Bloomberg News

Lufthansa Vows With BA Not to Let Virgin Gripe Kill BMI D

March 15, 2012

IAG CEO Willie Walsh said in an interview that the London-based company, formed last year from a merger of BA and Spain’s Iberia, has made proposals regarding competition on some routes. Photographer: Simon Dawson/Bloomberg

IAG CEO Willie Walsh said in an interview that the London-based company, formed last year from a merger of BA and Spain’s Iberia, has made proposals regarding competition on some routes. Photographer: Simon Dawson/Bloomberg

Deutsche Lufthansa AG (LHA) Chief Executive Officer Christoph Franz predicted the sale of its unprofitable BMI unit to International Consolidated Airlines Group SA will clear antitrust hurdles at the first attempt.

Franz said a European Commission examination of the deal is unlikely to trigger an extended probe, and that Lufthansa and the British Airways parent will work to answer any concerns the regulator might raise. IAG CEO Willie Walsh said he’s “not looking to walk away” and wants to address issues quickly.

The deadline for a ruling on the takeover was extended to March 30 after IAG (IAG) proposed measures to alleviate competition concerns, the commission said in a March 12 filing. Virgin Atlantic Airways Ltd. has said a deal would eliminate passenger choice by giving BA a monopoly on routes from northern Britain to London Heathrow, services through which BMI also supplies the Richard Branson-controlled carrier with vital feeder traffic.

“I can’t imagine that it will come to a phase two,” Franz said at a press conference in Frankfurt. “Once the first phase is over we will see what conditions we, as a seller, and IAG, as a buyer, are confronted with, and will then try to get the sale through as soon as possible.”

Reduced Service

Scottish campaigners opposed to the transaction say it will allow British Airways to raise fares on flights to Heathrow from Glasgow, Edinburgh and Aberdeen in the absence of competition and erode the number of overall services to Europe’s busiest air hub. The Manchester-Heathrow route would also become a monopoly, according to Virgin Atlantic, BA’s biggest long-haul competitor.

IAG’s Walsh said in an interview that the London-based company, formed last year from a merger of BA and Spain’s Iberia, has made proposals regarding competition on some routes, without revealing which ones or what the suggestions were.

“Our aim is to get clearance in phase one,” he said. “I believe we’ve made sensible and suitable concessions to address the concerns that they have highlighted, and I hope that would be sufficient to get this cleared by the end of March.”

Cologne-based Lufthansa, Europe’s second-biggest airline, agreed in December to sell BMI’s main Heathrow operations to IAG, the No. 3, for 172.5 million pounds ($272 million). Two bidders have also come forward for the East Midlands airport- based Bmibaby discount unit, it said March 5, and a draft deal has been reached for a regional operation located in Scotland.

Delay Risk

Walsh said a lengthy delay could be potentially damaging in business terms because of uncertainty created around BMI.

“We believe many of the arguments would be won in a phase- two investigation, but the question is what happens in the interim,” he said. “It’s in everybody’s interests that this is addressed quickly and that’s why, with Lufthansa, we are looking to see if we can get sensible phase-one clearance.”

Castle Donington, England-based BMI said separately that there’s no question of the plug being pulled in the event of a more drawn out antitrust examination.

“Contrary to media reports, we do have funding available beyond March,” spokeswoman Katherine Hill said in an e-mail.

Franz said today that the terms of Lufthansa’s agreement with IAG, which wants BMI for its scarce Heathrow slots, ease the burden of the disposal and antitrust process.

Losing Out

“We have agreed an all-inclusive package with IAG whereby the restructuring costs, the running losses until the closing of the deal, and the penalties imposed by the antitrust body are shared,” he said in answer to questions in Frankfurt.

It’s logical that BA would prefer to use a BMI takeoff and landing slot to operate an Airbus SAS A380 superjumbo to Singapore than a “half-empty” Boeing Co. 737 from Glasgow, said Scottish National Party politician Alyn Smith, a member of the European Parliament, the European Union’s legislative assembly.

“Vast numbers of Scots use Heathrow and I do not believe their interests are best served by this potential monopoly,” Smith said in an interview. “This will lead to fewer services from Scotland to Heathrow and more expensive services as well.”

Lufthansa (LHA) said today that its board approved a 140 million euro capital increase for Austrian Airlines aimed at sustaining a business that’s in a “critical” situation. In return, unions must compromise on contracts, with “competitive employment conditions” to be enforced for air crew, according to Franz, who said the company can no longer tolerate “permanent loss-makers.”

Tyrolean Switch

Austrian Airlines (LHA), where Lufthansa is seeking 260 million euros of savings, had a loss of 62 million euros last year, while discount unit Germanwings suffered a 52 million euro shortfall. BMI racked up deficits and disposal costs of 285 million euros, pushing the group to a 13 million-euro net loss.

“Whether at Austrian or other units where a profit is not likely, we will not continue to prop them up or subsidize them,” Franz said. “That’s simply not possible. We’ve too much respect for other Lufthansa employees where we are trying to cut costs.”

Should workers in Vienna fail to accept new terms, Franz said Lufthansa will consider transferring operations to Austrian regional unit Tyrolean Airways, which has a lower cost base.

Group-wide operating profit will be in the “mid three- figure million euro range” in 2012, Lufthansa said today in an earnings statement. That would extend a decline after last year’s figure fell 18 percent to 820 million euros.

Shares of Lufthansa, which also owns Swiss Air and Brussels Airlines, fell as much as 3.7 percent and traded 2 percent lower as of 3:32 p.m. in Frankfurt. The stock has gained 12 percent this year, valuing the company at 4.72 billion euros.

To contact the reporters on this story: Alex Webb in Frankfurt at awebb25@bloomberg.net; Steve Rothwell in London at srothwell@bloomberg.net

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


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