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The conquerors from Cologne: Frankfurt, Munich, Zurich and now Brussels – what's next for Lufthans

16-Sep-2008

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The conquerors from Cologne are at it again. Lufthansa has swept up an initial 45% stake in Brussels Airlines and with it, a strong presence at the gateway serving the seat of the European Parliament and NATO’s headquarters. As such, it is a high profile and high yielding addition to Lufthansa’s growing sphere of influence.

British Airways and China’s Hainan Airlines were also reportedly in the running for Brussels Airlines, which will now be ushered into the Star Alliance. Brussels Airlines, Belgium's largest carrier, was created from the 2006 merger of Virgin Express and the remains of former flag carrier, Sabena. The Belgian carrier offers about 300 flights a day with 49 aircraft – roughly one tenth the size of Lufthansa.

As observed in Europe Airline Daily on 05-Sep-08, over its short life in its current, Brussels has been aggressive, both entrenching an attractive African route network and establishing valuable codeshares like those with India’s Jet Airways (giving good access into the Indian market and beyond, as well as helping Jet hub into the US and other routes) and Ethiopian Airways. Now also with China service, Brussels has been selling itself as an ideal connection for the Chinese resources companies looking for convenient access into the mineral-rich west African region.

But the investment opportunity is unlikely to finish with Brussels. Lufthansa is presented with a mouthwatering array of opportunities to extend its influence in Europe, in addition to ongoing airline ownership rationalisation moves in Germany.

Vienna (Austrian Airlines)


Lufthansa has expressed interest in the sale of 43% of Austrian Airlines by the Austrian Government, Vienna would be a useful addition for Lufthansa to control feed to/from key emerging markets in the Middle East and Eastern Europe.

Copenhagen/Olso/Stockholm (SAS)

Troubled SAS has reportedly been in “exclusive” negotiations with Lufthansa, with speculation of a takeover pushing the Nordic carrier’s shares sharply higher last week. This is a potentially difficult acquisition, given SAS’ lack of specific focus and heavy competition in its core markets. A potential opportunity is a Finnair-style hub operation linking North America and Northern European markets with the (currently subdued, but high potential) India and China markets.

Rome (new Alitalia)

Italian Prime Minister Berlusconi has signaled Lufthansa is the preferred partner for a minority shareholding in the ‘new Alitalia’. An Italian linkage looks unlikely at this stage, with Alitalia teetering on the edge of oblivion and majority control not on the table. Lufthansa is already enhancing its own presence at the high yielding Milan hub (which Alitalia has downscaled).

London (bmi)

A key beneficiary of the friendly (and generously priced) sale of Brussels Airlines is Sir Richard Branson's Virgin Group Ltd - SN Airholding's largest shareholder, with a stake of about 30% (the remaining stock is held by Belgian companies). Sir Richard can now contemplate the rationalisation of ownership in the London market. Lufthansa is a key player in this with its interest in bmi. The majority Sir Michael Bishop-owned bmi is a potential partner for Virgin Atlantic if the British Airways-American Airlines deal is waived through by regulators. Maintaining a presence in Heathrow is crucial, so Lufthansa will be keeping its options open here.

Ultimately, Lufthansa’s investment targets and future shape will be determined by network fit and flows, access to high yielding markets and the level of control it can exert. Many strategic opportunities currently exist and more will surface as the market squeeze intensifies over coming months.


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