Lufthansa Makes Acquisition Progress On Two Fronts

Lufthansa this week made major breakthroughs in its long-running campaigns to buy Bmi British Midland and Brussels Airlines but has run into more regulatory problems with its efforts to purchase Austrian Airlines. The German flag carrier, and world's most acquisitive airline, also warned that it is implementing further cost-cutting measures to keep the full-year profit it projected a few months ago from turning into a loss.

On Monday, Lufthansa reached an out-of-court settlement with Bmi majority owner Sir Michael Bishop to buy his stake in the airline. Sir Michael had been insisting that Lufthansa honor an agreement struck in 1999 to buy him out at his time of choosing for £298 million. Lufthansa had resisted because Bmi is in financial difficulties, but Sir Michael responded by launching legal action.

Now the two parties have compromised, with Lufthansa paying Sir Michael £175 million to relinquish his right to sell and an additional £48 million for his stake in the airline of 50 percent plus one share. Lufthansa already owns an additional 30 percent of Bmi, while SAS owns 20 percent, a stake that the German airline has agreed to acquire as well.

The deal costs Lufthansa substantially more than the current market value of Bmi, but it brings 11 percent of the departure and landing slots at London Heathrow, making Lufthansa the second-largest player at the world's busiest international airport.

Also on Monday, the European Commission granted regulatory approval for Lufthansa to buy 45 percent of Brussels Airlines, with an option to purchase the remaining 55 percent starting 2011. However, the approval carries conditions, as the Commisson addressed concerns about competition on routes from Brussels to Munich and Hamburg—where Lufthansa would have a monopoly—as well as Frankfurt and Zurich. In consequence, Lufthansa agreed to release slots for new entrants on these routes and potentially allow participation for the new entrants in its frequent-flyer scheme.

Competition Commissioner Neelie Kroes said, "The comprehensive remedies package offered by Lufthansa will facilitate market entry on the affected routes and thereby create alternative choices for passengers. In the light of the current consolidation process in the European airline sector, the Commission takes great care to safeguard the interests of consumers in having a competitive choice of airline services in Europe." The acquisition will take effect at the end of this month.

Less good news for Lufthansa, according to the Kurier, an Austrian newspaper, is that the Commission is pressing for much stricter conditions on approval of its plans to buy Austrian Airlines. It reported that the Commission not only wants the German carrier to give up slots to potential competitors but also reduce its own frequencies, so great is the fear of Lufthansa's market power. In addition to Lufthansa's potential dominant market position, the Commission is investigating whether a proposal for the Austrian government to assume some of Austrian Airlines' debt breaches competition rules.

Meanwhile, Lufthansa announced additional, though unspecified, cost cuts despite making optimistic profit forecasts earlier this year. The airline blamed "persistently weak demand development in passenger and freight business, structural changes in passengers' travel behavior and rising fuel prices."