Bloomberg News

British Airways Parent IAG Wins EU Approval for BMI Takeover

March 30, 2012

British Airways (IAG) parent IAG won European Union antitrust approval to purchase Deutsche Lufthansa AG (LHA)’s BMI unit in a deal that will boost its position at London’s capacity-constrained Heathrow airport.

IAG, which agreed in December to buy BMI for 172.5 million pounds ($275 million), will cede 14 takeoff and landing slots at Heathrow to rivals out of the 56 controlled by BMI and connect passengers to competing long-haul flights there in order to maintain competition, the European Commission said today.

“It’s a price worth paying and, if anything, makes integrating BMI somewhat easier in the short-term as there’s less pressure to find a profitable use for all of its slots,” said Douglas McNeill, a transport analyst at Charles Stanley in London who recommends buying IAG stock.

Opponents of the merger who include Virgin Atlantic Airways Ltd. and Scottish lawmakers say it will give BA a monopoly on flights to Scotland and northern England from Heathrow, which operates at 99 percent of capacity, making slots expensive and tough to come by. Lufthansa Chief Executive Officer Christoph Franz said March 20 that the deal was vital to save BMI jobs.

‘Competitive Dynamics’

“The commission could clear this transaction in the first phase given the commitments package offered by IAG,” EU Competition Commissioner Joaquin Almunia said in a statement. “The competitive dynamics will be maintained so as to ensure choice and quality of air services for passengers.”

IAG, or International Consolidated Airlines Group SA, formed in January 2011 from a merger of BA and Spain’s Iberia, gained 0.2 percent to 178.9 pence in London today prior to the announcement and has added 21 percent so far in 2012. Lufthansa advanced 1.6 percent today and is up 14 percent this year.

“This is good for U.K. business and U.K. consumers,” IAG CEO Willie Walsh said today in a statement. “More British jobs will be saved than if BMI had closed. BA will consult with BMI staff and their unions as soon as possible.”

Virgin Atlantic said it was “incredible” that such an important transaction was approved without more scrutiny, and that it would study the ruling and review all available options.

“The last-minute remedies offered this week by British Airways were not shared with the industry and they have not been subject to a detailed assessment,” it said in a statement.

April Completion

Ireland’s Ryanair Holdings Plc (RYA), the biggest European discount airline, said in a statement that the EU ruling continued a sequence of “discriminatory” decisions that have seen acquisitions by flag carriers “rubber-stamped” while its own bid for Dublin-based Aer Lingus Group Plc (AERL) was blocked.

London-based IAG said the deal is likely to be completed around April 20, with BMI’s Heathrow operation integrated into BA in the following months. The slots will allow expansion of services to growth markets in Asia and Latin America, it said.

Lufthansa’s Franz said in a statement that he also welcomed the decision and that a sale to IAG is “the one solution which offers future prospects to BMI and its employees.”

Following the merger IAG will gain 42 daily slots pairs, giving it control of 51 percent in total. Lufthansa and Air France-KLM (AF) Group, Europe’s biggest airline, have a greater share of capacity at their own respective hubs.

Restructuring costs will be around 100 million pounds over three years and the remedy agreed with the EU doesn’t affect IAG’s plans to increase the 2015 operating profit target of 1.5 billion euros ($2 billion) by 100 million euros, it said.

Slot Surrender

BA and BMI overlap on 12 Heathrow routes, according to research from Credit Suisse, the same number of slots that IAG initially offered to surrender, according to today’s statement.

Of the 14 given up, seven are to be used for flights to Edinburgh and/or Aberdeen and five for services to those destinations or Nice, Cairo, Moscow or Riyadh in Saudi Arabia, IAG said. Two other slot pairs will be leased to Russian carrier OAO Transaero Airlines (TEAR), also to be used for services to Moscow.

Under the agreement with the EU, other airlines will be able to apply for seats on the integrated BA/BMI short-haul network for their transfer passengers, according to IAG.

McNeill at Charles Stanley said it’s not clear that other airlines will be willing to commence new Scottish services, though Declan Kearney, a spokesman at Aer Lingus, said by telephone that the Irish carrier has “made no secret” of its interest in expanding at Heathrow.

“It’s hard to see anybody else starting services to Scotland from Heathrow,” Mcneill said. “BMI couldn’t make any money doing it, so it’s hard to see a commercial case.”

Forced Purchase

In addition to the Heathrow business, Castle Donington, England-based BMI has two other units, a short-haul regional operation based in Aberdeen, Scotland, and low-cost BMIbaby. Lufthansa is seeking to offload both separately, and IAG will get a “significant price reduction” if BMIbaby isn’t sold.

“With respect BMI Regional and BMIbaby, both businesses have attracted interest from potential buyers and discussions continue,” BMI said in an e-mailed statement.”

Lufthansa acquired BMI in 2009 after founder Michael Bishop exercised an option to sell his controlling stake. Since then the Cologne-based company has cut jobs and grounded planes as it struggled to stem losses at the unit.

CEO Franz is reversing an expansion strategy pursued by predecessor Wolfgang Mayrhuber in order to focus on Lufthansa’s namesake brand, and said on March 15 that the company will no longer prop up unprofitable operations.

Lufthansa said yesterday it would sell bonds exchangeable for shares of JetBlue Airways Corp. in a move that paves the way for the disposal of its stake in the New-York based carrier.

To contact the reporters on this story: Steve Rothwell in London at srothwell@bloomberg.net; Aoife White in Luxembourg at awhite62@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Anthony Aarons at aaarons@bloomberg.net


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