Lufthansa German Airlines and Swiss International Airlines last month formalized an integration plan in which the former takes control of the latter, marking the next step in European airline industry consolidation. The deal mitigates some of the uncertainty around Swiss' future, paves the way for the carrier to participate in the Star Alliance and ultimately may present new opportunities for multinational corporate clients.
The deal structure allows Swiss to maintain its brand and a degree of independence, similar in concept to the Air France-KLM merger last year
(BTN, May 4, 2004). Also similar to Air France-KLM, Lufthansa and Swiss officials emphasized the customer benefits of the integration, including a larger network, better flight connectivity, a combined frequent flyer program and reciprocal airport lounge programs.
"The merger is not only good for Switzerland and Germany, it is also beneficial for our Star Alliance partners and strengthens the European aviation sector," said Lufthansa chairman and CEO Wolfgang Mayrhuber.
Combined, Lufthansa and Swiss would operate a wide network across continental Europe (see chart, above). Under terms of the agreement, Swiss also would maintain "a demand-driven international network of routes" complementing Lufthansa's intercontinental operations, and continue to develop the Zurich hub "on an equitable basis with the Lufthansa hubs in Frankfurt and Munich." Swiss also would continue operating its long-haul fleet, to which Lufthansa plans to contribute two intercontinental jets.
A merged Lufthansa-Swiss entity would rank second in the European market, behind Air France-KLM and ahead of British Airways. A week before announcing the Swiss acquisition, Lufthansa in its annual report said, "We will systematically pursue expansion of the core passenger business."
Both Lufthansa and Swiss cater to the corporate travel community by operating three-class aircraft on intercontinental routes, serving key business destinations in Europe and offering all-premium class services across the Atlantic. Officials from both airlines declined to comment on possible corporate sales synergies, citing legalities around the nascent merger. Considering the structure of the transaction, however, future joint contracts for corporate buyers likely would be similar to those developed by Air France-KLM
(BTN, June 7, 2004).Corporate buyers with traffic in Switzerland may assess the potential benefits of global airline partnership deals as Swiss moves into the Star Alliance.
Swiss had been in the hunt for an alliance affiliation since it formed from Swissair's remnants in early 2002
(BTN, Jan. 31, 2002). The airline was prepared to partner with British Airways and join the Oneworld alliance before terminating that deal last year
(BTN, June 3, 2004).Within Star, Swiss would find itself partnered with traditional competitor Austrian Airlines, providing the alliance an even stronger position in central Europe. In fact, the European Commission in 2000 raised concerns about how a Lufthansa-Austrian partnership would stifle competition between Germany and Austria before granting the carriers antitrust immunity in January 2001.
Lufthansa and Swiss said they expect clearance from the European Commission by the third quarter and plan to begin integrating their flight networks in the winter 2005/2006 schedule. Lufthansa's complete takeover of Swiss is not expected until late 2006 or early 2007. In the interim, Lufthansa will buy into AirTrust, a new Swiss company holding shares of the Swiss airline. The carriers expect Lufthansa would pay between $60 million and $385 million.
Consolidation of such scale has not occurred in the U.S. since American Airlines purchased Trans World Airlines in 2001
(BTN, April 9, 2001). Otherwise, the pecking order of the largest domestic players has remained relatively unchanged for a decade. That could end if lawmakers heed calls to the federal government to loosen foreign-ownership restrictions. UAL Corp. chairman and CEO Glenn Tilton this month said foreign investment limits should be raised from 25 percent to 49 percent to allow U.S. carriers to compete against emerging "super-carriers" based in Asia and Europe. "As the global aviation industry is revolutionized around us, the U.S. and its major air carriers run the risk of being marginalized and left behind," he said in a speech to the Asia Society.