michael Bishop earlier this year, the deal drew criticism from analysts, one of whom called it a "disaster", because bmi was seen dragging down earnings without offering hope for a speedy turnaround. 

"(Bmi is) in an odd position because it's not really a low-cost carrier but is in a market which is increasingly dominated by low-cost carriers" said Evolution analyst Nick Cunningham.

Bmi's new chief executive, Wolfgang Prock-Schauer, the Austrian-born manager who helped AUA integrate Lauda Air during the 1990s and who joins bmi from India's Jet Airways, took the helm on December 1 with the aim of turning the business around.

Bmi aims to return to profit by 2012 at the latest, but it will need 190 million pounds of additional financing by the end of October next year to continue its business, according to recently published financial statements. Half of that sum will have to come from Lufthansa, the statements showed.

Key to market watchers will be what Lufthansa decides to do with bmi's Heathrow access.

It controls about 11 percent of take-off and landing slots at Heathrow, the world's second-busiest airport. The slots were worth 616 million pounds at the end of 2008, down from 770 million a year earlier.

That makes it second there only to BA, and bmi said the sale of slots could help pay off the rest of its end-2008 117 million pound debt, adding it had already held "significantly advanced" talks with several airlines.

WEARING THE JEWELS

While a potential money-spinner, a complete sale of bmi's crown jewels to a rival airline is unlikely, analysts said.

Lufthansa could, however, sell some of the slots internally to sister units such as Swiss or Austrian Airlines, flushing cash into bmi's coffers and giving other company units access to Heathrow slots. 

Failing that, Lufthansa may seek to offload bmi regional and low-cost carrier bmibaby, which do not fit its core business plan of using new additions to the group to feed into its premium long-haul route network.

Bmi has said it could cut more than 750 jobs at bmibaby, bmi mainline and bmi regional as it halts unprofitable routes and cuts its fleet size. Lufthansa has not ruled out a sale of bmi as a whole, though that would mean losing the Heathrow slots.

Media reports have said that bmi had attracted the interest of 12 potential buyers who would either take over the whole airline or its subsidiaries bmibaby or bmi regional. BA and Virgin Atlantic were among the potential buyers.

Bmi, which traces its roots to a 1938 flight school for Royal Air Force pilots, carried 10 million passengers in 2008, generating revenue of just over 1 billion pounds. That compares with 33 million passengers and about 9 billion pounds at BA.

The less optimistic Lufthansa is about a near-term economic recovery, the more likely it will be to consider a sale of bmi as a whole, giving up the Heathrow slots along with the business, LBBW analyst Per-Ola Hellgren said.

"If no sale is announced before the end of 2009, the urgency of negotiating one would probably dissipate, and the sale might then be deferred until 2011 or later" adding he currently saw only BA and Virgin Atlantic as serious contenders for bmi.