Bloomberg News

Lufthansa Reports Multiple Bids for BMI as Unit’s Losses Widen

October 27, 2011

Oct. 27 (Bloomberg) -- Deutsche Lufthansa AG, Europe’s second-biggest airline, said it’s contemplating multiple bids for its U.K.-based BMI operation and could tie up a sale by the end of the year as losses at the unit mount.

“We are in talks with potential buyers and we have made a lot of progress,” Chief Financial Officer Stephan Gemkow said in a press briefing at Frankfurt airport, Lufthansa’s main hub, while declining to specify how many offers have been received.

BMI, based in Castle Donington, England, suffered a nine- month operating loss of 154 million euros ($216 million), widening from 90 million euros, and the division is unlikely to match 2010’s full-year sales and earnings, Lufthansa said today.

The German carrier aims to exit unprofitable units with poor turnaround prospects after group operating profit fell 27 percent in the period and is exploring “various disposals and strategic options” for BMI, it said, adding that annual earnings should still be in “the upper three-figure million euro range”

Lufthansa rose as much as 6.8 percent and was priced up 6.2 percent at 10.67 euros as of 1:08 p.m. in Frankfurt, valuing it at 4.9 billion euros. The stock is down 36 percent this year, versus a 30 percent drop in the Bloomberg EMEA Airlines Index.

‘Several Options’

“We would like to sell BMI as part of a share deal, as part of an overall sale,” Gewkow said. “But several options and variants are on the table and various parts should come together for us to achieve the best result for us and for BMI.”

BMI’s most attractive asset is its portfolio of takeoff and landing slots at London Heathrow airport, where it controls 8.5 percent of the available positions. Six daily slots have already been sold to British Airways, Heathrow’s biggest operator, and BA parent International Consolidated Airlines Group SA says it’s interested in buying the entire business, as does rival Virgin Atlantic Airways Ltd., owned by billionaire Richard Branson.

Lufthansa sought bids for BMI after failing to turn round an operation added under duress in 2009 after then-owner Michael Bishop exercised a put option as airline values slid during the global recession. The unit has been losing money after Arab unrest hurt demand on its Middle Eastern routes.

While nothing has been concluded, it’s possible that BMI could be off Lufthansa’s books by the end of the year, Gemkow said. Quarterly losses at Austrian Airlines narrowed to 34 million euros, while widening to 23 million euros at the Germanwings unit. The Swiss division remained profitable.

Jade Question-Mark

Lufthansa is also analyzing profitability at its Jade Cargo International Co. venture with Shenzhen Airlines, Chief Executive Officer Christoph Franz said in the briefing, and is mulling the disposal of “non-strategic investments,” including information-technology unit Lufthansa Systems.

Lufthansa, which said that no acquisitions are currently planned, has cut a planned increase in winter capacity by two- thirds to 4 percent as slowing growth, declining consumer confidence and Europe’s sovereign-debt crisis hurt demand.

Third-quarter operating profit fell to 575 million euros from 783 million euros a year earlier as a slowing economy hurts bookings, Cologne-based Lufthansa said today. Analysts had expected a profit of 646 million euros, based on five estimates.

Sales rose 6.7 percent in the period to 8.08 billion euros and net income slumped 21 percent to 494 million euros as bookings at the passenger-airlines unit “declined considerably,” Lufthansa said. The company plans to reduce the size of its fleet by a net six jets in 2012, Gemkow said, taking delivery of 32 planes and retiring 38, include nine to be put in storage.

Flight Ban

“Fears of a recession and concerns about the effects of the debt crises in Europe and the U.S. have already had a clear effect,” Franz said, adding that while the result “does not have us jumping for joy,” Lufthansa is profitable while “competitors are struggling to make figures that are not in the red.”

Lufthansa said Sept. 20 it would miss a goal of beating 2010’s 876 million-euro operating profit.

Karl Ulrich Garnadt, CEO at Lufthansa Cargo, said last week that a night-flight ban in Frankfurt will cost at least 10 million euros per year. Some freight will be loaded onto trucks and taken to other airports to avoid the ban, Franz said today.

Fuel-price hedges average $104 a barrel for 2012, Gemkow said, and the carrier is 63 percent hedged for the coming year.

Industrywide profit will drop by more than half this year and 40 percent in 2012, with the risk on the downside, the International Air Transport Association trade group reckons.

Air France-KLM Group, Europe’s biggest airline, reduced its earnings target in July and aims to break even this year versus a year-earlier operating profit of 28 million euros. The Paris- based company has pared a winter-capacity increase to 3.4 percent, cutting long-haul growth by almost half to 2.6 percent.

Finnair Oyj said today third-quarter net income fell 94 percent to 1.9 million euros, missing estimates, as demand for business travel waned, and CEO Mika Vehvilainen is reviewing whether to shrink the short-haul fleet. Discount specialist Air Berlin Plc said yesterday quarterly pretax profit fell 44 percent to 96.8 million euros, 30 percent short of estimates.

--With assistance from Steve Rothwell in London Ola Kinnander in Stockholm. Editors: Chris Jasper, Chad Thomas.

To contact the reporter on this story: Alex Webb in Frankfurt awebb25@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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